Top senators rolled out a plan Wednesday to overhaul the United States’s decades-old rules on international taxation, a framework they said could also give the nation’s roads and bridges badly needed funding.
The long-awaited proposal from Sens. Rob Portman (R-Ohio) and Charles Schumer (D-N.Y.) could help form the core of a deal in one of the increasingly few potential areas for tax reform agreement this year — international rules for businesses that date back to the days of President John F. Kennedy.
{mosads}Portman and Schumer’s framework, while light on details, appears to have at least something in it for all sides. It looks to shield most offshore corporate income from U.S. taxation, the sort of “territorial” system long favored by Republicans.
It also calls for tougher rules, sought by Democrats, to prevent multinational corporations from gaming the system by shifting profits to tax havens. And the plan would put into place a new tax incentive for domestic innovation, known as a patent or innovation box, while potentially giving both parties years of breathing room on highway funding that expires at the end of the month.
“Our international tax system is upside down and inside out. It creates incentives to send jobs and stash profits overseas, rather than creating jobs and economic growth here in the United States,” Schumer, the Senate Democrats’ leader-in-waiting, said in a statement.
Schumer, who headed a Senate Finance working group on international issues with Portman, added that the framework built on proposals from both President Obama and former House Ways and Means Chairman Dave Camp (R-Mich.), who released a broad tax reform working draft in 2014.
In their plan, the two senators make the case that the half-century old international system “reflects the realities of a different era” and that updating them could help businesses and workers alike. The permanent package of international reforms would be designed to be deficit neutral, along with the one-time infusion of cash for infrastructure.
U.S. multinationals, for instance, now get over half their income from elsewhere in the world. Three decades ago, those corporations got more than three-quarters of their income domestically. Plus, the two senators say that allowing corporations to create jobs abroad will also increase the American workforce.
The current Ways and Means chairman, Rep. Paul Ryan (R-Wis.), has also pointed to the international rules as a potential area of agreement this year, as a way to tide Washington over until 2017 on tax reform. Such a deal would likely not reduce the U.S.’s high corporate rate of 35 percent, though Portman and Schumer do say it would be best if their international framework was paired with a broader overhaul of the business tax system.
“We have the opportunity to modernize our international tax system to protect American jobs and American manufacturing and use this one-time revenue to pay for the long-term highway bill our nation so desperately needs,” said Sen. Sherrod Brown (D-Ohio), a member of the international working group.
“Critics say that we can should wait for comprehensive tax reform. How long shall we wait?”
But there are still plenty of roadblocks to getting a deal this year, and Schumer and Portman still have plenty of gaps to fill in their proposal. In their framework, the senators said they were working with congressional scorekeepers on the specifics of a plan.
Business groups and corporate tax reform coalitions have already objected to the idea of taxing corporate profits already offshore and using the revenue for roads — an idea embraced by Portman and Schumer in their framework. Other Republicans, like Senate Finance Chairman Orrin Hatch (Utah), have also not sounded enthused about that idea.
And while the corporate community has long pushed for a territorial system, big business could also be put off by some of the other proposals floated by Portman and Schumer.
The two senators suggest that they’re open to at least some of the Organization for Economic and Cooperation Development’s recommendations to stop profit shifting to tax havens, proposals that top officials in both parties have said could be used by other countries to grab revenue from U.S. companies.
Portman and Schumer also call for potentially limiting how much of a tax deduction corporations can take after paying interest on debt, a prized provision for businesses.
Democrats have said that they have little interest in another stopgap extension of the Highway Trust Fund, and there’s a variety of opinion among lawmakers about just how broad a longer-term extension should be. But Congress would likely need another short-term extension, potentially until the end of the year, if lawmakers want to further pursue the idea of using the offshore revenue for roads.
Portman and Schumer, for instance, don’t weigh in on what sort of rate they want on the $2 trillion currently held offshore by corporations. Camp’s plan taxed those profits at 8.75 percent, with an even lower rate on offshore brick-and-mortar assets. Obama called for a 14 percent rate in his latest budget.
The framework also leaves the details of the territorial system for another day, as well as what sort of intellectual property would receive the lower rate from a patent or innovation box.
Lawmakers interested in the issue have said an innovation box should also include copyrights and trade secrets, even though that sort of approach could end up making the proposal very expensive.