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A Project of The Annenberg Public Policy Center

Spinning ‘Tax Breaks’ for Outsourcing

Who says Congress can’t get anything done? As a new TV spot in New Hampshire once again demonstrates, it excels at grinding out symbolic votes that become fodder for political attack ads.

We refer to an ad released Sept. 2 by the Senate Majority PAC, stating that Republican Sen. Kelly Ayotte “supported tax breaks for companies that shipped jobs overseas, instead of protecting New Hampshire jobs.”

That claim has been a staple of Democratic attack ads for more than a decade. But there’s little substance to it.

Substance vs. Symbolism

As we reported back in 2004, when then-Sen. John Kerry raised the claim against President George W. Bush, the tax code is only a minor factor in the decisions of U.S. companies to locate employment in other countries. Those decisions are made mainly to take advantage of lower wages, and to locate production close to foreign customers.

Furthermore — contrary to widely held perceptions — even some Democratic economists say such “offshoring” accounts for just a small fraction of the many millions of jobs that are lost each year. For example, Christian Weller of the Center for American Progress — who was a backer of Kerry’s plan — conceded in 2004 that “offshoring accounts for a relatively small portion of U.S. unemployment.”

And in this case, the anti-Ayotte ad cites some votes that amounted to pure symbolism; none of the Democratic-sponsored measures she opposed had any practical chance of passage. Also, one independent analysis of the proposal she opposed suggested that it could backfire, possibly causing less U.S. employment, not more.

The 2012 Vote

The first vote the ad cites is on a 2012 bill sponsored by Democratic Sen. Debbie Stabenow of Michigan. She introduced it July 9, and it was brought to the floor directly by then-Majority Leader Harry Reid two days later. It died on July 19, 2012, when Reid failed to muster the 60 votes required to end debate and force a vote on passage. Ayotte was among the 42 senators, all Republicans, who voted to block the measure.

The only “tax breaks” that measure would have ended were deductions for expenses that businesses incur in relocating a business unit from the U.S. to another country. It would not have touched the larger advantage that is built into the U.S. tax code, which is the ability of U.S.-based multinationals to avoid relatively high U.S. tax rates on profits earned overseas, unless and until those profits are brought back to the U.S.

The other provision of the Stabenow measure would have allowed U.S. businesses to claim a tax credit against their U.S. income taxes of 20 percent of the costs of relocating jobs from an overseas unit to one in the U.S.

Both of the bill’s provisions were borrowed from the Obama administration’s “framework for business tax reform” put forth earlier in 2012. The administration estimated that the combined effect of the two proposals would result in a relatively tiny $90 million loss to the Treasury over 10 years. The nonpartisan Joint Committee on Taxation put the cost at $86 million. Neither Treasury nor the JCT produced any specific job estimate.

Reid claimed the measure would create 1 million jobs, but that’s not supported by a lengthy analysis that the Joint Committee on Taxation published after the Obama administration first proposed the two ideas. The JCT said “the proposal may reduce economic
efficiency” by distorting investment behavior.

JCT also said economic research is “inconclusive” as to whether total U.S. employment is reduced or increased by sending some work overseas where it can be done more cheaply. Although the JCT didn’t mention names, we note as one example that Apple claims to have created or supported more than 1 million jobs in the U.S., even while locating most of its production overseas.

The JCT said that the proposal could have a positive or negative impact on U.S. employment, depending on which research findings are believed. Reid’s opening remarks on the legislation, however, dealt more with politics than with economics:

Reid, July 11, 2012: Republicans are looking for any excuse to vote down the proposal for two reasons: Number one, it has the support of President Obama and the Democrats in Congress. Second, it would strengthen the economy, which would help President Obama.

The bill had no practical chance of becoming law. Obama’s proposals weren’t going anywhere in the Republican-controlled House, even if Reid could have pushed them through the predominately Democratic Senate. In fact, the gridlock on taxes wasn’t broken until after the 2012 presidential election was settled. A compromise measure to avert the scheduled “fiscal cliff” increases in personal federal income tax rates was passed the following January, and signed by Obama. But even that measure did not address corporate taxes.

The 2014 and 2015 Votes

The ad also cites an identically worded bill that Reid brought up in similar fashion in the midst of the 2014 midterm elections. This time it was sponsored by vulnerable Democratic Sen. John Walsh of Montana, the state’s lieutenant governor who was appointed to the Senate in February 2014.

Polls showed that Walsh was in danger of losing his seat in the 2014 election to GOP opponent Steve Daines when Walsh introduced the jobs bill on July 8, 2014 — even though Stabenow had reintroduced her bill two weeks earlier under the same title and with identical language. (Walsh later dropped out of the race Aug. 7, 2014, after a report that he plagiarized parts of his thesis at the United States Army War College in 2007.)

Reid brought Walsh’s version to the floor without any hearings on July 17, 2014, and it died when a motion to end debate failed to get the required 60 votes on July 30. The cloture vote was 54 to 42.

Finally, the ad cites a 2015 vote on a Democratic amendment (authored by Stabenow) to the Senate budget bill. Unlike the earlier proposal, this would not have made any change in tax law by itself, and didn’t propose any specific changes.

Rather, it proposed that the chairman of the Senate Budget Committee be allowed to set budget targets for legislation “to encourage United States enterprises to relocate operations from overseas to within the United States, closing offshore tax loopholes … or discouraging United States enterprises from relocating United States operations to other countries.”

With Republicans now holding a majority of Senate seats, the Stabenow amendment was defeated by a party-line vote of 46 to 54 on March 26.

For the record, Ayotte favors a different approach to the incentive the tax code provides for locating profit centers overseas: a lower corporate tax rate. She has called for unspecified “reform” measures to “bring down rates for individuals and businesses so we can keep jobs here at home,” and to “allow American businesses to bring back the trillions parked overseas because of our soaring corporate tax rate.”

Actually, the corporate rate isn’t “soaring.” The top federal income rate paid by big corporations hasn’t changed since 1993. But the pro-business Tax Foundation calculates that the U.S. has the third-highest top marginal corporate income tax rate in the world, when state taxes are added to the federal rate.

At 39.1 percent, the combined U.S. rate is exceeded only by that of Chad and the United Arab Emirates, the foundation said.

To be sure, many U.S. corporations currently receive special tax benefits that drop their effective tax rate below that top marginal rate. Nevertheless, that 39.1 percent combined top rate in the U.S. compares with a worldwide average top corporate income tax rate of 22.6 percent, according to the foundation.

Ireland’s top corporate rate is 12.5 percent, for example, making it a magnet for U.S. corporations including Google, Amazon and eBay, which have located their overseas corporate offices there.

The symbolic votes cited by this ad are by no means the only ones that Congress has supplied to partisan ad makers. For example, Republicans voted repeatedly to repeal the Affordable Care Act, knowing that any repeal measure would be vetoed by Obama in the unlikely event that it ever reached his desk.

So voters beware: We think it likely Congress will continue to grind out such meaningless votes as grist for attack ads, and ad makers will continue to cite them.

— Brooks Jackson