Small Businesses Bash 'Tax Holiday' Plan For Corporate Titans
WASHINGTON -- Debra Ruh runs TecAccess, a small business that works with large companies and the federal government to help make their tech products accessible to people with disabilities. The 11-year-old central Virginia-based operation has always been small -- at its peak before the economic crash, Ruh had 35 employees. Ruh says she always reached out to workers who themselves lived with disabilities. The cause is close to Ruh's heart: Her 24-year-old daughter was born with Down Syndrome. But it's also good business: People with disabilities can tell when a new product does or does not work well.
But TecAccess took a huge hit with the recession. TecAccess's most important lender, Virginia Business Bank, failed, taking down her line of credit with it. Since then, she's been struggling to get the credit needed to fund basic operations. Although she runs about $2 million a year in total sales, Ruh's costs made the firm unable to keep employing 28 of her workers. Today, she's down to seven employees.
"We need to hire people, but we don't have the cash or the credit to do it," Ruh says.
Things could be worse. Unlike many small businesses, TecAccess has actually survived the crash. But Ruh is frustrated with the current debate over fixing the U.S. economy, which seems to be focused on tax perks for the wealthy and large corporations, while ignoring the plight of ordinary workers and small firms like her own. Any proposal that might have any small chance of creating jobs or stimulating the economy seems to require huge front-end profits for corporate titans.
Case in point: the current quarrel over a corporate tax "repatriation" holiday. The plan is widely viewed by economists, tax experts and small business owners as a useless government giveaway to a handful of multinational corporate behemoths. But several companies and a Wall Street friendly think tank are now touting the idea as a new "stimulus" to create jobs.
Lobbyists for Microsoft, Oracle, Pfizer, Apple and other major firms are currently pushing to inject the holiday into congressional negotiations about raising the federal debt ceiling. The companies say they currently have about $1 trillion in cash stashed abroad that they are unwilling to bring back to the U.S. at the statutory 35 percent corporate tax rate. But if Congress will grant companies a one-time tax holiday, allowing that money to be brought back to the states at a rate of about five percent, companies would be willing to do it. Corporate titans acknowledge that they'd be getting a sweetheart deal, but they say as it stands, the U.S. is never going to get their money anyway.
"Bring the money back," says Doug Thornell, and adviser for the WinAmerica Campaign, a group of about a dozen multinational companies and several trade groups lobbying for the holiday.
The trouble is, this has been done before, and it didn't work. In 2004, Congress approved almost the exact same plan. According to an review by economists Roy Clemens and Michael Kinney for Tax Analysts, a total of 364 companies brought back $284 billion of overseas cash for the 2004 tax holiday. But even during the economic boom years of the housing bubble, the fresh cash did not create new jobs or investments. Instead, the economists say, companies simply used the cash to enrich their shareholders, using the money to buy up their own stock, driving share prices higher.
A 2009 paper by three researchers with the National Bureau of Economic Research came to a similar conclusion: "A $1 increase in repatriations was associated with an increase of almost $1 in payouts to shareholders," the researchers wrote.
What's more, an April analysis from the Center on Budget and Policy Priorities found that 10 of the biggest players in the WinAmerica Coalition are sitting on a combined $47 billion in domestic cash. If the companies aren't using their excess U.S. cash to create jobs, they aren't very likely to spend any money they bring in from overseas on jobs, either.
"Big businesses, they're not sitting around going, 'God we've got this market opportunity, and I wanna hire people, but I don't have the money to hire people,' " says Brian Setzler, President of TriLibrium, a business advisory firm based in Portland, Oregon, that mostly works with small firms. "They're sitting on cash. And if there were market opportunities there, they'd deploy it."
Cutting the tax rate from 35 percent to 5 percent represents about an 85 percent reduction in the amount companies would have to hand over to Uncle Sam. While the Congressional Budget Office has not analyzed the implications of such a move for the federal budget deficit, the Joint Committee on Taxation, a nonpartisan congressional committee focused on tax policy, has. The committee's conclusion? "Bringing the money back" would actually cost the government $78.7 billion over ten years, as companies scored a sweetheart tax deal on cash they planned to bring back to the country anyway.
"Investing it in infrastructure, helping small local business -- there's just a lot of things they could do with $80 billion other than throwing these major corporations a bone," says Setzler. "They'll just dividend it out, buyback stock, it will do nothing to create jobs."
As corporate titans lobby for tax breaks, programs for small firms are being cut due to budget constraints. The Obama administration's proposed 2012 budget would cut funding to the Small Business Administration by 45 percent, largely because supplemental stimulus funding aimed at boosting small business loans will not be renewed. The budget will also cut that agency's PRIME Program, which provides $5 million worth of grants a year to entrepreneurs to seeking technical training on how to begin hiring more employees.
Last week, 12 umbrella groups representing over 100,000 small businesses sent a letter to every member of Congress urging them not to support the tax holiday for multinational corporate giants. The effort was organized by Business for Shared Prosperity, and includes Main Street Alliance and the American Sustainable Business Council.
"As business organizations with small business members throughout the United States, we call upon Congress to reject pleas by U.S. multinational corporations for short and long-term tax holidays on profits held offshore, and to instead close the tax loopholes that reward companies for transferring U.S. profits, jobs and investment abroad," the letter reads.
"When powerful large U.S. corporations avoid their fair share of taxes, they undermine U.S. competitiveness, contribute to the national debt and shift more of the tax burden to domestic businesses, especially small businesses that create most of the new jobs."
Lobbyists promoting the tax holiday couch the discussion in terms of "overseas" cash, but the truth about this $1 trillion pile of money is much less flattering for the multinational crowd. Big corporations have long stashed assets in tax haven countries like the Cayman Islands or the Bahamas that feature low tax rates so they can avoid paying taxes in the U.S. Even when firms are conducting their actual business within U.S. borders, having an address in a tax haven nation can help them skimp on their tax bill.
"The reason this money is overseas is because these corporations did something wrong," says Paul Egerman, founder of healthcare software start-ups IDX Systems and eScription. Both companies were wildly successful and were eventually sold at a healthy profit. "They played a game to save on taxes, and we shouldn't be rewarding that kind of behavior."
According to a 2008 report by the Government Accountability Office, 83 of the 100 largest American companies operate subsidiaries in nations identified by the GAO as tax havens. Of the 10 companies currently lobbying hardest for the tax holiday, four -- Apple, Cisco, Microsoft and Pfizer -- were noted in the GAO report. Those four companies operated a combined 572 sub-companies in tax shelter countries at the time the report was published.
"The Multinational corporations keep accumulating big funds offshore awaiting a chance to bring them home at trivial tax," says University of Texas economist Calvin Johnson. "The more billions offshore the more pressure they can put upon a yielding Congress to give them tax amnesty. This is called moral hazard -- You encourage terrible behavior by the multinationals."
This kind of activity rankles small businesses. Not only does it give big companies even greater competitive advantages over small operations who can't stash cash in the Caymans, it deprives the government of tax revenue that it could use to spur job creation at home -- activity that could boost small business returns by expanding consumer demand.
"If you really want to see who is creating the jobs, they're not being created by GE or Microsoft, they're being created by small businesses -- entrepreneurs like me," says Egerman. "I employed 200 people ... I couldn't employ an army of accountants. We couldn't do offshore accounts in the Cayman Islands. That didn't make sense for us. We focused on our customers."
Early this year, the tax holiday proposal seemed politically dead in Washington. Amid concerns about the federal budget deficit and continued anger over the bank bailout, the prospect of another big giveaway to major corporations seemed unlikely. But today the idea has more momentum, fueled by $13.7 million in lobbying money that has been poured into Washington by just 13 companies in the WinAmerica Coalition, according to a HuffPost analysis of lobbying reports. That's more than six times the annual sales of TecAccess.
And strangely, the proposal seems to be garnering political momentum even as its supporters retreat from the notion that it will create jobs.
Cisco won't say with certainty whether it would use any of the money it brings back from overseas to hire new people. "We'll have to see what our opportunities are," spokesperson Jennifer Dunn told HuffPost, adding that possible uses include "R&D, facilities and jobs."
Duke Energy spokesman Tom Williams told HuffPost that his company would use the money to alter the financing of its "capital program," which involves upgrading old power plants and building new ones. While Duke is currently able to raise cash at very low rates on Wall Street to finance that program, the tax holiday would allow the company to rely less on banks and more on its own earnings. Nine of the other major companies in the WinAmerica Coalition -- Adobe, Apple, Microsoft, Oracle, Pfizer, CA Technologies, Kodak, Google and Qualcomm -- all declined to comment for this story.
Third Way, a Democratic think tank with close ties to Wall Street, held an event promoting the tax holiday in mid-June, featuring Rep. Jared Polis (D-Colo.), Rep. Loretta Sanchez (D-Calif.), Sen. Kay Hagan (D-N.C.) and former Service Employees International Union President Andy Stern.
And while everybody continued to insist that the holiday would create jobs, the participants in the meeting also insisted that simply boosting corporate profits was an admirable goal in and of itself.
"It shouldn’t matter how the repatriated money is deployed," Polis said, "And if it’s better to be used as a dividend or as a share buy-back, that, of course, is pumping money into our economy as well."
"I don't care how you use it," Sanchez said. "I think you should be able to use your money the way you want to use your money. I mean, you know, people think that the last time, in 2004, when we did this, that people -- that corporations used it and they bought back their stock. So what? If I was a stockholder in that company, I did well. They paid out dividends. Hey! If I got dividends as a stockholder, that's good."
But the biggest political boost to the corporate tax holiday may come from an idea put forward by former White House Chief of Staff and current Chicago Mayor Rahm Emmanuel (D) -- use the tax revenues that come in at the 5 percent rate to start an infrastructure bank aimed and creating jobs. Sen. Chuck Schumer (D-N.Y.) is currently trying to build support for the idea among Senate Democrats, according to a report by Fortune.
But if the infrastructure bank is supposed to create jobs, many small business owners don't understand why it has to be coupled with a tax break for multinational corporations.
"We don't have to cut taxes for giant corporations if the infrastructure bank is supposed to create jobs. We can just start an infrastructure bank," says Wendy Rosen, head of the American Made Alliance, which represents artists and craftsmen who make their goods in the United States. Typical members of the coalition employ five workers or less.
"How do I explain ... to my members -- people who have weathered the recession, laid off employees -- that big companies are going to get a tax break and they aren't? The small, family-owned businesses that I know are hurting. We need help on Main Street. Let's get help. But let's do it with the tax money that we deserve, not through some back-end deal."
If getting corporations to bring home the money they have abroad is the goal, says University of Texas economist Johnson, the government can use sticks as well as carrots to pursue it. Johnson suggests one taxing "stateless income" -- money derived from business in the States that is stashed in a tax haven -- at 55 percent starting January 1, 2012, encouraging companies to transfer it back home now at the 35 percent rate.
"I don't mind paying taxes," says Ruh. "I like living in the United States and having the opportunities here. I don't understand why running a business has to be about avoiding paying taxes."