Feb 09, 2015 - 4:00pm

The Many Problems of Funding Highways and Transit with a Repatriation Shakedown

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

Washington rumors suggest enduring if not growing interest in an odd couple proposal to link a new tax on corporate repatriations and funding the federal highways and transit program.  The issue is sufficiently confusing on its face and even experienced reporters tangle with the basic facts. For example, confusion surrounds the most basic issue of whether the proposal would raise or lose money for the federal government because, after all, it’s hard to fund highways and transit spending with a tax provision that loses money. A little clarification appears to be in order.

The confusion begins with the word “holiday” in the context of past references to a repatriation tax holiday.  The word “holiday” suggests an exemption from some duty or assessment.  When enacted in 2004, the episode fit the label.  Companies were allowed to repatriate foreign earnings at a reduced tax rate.  In short, they got a tax cut intended to boost the economy, and in part they responded as expected – they repatriated a lot of money.

If enacted again in generally the same form, U.S. multinational companies would again get a tax cut primarily on past earnings, they would repatriate vast sums, and as one might imagine the tax cut would reduce federal tax receipts. 

The new proposal relating to highways and transit programs is different in one key respect – repatriations would not be voluntary but compulsory, essentially the difference between a holiday and penalty. 

Much of the earnings companies have accrued abroad would remain abroad even with a repatriation holiday.  Companies have declared they intend to leave much of these earnings overseas where they are most needed.  Under current law, the U.S. only levies tax on the earnings of U.S. companies’ foreign subsidiaries when the income comes home.

If the foreign earnings never come home, the earnings are subject to whatever foreign taxes are applicable but these earnings never face U.S. tax.  Unless, that is, U.S. law is changed so the earnings are “deemed” repatriated whether repatriated or not.  This deeming is at the heart of the proposal circulating in the context of the highway trust fund.  Rather than a repatriation tax holiday, this is a repatriation tax shakedown. 

It’s All About Context

This corporate tax hike would raise substantial sums that might be used for a variety of purposes, including supplementing the income into the highway trust fund.  If Republicans took over the Congress so they could impose retroactive tax hikes on U.S. companies, then never let it be said again Republicans cannot change their stripes. 

Context, of course, is often important.  The deemed repatriation ploy is hardly new, nor need it be objectionable in every context. For example, the basic principle was in play in the Camp tax reform plan as a revenue source to pay for international tax reform.  In that case, the tax hike on certain companies was linked with tax reform and in many cases tax relief for many of these same companies.  If the reforms were sufficiently beneficial, the companies might well have accepted the deal.  In contrast, using the new repatriation tax ploy to pay for anything other than comprehensive tax reform, including supplementing highways and transit revenues, can only be interpreted as a powerful blow to tax reform’s prospects.

Neither Sustainable, Nor Sensible

The federal highways and transit program has long faced a fundamental mismatch between spending goals and available resources, and this mismatch projects to grow steadily under current law.  Even proponents of this odd couple proposal do not dispute the fact, but it bears mentioning anyway that the repatriation tax shakedown is by construction a one-time revenue grab, not a sustainable solution.  Just once, wouldn’t it be nice if Congress provided a long-term solution to a long-standing problem?  Again, Republicans wanted control of Congress to do this?

Finally, a longstanding tradition says the federal highways and transit system along with its state and local counterparts provide a public benefit that ought to be financed by a widely borne tax, preferably one in the nature of a user fee/excise tax. Thus it is that the gas tax has long been relied upon as the primary revenue source.

The repatriation tax shakedown is yet another refutation of the user pays principal.  And it refutes the principle that whatever funding mechanism is used, it should be widely borne.  In this case, the tax falls on a very select set of taxpayers – U.S. multinational corporations – on a narrow portion of their earnings – those earned abroad – and just to make it interesting, the tax hike is retroactive since these earnings are profits earned in years past and kept overseas.  Should U.S. companies become fully aware of this proposal, they may ask its proponents why a few U.S. companies should be asked to be the piggybank for a public good. 

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About the Author

About the Author

Former Senior Vice President, Economic Policy Division, and Former Chief Economist

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.