* Rating agency says investment boost unlikely to result
* Senators Hagan, McCain introduce dual-track legislation
* Proposal likely to factor in deficit, tax reform debate
(Recasts with reaction to the bill, adds comments by Obama
administration, adds other background)
By Kevin Drawbaugh
WASHINGTON, Oct 6 Giving U.S. corporations a
tax break on their overseas profits likely would not boost the
economy or jobs, said credit rating agency Fitch Inc on
Thursday after two senators unveiled a tax "holiday" bill.
The Fitch statement echoed two other studies released on
Tuesday that reached the same conclusion -- a stark contrast
with the picture painted by Republican Senator John McCain of
the legislation he introduced with Democrat Kay Hagan.
The lawmakers appeared at a news conference to discuss
their measure, which offers two possible reduced tax rates for
repatriating, or bringing into the United States, earnings now
stashed abroad avoiding the 35 percent corporate income tax.
Under the bipartisan Hagan-McCain bill, multinationals
could repatriate foreign profits at an 8.75 percent tax rate
or, if they boost hiring, at 5.25 percent. Corporations are
sitting on an estimated $1.5 trillion in overseas profits. (For
a Reuters Insider interview with Hagan:
McCain said his bill would be offered as an amendment to
President Barack Obama's jobs package when that measure arrives
in the Senate, if the Democratic Senate leadership does not
explicitly include the tax provision in the jobs package.
The Obama administration reiterated its refusal to consider
a foreign profit tax break on its own.
Citing past statements on the issue by U.S. Treasury
Secretary Timothy Geithner, a Treasury spokeswoman on Wednesday
said, "We won't consider tax relief for repatriated earnings
outside the context of broader corporate tax reform."
The Hagan-McCain bill is seen as having little chance of
passage as a stand-alone item, but it could be an important
bargaining chip as lawmakers and the administration grapple
with deficit reduction, tax reform and job creation.
Though small and mid-sized firms have little stake in the
matter, big multinationals keenly desire the overseas income
tax break. It could be a valuable carrot for Democrats to
dangle in seeking support for closing tax loopholes that would
raise new revenues and clean up the tax code, analysts said.
FITCH WEIGHS IN
Corporate lobbyists trying to spin the tax break as a form
of stimulus took another blow from Fitch on Thursday, however.
"Proposed legislation to provide a temporary tax holiday
for U.S. firms repatriating foreign earnings is unlikely, if
passed, to support growth-oriented investment by U.S. firms,"
said Fitch, a top global credit rater, in a statement.
"Fitch expects most firms benefiting from the proposed
repatriation tax relief, notably large multinational companies
in the technology and pharmaceutical sectors, to prioritize
share repurchases at a time when cash balances are strong and
capital spending plans are increasingly uncertain," it said.
Multinationals have been pushing for months for the tax
break, hoping to replay a similar Bush administration holiday.
In 2004-2005, in the first overseas corporate profit
repatriation tax holiday, 843 corporations brought home $362
billion in overseas income at a 5.25 percent tax rate. Without
the holiday, they would have had to pay 35 percent in tax.
As they are doing now, proponents of the tax break six
years ago represented it as a boost to jobs and the economy,
but numerous studies have raised doubts about this.
Reports released on Tuesday by two think tanks said the
2004-2005 tax break did little or nothing to boost the economy
or create jobs, despite promises that it would, and said that
another such tax break would likely have the same outcome,
going to bonuses and dividends rather than new investments.
Spanning the ideological spectrum, one of the studies this
week came from the left-leaning Institute for Policy Studies;
the other from the conservative Heritage Foundation.
The Joint Committee on Taxation, a nonpartisan research arm
of Congress, has estimated that another tax holiday like the
one in 2004-2005 would boost government revenues at first, but
eventually cost taxpayers about $78.7 billion over 10 years.
PENALTY FOR JOB CUTS
Hagan-McCain would slap a penalty on corporations that
repatriate profits from overseas and then cut payrolls. The
penalty would be $75,000 per full-time position eliminated.
The 2004-2005 tax break had similar sanctions, but studies
have shown that companies found ways to get around them.
Calling the bill "a critical step forward in the effort to
jump-start our economic recovery," WIN America campaign
director Karen Olick said it would cause "upwards of $1
trillion" to be brought into the country by businesses.
WIN America is a coalition of companies -- including
high-tech giants Apple Inc (AAPL.O), Cisco Systems Inc
(CSCO.O), Oracle Corp ORCL.O and Microsoft Corp (MSFT.O) --
that is lobbying Congress for the income tax break.
Similar legislation has already been introduced in the U.S.
House of Representatives by Kevin Brady, a House Republican.
McCain, a former presidential candidate who seldom takes a
lead role in business and economic legislation, said his bill
would pump between $50 billion and $80 billion of tax revenue
into the U.S. Treasury and create 2 million jobs.
To get the extra-low tax rate of 5.25 percent, under the
bill, companies would have to increase "qualified payroll" by
10 percent or more. Qualified payroll means all wages paid to
employees that are subject to payroll tax, the senators said.
(Additional reporting by Rachelle Younglai, editing by Matthew