Congress sees tax holiday as questionable fix to Highway Trust Fund

Lawmakers and tax experts cast a shadow on proposals to refinance the Highway Trust Fund with a temporary tax holiday that would require U.S. corporations to repatriate their overseas earnings at a reduced tax rate, but the idea of some kind of repatriation scheme, at least on a voluntary basis, appears imminent as the expiration of the fund approaches.

“What we know to be true is that repatriation cannot be done as a standalone; it must be part of a transition to a more competitive system,” said Rep. David Reichert, R-Wash., chairman of the House Ways and Means Subcommittee on Select Revenue Measures. He said, taken outside of the context of a transition, mandatory repatriation, as proposed by the Obama Administration in its 2016 budget, would be a tax increase.

“A tax increase that American companies would be forced to pay unlike their foreign competitors,” said Reichert during a hearing Wednesday on the repatriation scheme.

Reichert’s skepticism was met by tax experts testifying before the committee who agreed a major revenue enhancement like the president’s proposal should be part of a comprehensive corporate tax reform that includes a reduction in the nominal 35 percent rate, especially as foreign governments are looking to U.S. corporations to shoulder a big tax burden.

“These and other related developments have increased the urgency for reform of the U.S. rules for taxing the foreign operations of U.S. companies,” Dirk Suringa, advisor to the Treasury’s International Tax Counsel and an attorney with Covington and Burling LLP, told the panel.

The debate over a tax holiday comes as lawmakers are frantically searching for a way to fund the HTF, which expires July 31.
The U.S. Senate Environment and Public Works Committee on Wednesday unanimously passed a six-year transportation authorization bill. The legislation, called the Developing a Reliable and Innovative Vision for the Economy Act, or DRIVE Act, was praised by a number of transportation advocacy groups. The Senate Finance Committee would be responsible for finding the necessary funding sources for the bill.

Republican lawmakers who control the House and Senate are unenthusiastic about raising the federal gas tax, which has been at 18.4 cents a gallon since 1993, and also want any kind of corporate tax proposal that would address a shortfall in highway funding to be part of a comprehensive tax reform.

The White House has proposed a mandatory one-time tax holiday, which would allow U.S. corporations to repatriate foreign earnings at a 14 percent rate, raising an estimated $268 billion to be earmarked for transportation projects. Republicans and Democrats have expressed doubts about the viability of a tax holiday. Rep. Richard Neal, the ranking Democrat on the Ways and Means Subcommittee, pointed to the 2004 tax holiday and insisted that the savings accruing to companies by the lower rate were not invested in operations, as promised, but spent on “increases in executive pay, stock buybacks and stockholder dividends.”

Still, some members of both parties appear to be coalescing around a bipartisan repatriation plan that was proposed by Senators Rand Paul, R-Ky., and Barbara Boxer, D-Calif., that would be voluntary and would allow companies to repatriate overseas earnings at a tax rate of 6.5 percent over 10 years. It wouldn’t change the underlying tax system, a key for Republicans, and it would limit companies from using repatriated profits to boost executive pay or buy back stock, something important to Democrats.

However, while the plan would bring in an estimated $30 billion in revenues through 2017, it would cost the government a net of $118 billion over 10 years, according to testimony by Thomas Berthold, chief of staff of the Joint Committee on Taxation, at Wednesday’s hearing.