RALEIGH — North Carolina Sen. Kay Hagan Thursday introduced a bipartisan bill to entice U.S. corporations to bring home offshore profits at a sharply discounted tax rate - a move she said could help jump-start a stagnant economy.
At a news conference with Republican Sen. John McCain, Hagan said that offering a tax holiday - a temporary lowering of corporate taxes for offshore profits from 35 percent to 8.75 percent or lower - would encourage companies to hire more American workers.
"More than $1 trillion of American company earnings are stranded outside of America where it is not doing one bit of good for the American economy," said Hagan, a Democrat from Greensboro. "Companies with a North Carolina presence have roughly $200 billion sitting overseas. I want that money back in America and I want it back in North Carolina."
"Our goal," Hagan said, "is enhanced economic growth."
Large multinational corporations - many with a presence in the state - such as Cisco Systems, Pfizer, Apple, Microsoft and Duke Energy, have lobbied for the tax holiday.
To help build support for her proposal, Hagan has scheduled a news conference for this morning in Durham with Dennis Gillings, CEO of Quintiles; Jim Whitehurst, president and CEO of Red Hat, as well as top North Carolina executives with Cisco, EMC, NCM Capital, the N.C. Chamber and the N.C. Technology Association.
A U.S. Chamber of Commerce study released last month predicted the repatriation tax holiday could result in three million American jobs, could increase the U.S. gross domestic product from 1 percent to 4 percent, and result in only nominal cost to taxpayers.
But the idea has drawn skepticism from both the right and the left, with critics saying a similar tax holiday for corporate offshore profits in 2004 produced windfalls for shareholders, but no jobs and little new investment.
Senate Majority Harry Reid of Nevada said the corporate repatriation proposal would not pass the Senate as a stand-alone bill, but would likely be folded into legislation dealing with infrastructure needs, Bloomberg News reported.
Sen. Charles Schumer of New York has said that Senate Democrats might be open to a corporate repatriation bill, using the expected tax revenues to finance an infrastructure bank.
Details of Hagan's bill
The Foreign Earnings Reinvestments Act is aimed at an estimated $1 trillion in profits earned by foreign subsidiaries of U.S. companies. Under the system known as worldwide taxation this income is subject to tax first in a foreign country and again in the United States - if and when the income is returned to the U.S. parent company.
The Hagan-McCain bill would temporarily reduce the 35 percent tax rate to 8.75 percent on repatriated profits. The tax rate on returned profits would drop to 5.25 percent if a company increased its payroll.
Hagan said it would provide "an immediate jolt to the economy." She said she was responding to widespread concern about North Carolina's high 10.4 percent unemployment rate, and the public's demand that Washington act in a bipartisan fashion to do something about it.
Jim Rogers, chairman and CEO of Charlotte-based Duke Energy, said the state's largest utility has "$1.2 billion held hostage overseas by our tax system that penalizes U.S. business that wants to bring their foreign earnings to America to create jobs." As part of Duke's proposed merger with Raleigh-based Progress Energy, the two companies have said they would eliminate 2,000 jobs.
Harvey Schmitt, president and CEO of the Greater Raleigh Chamber of Commerce, said the legislation would provide a strong boost to the economy in the Triangle.
"Many of our businesses are competing on a global scale, and the current tax rate puts them at a significant disadvantage," Schmitt said.
The 2004 tax holiday, however, did not produce the flood of new jobs and investments its supporters predicted, according to independent studies.
According to the Internal Revenue Service, 842 of the 9,700 U.S. businesses with foreign subsidiaries transferred a total of $362 billion from those subsidiaries back to their U.S. parent companies.
Studies: Jobs unlikely
The Heritage Foundation, the conservative think tank based in Washington, said in a report released this week that there was no evidence the money was used for job creation or for research and development. Instead, the report said, the money was likely used for shareholder dividends, to buy back shares, and perhaps to be shipped back overseas.
The Hagan-McCain bill, the Heritage Foundation concluded, "would likely have the same effects it did in 2004 - backward-looking tax relief for international companies and their shareholders, but little in the way of new investment, economic growth or job creation."
The Heritage Foundation also said there is no evidence that "U.S. multi-national corporations are capital constrained today."
The Institute for Policy Studies, a liberal Washington, D.C.-based group, did a study of 58 companies who received 70 percent of the tax breaks from the repatriated funds in 2004. It found that the companies had laid off nearly 600,000 people since then. Those 58 companies today maintain cash reserves of $450 billion, the study found.
"The corporate lobbyists made basically the same arguments that they are making now which is that their offshore profits were trapped overseas and they would bring them back if they were offered a deeply discounted tax rate of 5.25 percent," said Sarah Anderson, co-author of a new institute study on the subject.
"Back in 2004 they argued that this would be a one-time deal," Anderson said. "Now they are back asking for it again. Many of companies that got the tax break that time, very quickly accumulated a lot of offshore profits again. We think it sets a dangerous precedent. It encourages companies to hold funds offshore until they can get a tax holiday like the one they are debating right now."
Bill has penalties
Hagan, however, said her bill is "very different" from the 2004 bill because it provides strong incentives for creating jobs - and penalties for laying off workers. If the work force dropped an employee, a company would find its taxable income increased by $75,000.
"If a company lays workers off after participating in the program," Hagan said, "those companies will face steep penalties. This, I believe, is a strong incentive for companies to hire workers in our country."