Senate Misses Opportunity to Reform Our America-Last Tax Code

Senate Lawmakers Propose Modest International Tax Reforms, Extending Corporate Handouts and Cutting Essential Services

WASHINGTON, DC – Today, the Senate Finance Committee released its version of tax provisions passed by the House last month, including permanent expansions of major corporate tax provisions and deeply regressive individual tax cuts.

While the Senate package allows the tax rates paid by U.S. multinational companies on their foreign and export profits to increase slightly, it also makes numerous other changes to how such income is calculated that will likely result in reduced effective tax rates for multinationals overall.

“This proposal by the Senate Finance Committee is a missed opportunity to truly reform our America-last tax code, even though in some minor respects it improves on the disastrous House bill’s international tax provisions,” said Zorka Milin, FACT policy director. “This small step in the right direction does not address the core problem of our international tax code: there is no reason to keep giving tax breaks to companies when they move profits and jobs overseas.”

In one small step forward, the Senate package omits a galling House-passed exemption for certain income earned in the U.S. Virgin Islands from a minimum tax provision designed to deter the use of tax havens. The lobbying to introduce this loophole – which would have cost taxpayers nearly $1 billion over the next ten years while mostly benefiting a single firm – was the subject of recent reporting by the Washington Post in which FACT was quoted.

Meanwhile, the Senate bill largely maintains, subject to a delay and small tweaks, a controversial House-passed provision imposing harsh retaliatory taxes on foreign individuals and companies from countries that the U.S. Treasury deems to have so-called “unfair”, “discriminatory”, or “extraterritorial” taxes, including core elements of the OECD’s global corporate minimum tax. This provision – known as the proposed Section 899 – has been met in recent weeks with a tidal wave of outcry and opposition, with tax and industry experts explaining that such retaliatory taxes would devastate inbound foreign direct investment and result in a loss of up to 700,000 domestic jobs.

“Rather than defending U.S. tax sovereignty as its proponents claim, this misguided policy is standing up for tax havens that have long been used by American multinational corporations to dodge taxes at home and abroad. This isn’t ‘America-first’, it’s really ‘tax havens first’,” said Milin. “That this retaliatory tax would also cost American jobs and collapse foreign investment in the U.S. should be reason enough for Senate lawmakers to discard it.”

Another new tax passed by the House – a 3.5 percent excise tax on the money that non-citizens send home, or “remittances” – is also included in the Senate reconciliation package. As FACT’s Julia Yansura and Zorka Milin wrote in a recent blog, the proposed remittance tax is both deeply regressive and presents a host of compliance, enforcement, and illicit finance issues.

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Notes to the Editor:

Read the full text of the Senate Finance Committee’s preliminary tax proposal here.
Some of the many changes introduced in the Senate Finance proposal to the taxation of U.S. multinationals’ foreign and export income are consistent with provisions of the International Competition for American Jobs Act (S. 1605), a grab bag of corporate handouts long sought by industry lobbyists and trade associations. They include a number of changes to the calculation of Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) that would likely result in lower effective tax rates on these categories of corporate profits.
- In a surprising divergence from S. 1605, however, the Senate tax package allows for a slight step up in the tax rate for both FDII and GILTI, though both still fall short of the 15 percent internationally-agreed global minimum rate. Both provisions are also changed by removing an exemption for income assumed to be derived from tangible assets, an aspect of GILTI and FDII that has long been considered an incentive for companies to offshore U.S. manufacturing and jobs.
The Senate’s international tax changes still fall far short of the full suite of reforms to raise substantial revenue and end offshoring incentives in the tax code, long championed by FACT. These include the provisions of the No Tax Breaks for Outsourcing Act, led by Rep. Doggett and Sen. Whitehouse, which would equalize the tax rate paid by U.S. multinationals on their domestic and foreign income, among other vital reforms.
- Last week, new legislation was introduced by Senators Wyden, Warner, Warnock, and Welch to end the so-called “round-tripping” loophole used by major pharmaceutical companies to mischaracterize profits from their U.S. sales as foreign and avoid U.S. taxes.
- Representative Ro Khanna also recently unveiled his ambitious “Progressive Deficit Reduction Plan,” which would lower the deficit by $12 trillion, including by raising $1 trillion in new revenues by effectively taxing the foreign profits of U.S. multinationals.
Further corporate tax breaks included as temporary provisions in the House bill are proposed to be permanently extended in the Senate package, including full expensing for investments in machinery and equipment, an expanded tax discount for firms that have large volumes of debt, and immediate expensing of research and development costs.
- At the same time that the bill cuts tax credits for green energy production and other pro-climate policies, it also introduces a new carveout for large polluters in the form of pro-drilling modifications to the Corporate Alternative Minimum Tax (CAMT) regime.