TAX NEWS - June 2010

U.S. Tax: Democrats Target Corporate Tax Rules

Democrats are trying to boost their political fortunes ahead of this year's midterm elections by attacking corporate tax rules they say encourage U.S. multinationals to send jobs overseas.

They want to eliminate several complex rules that give special tax breaks to overseas earnings, and some Democratic candidates are arguing in campaign ads that Republicans who oppose the changes are siding with big corporations over workers.

Republicans criticize the Democrats' attack as misleading and unfair. Many Republicans and companies also believe the corporate tax system needs to be overhauled, arguing that the U.S. system puts American companies at a disadvantage compared with their foreign counterparts. But they differ with many Democrats over how to do so, generally favoring broader changes.

"This is going to be a big debate," Rep. Chris Van Hollen (D., Md.), head of the House Democrats' campaign effort, told reporters during a recent conference call highlighting the tax issue.

Republicans argue that Democrats' proposals for more taxes and regulation on corporations could drive more jobs overseas.

Democrats hope the fight over corporate tax rules will give them a chance to show they are being tough on business and to focus blame on companies and their traditional allies in the GOP at a time when voter approval ratings on Democrats' handling of the economy have fallen.

Democrats say the issue was central to the victory of Rep. Mark Critz (D., Pa.) in a special election last month to replace the late Rep. John Murtha. Mr. Critz raised the tax issue extensively in television ads that attacked his GOP opponent for supporting policies that he alleged contributed to layoffs in Pittsburgh.

Most of the rules in question deal with taxes on profits earned by U.S. companies' overseas subsidiaries. Democratic critics say loopholes in the current tax system unfairly enrich U.S. companies, while encouraging them to invest profits offshore, leading to job losses in the U.S. They want to pare back many of the system's specific breaks.

Some of the changes favored by Democrats have been inserted in a pending jobs bill. The measure would increase taxes on U.S. multinationals' overseas earnings by about $14 billion over the next decade. The money would be used to help offset the cost of extending targeted domestic tax breaks for businesses and individuals. The bill is pending in the Senate; the House passed a similar version last month.

Many business advocates — and many lawmakers of both parties — agree the whole system needs to be overhauled. But some worry that the current fight could make change harder to achieve.

Rep. Pat Tiberi (R., Ohio), a top Republican on the Ways and Means Committee, said multinational companies often need to maintain operations overseas to serve growing international markets. If the U.S. makes it more costly to do that, "it means fewer jobs here in America" in headquarters and support operations, he said. He argued that some companies could even move elsewhere if U.S. tax rules become less favorable.

Business advocates say a number of the corporate-tax rules being targeted by Democrats have been accepted as garden-variety tax planning techniques for years.

Democrats argue in response that some tax lawyers have helped companies take advantage of loopholes in several of the rules for multinationals.

In some cases, they say, American taxpayers are effectively subsidizing multinationals' payments of taxes to foreign governments.

Businesses also worry that congressional Democrats could try to pass far-larger tax increases on multinationals in coming months, as they scramble to offset the cost of extending Bush-era tax breaks for the middle class.Mr. Van Hollen said Republicans have themselves to blame for their vulnerability on the corporate tax issue. "They have one answer to every economic issue — restore the Bush tax cuts for the wealthy," he said in an interview. "They're Johnny One-Note."

Democrats have used the corporate-loophole issue in previous election cycles, including in 2008. But with the economy still sputtering and job growth still weak, Democrats appear likely to make heavier use of it this time around.

Some GOP aides question the effectiveness of the Democrats' strategy to seize on the corporate tax issue, pointing to a recent Hawaii congressional race where this was an issue; the Republican candidate won.

Still, Mr. Tiberi acknowledged, a 30-second ad about the issue could be "very powerful on a retail level."

Within minutes of a House vote last week on a bill that included a small portion of the corporate tax increases, Democratic campaign officials had sent out 20 press releases, criticizing vulnerable Republican incumbents, including Rep. Charlie Dent of Allentown, Pa., and Rep. Lee Terry of Omaha, Neb., for opposing the measure.

"Rather than nurturing small businesses and incentivizing investment, Speaker [Nancy] Pelosi imposes tax hikes, mandates and regulatory burdens on job creators," Mr. Dent said.

Mr. Terry's office issued a news release criticizing the Democrats' jobs legislation as "a 'job killer' that would hurt businesses." He also criticized the jobs bill's impact on the federal deficit, which he put at about $54 billion.