(Bloomberg) — Republican lawmakers are doing something surprising with President Barack Obama’s proposal to tax U.S. companies’ overseas profits. They’re calling it constructive.
Top members of the committees focused on taxes in Congress say they see Obama’s latest plan as a place to start negotiations toward a revamped business tax system that would lower rates, remove breaks and make it easier for companies to bring home their foreign profits.
“They seem to be moving in the right direction,” Representative Charles Boustany, a Louisiana Republican, said in an interview. “We have an opening to test their intent on reform, so we’ll work to put proposals forward and see if they’re willing to bite on it.”
After years of stalemate on revamping the tax code, lawmakers say they need to move quickly to explore a possible deal before momentum fades and the 2016 presidential election takes attention away.
Because Obama wants to tie business taxes to funding for highway and bridge construction, lawmakers probably need to make a “go/no-go” decision by the end of May, when current funding for such projects lapses, said Warren Payne, former Republican policy director for the House Ways and Means Committee, at a Feb. 3 Bloomberg BNA event in Washington.
To meet that deadline, plenty of work must be done to resolve differences.
Revenue Targets
The parties are still far apart on the revenue targets for a bill and on how they should treat businesses that pay taxes through their owners’ individual tax returns at higher rates. The Ways and Means Committee squabbled Wednesday over whether to revive and extend lapsed tax breaks for small businesses and charities.
The potential for a tax deal will have its next test Thursday morning at the Senate Finance Committee, as Treasury Secretary Jacob J. Lew testifies on the administration’s plan.
Josh Earnest, the White House press secretary, said Wednesday that there have been “extensive conversations” with lawmakers on tax policy and that the administration wants to maintain an “open dialogue” on the issue.
Any deal almost certainly would be confined to business taxes because Obama’s budget, released Feb. 2, proposed higher taxes on the individual side that Republicans won’t accept. The budget called for higher taxes on capital gains and dividends and a tax on appreciated assets at death.
International Taxation
Obama’s latest business proposal centers on international taxes paid by U.S.-based companies.
Under current law, such firms owe the full U.S. tax rate — 35 percent — on profits they earn around the world. They get credits for foreign taxes paid and can defer the U.S. tax until they bring home the money.
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That system gives companies an incentive to shift profits to low-tax countries and leave them there. That’s exactly what companies including Apple Inc. and Google Inc. have been doing, stockpiling about $2 trillion in offshore profits.
Business groups and Republicans in Congress have been advocating what’s known as a territorial tax system, in which companies can repatriate foreign profits without an extra layer of U.S. taxation.
The plan included in Obama’s budget resembles a territorial system. Companies could bring home profits they earn around the world and use them however they want.
Minimum Tax
The catch: They would have to pay a minimum tax of 19 percent — relatively easy for companies that are operating in most industrialized countries and paying taxes there. The tax would be much tougher on companies with low foreign tax rates because they claim that much of their profits are earned in places such as Bermuda and the Cayman Islands.
Obama also wants a 14 percent one-time tax on the money stockpiled overseas, which he would use for infrastructure.
Business groups are criticizing the plan. The Business Roundtable, the National Association of Manufacturers and targeted coalitions of companies all say it would hurt U.S. companies, and some warned that it could lead to foreign takeovers of American businesses.
“The litany of new taxes placed on globally engaged, U.S. companies is at best a short-sighted attempt to raise government revenues, and at worst a misguided policy that doesn’t recognize America’s role in the 21st century economy,” said a statement from the LIFT America Coalition, whose members include Cisco Systems Inc., Johnson & Johnson and Pfizer Inc.
Republicans in Congress are taking a different tone, one that suggests a possible path forward to some kind of agreement.
‘Baby Steps’
Representative Paul Ryan, chairman of the House Ways and Means Committee, said at a budget hearing Tuesday that the international tax proposals were “constructive” and that the administration’s approach to small businesses represented “some baby steps in the right direction.”
Senator Mike Enzi of Wyoming, a member of the Senate Finance Committee, said there were similarities between Obama’s proposal and his own international tax plan.
“It’s the same as mine except for different percentages,” he said in a brief interview Tuesday, adding that he didn’t think Obama’s proposal offered enough of a long-term funding stream for infrastructure. “It’s a good place to start.”
Boustany, a senior member of the Ways and Means Committee, said he didn’t like the proposed rates and some other details. He said Republicans are still refining their own approach to international tax rules.
Senator Rob Portman, an Ohio Republican on the Finance Committee, said Obama’s plan was “not inconsistent” with the kind of tax revamp Republicans could support.
‘Continue’ Discussion
“The next step is for us to continue our discussions we’re already having with them on trying to find a way to make our American workers and American companies more competitive,” he said in an interview. “I don’t know if it will be a public counter, but we will continue the discussion we’re already having.”
Those talks will occur, though, amid the distrust that has plagued relations between the Obama administration and congressional Republicans.
“We’ve been this route before where they offer proposals in the context of the budget and we ask them to sit down with us and start working on legislative language and we get no answer,” Boustany said. “The question now is will Treasury, with the OK — the explicit OK of the administration — roll up the sleeves and work with us?”
Earnest, the White House press secretary, said the administration will try. “We certainly welcome that kind of constructive response from Republicans,” he said. “Representative Boustany is not someone with whom we’re going to agree on a lot of issues.”
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