There was a time not long ago when corporate America hoped it could have it all. It would lobby for a corporate rate cut and a territorial system and let somebody else worry about footing the bill. And why shouldn't business think that way? After all, President George W. Bush pushed through huge individual tax rate cuts in 2001 and capital gains and dividend rate cuts in 2003 without paying for them.
But then a series of events transformed the prospect of revenue-losing corporate tax reform from difficult to near impossible. It began with the financial crisis that plunged the economy into a deep recession and triggered skyrocketing deficits. Then Barack Obama, who made raising taxes on the foreign-source income of multinationals a high-profile campaign issue, won the 2008 presidential election. After that, the Occupy Wall Street movement and rising public awareness of growing income inequality gave any attempt to lighten business tax burdens the appearance of a reward for corporate greed.
On February 3, 2009, an amendment to include a second tax holiday for unrepatriated profits in the stimulus bill was rejected by a 55-43 vote in the Senate. (The American Jobs Creation Act of 2004, which included the original holiday, passed the Senate by a voice vote.) Still, some in the business community did not get the message. Bolstered by near universal agreement among economists about the need for corporate rate cuts, they pushed for reform but provided only the vaguest hints of how to pay for rate cuts. Testifying on behalf of the Business Roundtable at a 2011 House Ways and Means Committee hearing, then-CEO Robert McDonald of Procter & Gamble suggested that revenue neutrality be taken off the table. (Prior coverage: Tax Notes, Feb. 14, 2011, p. 731.)
The last glimmer of hope for pain-free corporate tax reform was completely snuffed out by the release on October 26, 2011, of a tax reform discussion draft by Ways and Means Committee Chair Dave Camp, R-Mich. Yes, Camp was committed to a 25 percent corporate rate and a territorial system. But he also stressed that overall tax reform would be revenue neutral and that more specifically, within the larger overhaul international tax reform would on its own be revenue neutral. To meet this last objective, Camp had to include a wide array of revenue raisers and anti-base-erosion provisions, including an expansion of subpart F rules, new restrictions on deductions of interest allocable to foreign-source income, and mandatory taxation (albeit at a low rate) of all accumulated unrepatriated foreign earnings.
Since the Camp release, business no longer argues about whether there should be anti-base-erosion rules. Now it is focused on the immensely complex question of how those rules should be designed. And revenue neutrality is not something that is brushed aside. It is openly acknowledged as an essential feature of any corporate tax reform plan that has a chance of winning congressional approval.
Alliance for Competitive Taxation
On June 4 a group of 42 U.S. corporations formed the Alliance for Competitive Taxation (ACT). This group has fully embraced the new realistic approach to corporate tax reform. According to its website: "After studying this for over two years, our members understand that to fully pay for a more competitive tax system requires sacrificing specific tax breaks they currently benefit from and tough rules to protect the U.S. tax base." (Prior coverage: Tax Notes, June 10, 2013, p. 1250.)
As should be expected, the group wants the corporate rate cut to 25 percent, a territorial system, and relief for repatriated foreign profits. But unlike most business lobbying organizations, the group doesn't gloss over the issue of funding tax reform. It says that not only should tax reform be revenue neutral, but a corporate rate cut for domestic businesses should be paid for without any shift of the tax burden to small businesses, a reformed international tax system should "protect the U.S tax base," and "international reforms should be fully paid for through international measures."
On Bloomberg television on June 4, Laura D'Andrea Tyson, former chair of the Council of Economic Advisers under President Clinton and now ACT's economic adviser, described the coalition this way:
What's really interesting about this coalition is company after company has said that we would like to simplify the code. We understand that at the end of the day, that with lower rates there is going to be base broadening and that some of us will end up over time paying more. But we would much rather have an efficient system which allows us to compete on a level playing field with other multinationals who are in very different systems with much lower rates, where it is much easier for them to bring their profits back to their home headquarters for investment in their home countries.
Table 1. Alliance for Competitive Taxation Members' Tax Statistics
From Latest Annual Reports
Profit as patriated
Worldwide Share or Foreign Foreign
Effective Worldwide Effective Earnings
Tax Rate Profit Tax Rate (millions)
All Members (average* or total) 24%* 52%* 19%* $792,657
McGraw-Hill Financial Inc. 37% 27% 34% $762
FedEx Corp. 36% 19% 41% $1,000
United Parcel Service Inc. 34% 15% 26% $3,575
General Mills Inc. 32% 12% 23% $2,800
Wal-Mart Stores Inc. 32% 23% 25% $19,200
Emerson Electric Co. 32% 49% 31% $6,300
The Dow Chemical Co. 31% 28% 26% $574
Kimberly-Clark Corp. 31% 39% 35% $9,500
Prudential Financial Inc. 30% 44% 29% $1,747
Alcoa Inc. 29% 106% 12% $8,000
JP Morgan Chase & Co. 28% 28% 25% $25,100
Caterpillar Inc. 28% 62% 23% $15,000
Kellogg Co. 28% 25% 25% $1,700
Intel Corp. 27% 21% 18% $17,500
United Technologies Corp. 27% 60% 25% $22,000
McCormick & Co. Inc. 27% 28% 14% $968
International Paper Co. 26% 53% 21% $4,700
Procter & Gamble Co. 25% 42% 20% $39,000
State Street Corp. 25% 50% 29% $2,700
PepsiCo Inc. 25% 56% 17% $32,200
Nike Inc. 25% 69% 22% $5,500
International Business Machines 24% 54% 20% $44,400
Oracle Corp. 24% 48% 17% $20,900
Honeywell Inc. 24% 64% 21% $11,600
Texas Instruments Inc. 23% 38% 13% $5,540
EMC Corp. 23% 51% 7% $5,700
Pfizer Inc. 23% 127% 17% $73,000
Johnson & Johnson 22% 66% 14% $49,000
Eli Lilly and Co. 22% 59% 17% $20,980
The Coca-Cola Co. 21% 63% 16% $26,900
Google Inc. 20% 59% 4% $33,300
Qualcomm Inc. 20% 48% 25% $16,400
Cisco Systems Inc. 19% 80% 6% $41,300
Dell Inc. 19% 91% 5% $19,000
General Electric Co. 18% 54% 24% $108,000
E. I. du Pont de Nemours 17% 79% 19% $13,179
Morgan Stanley 15% 56% 30% $7,191
Johnson Controls Inc. 13% 45% 1% $6,400
Abbott Laboratories 11% 103% 12% $40,000
Verizon Communications Inc. 6% 6% -4% $1,800
Boston Scientific -4% 20% -34% $11,041
Bank of America -162% 1,259% 33% $17,200
Sources: Author's calculations using latest Form 10-K reports. Company
percentages are three-year weighted averages. See end-notes for more details.
FOOTNOTE TO TABLE
* Averages exclude Boston Scientific and Bank of America.
END OF FOOTNOTE TO TABLE
Perhaps it is true what tax attorney Paul W. Oosterhuis of Skadden, Arps, Slate, Meagher & Flom LLP told the Ways and Means Committee at a June 13 hearing on international tax reform: "I think the multinational community is more ready to embrace tax reform, even if it involves some pain for them, than they have been in the last 20 years."
Another notable feature of ACT is the relative diversity of its members' interests. Table 1 shows that all members will probably be placing a high priority on tax relief for repatriated profits. And what corporation doesn't want a rate reduction? But the interests of the members will no doubt vary greatly on the relative importance given to specific tax proposals and pay-fors. Accelerated depreciation, the section 199 manufacturing deduction, the research credit, and limitations on interest deductions all must be on the table if there is to be any hope of reducing the corporate tax rate to 25 percent.
Table 2 shows that many members of ACT are or were members of other corporate coalitions. Eleven are members of the LIFT America Coalition, which is seeking a territorial tax system. Seven are members of the RATE Coalition, which is seeking a low corporate tax rate. Six were members of the now defunct WIN America Campaign, which sought a repeat of the 2004 tax holiday. Unlike those other three coalitions, ACT is sufficiently diverse that it is hard to see how any revenue-neutral tax reform can be designed that would not result in a significant portion of its members paying more taxes. (Prior coverage of the RATE and WIN America coalitions: Tax Notes, Mar. 19, 2012, p. 1481.)
Table 2. ACT Members' Membership in Other
Corporate Tax Reform Coalitions
LIFT WIN America RATE
Emerson Electric Pfizer Intel
Caterpillar Cisco Systems FedEx
Intel Oracle United Parcel Service
United Technologies EMC Kimberly-Clark
Procter & Gamble Google Nike
Honeywell Qualcomm Texas Instruments
Johnson & Johnson
If corporate tax reform ever really gets started -- for example, if Camp puts a paid-for bill before his committee for a vote before the end of this year -- will ACT members on the short end of the stick still favor tax reform? Or will some get cold feet when CFOs tell their CEOs that the legislation they would be supporting would raise their taxes?
If these losers are still willing to provide their support after real legislation surfaces, we will know that tax reform is about more than static dollars-and-cents calculations of tax liability. It could be that tax reform is also about the promise of economic growth and simplification. But the hoped-for benefits are probably more tangible and immediate than that. Corporations want access to their ever-growing piles of offshore cash. As Apple CEO Tim Cook explained in a May 28 interview (available at http://wsj.com): "We are not in there saying we think we should pay less; in fact, I said I think if you implement what we are suggesting, we may wind up paying a little more. But what we get for that is that we would have unlimited ability to pull our capital back."
Notes on the Data
All percentages in Table 1 are three-year weighted averages. For most of the 42 firms, the data refer to the three-year period ending in December 2012. Twelve firms, however, did not have a fiscal year coinciding with the calendar year. The end of the three-year period from which the data are drawn for each of these 12 firms is as follows: FedEx, General Mills, Nike, and Oracle (May 2012); Cisco (July 2012); Emerson Electric and Johnson Controls (September 2012); McCormick and Qualcomm (November 2012); Wal-Mart (January 2013); and Kellogg and Dell (February 2013).
The effective tax rate is the three-year total tax expense divided by the three-year total of worldwide before-tax profit. The foreign effective tax rate is the three-year total foreign tax expense divided by the three-year total of non-U.S. before-tax profit. The foreign share of profit is the three-year total of non-U.S. before-tax profit divided by the three-year total of worldwide before-tax profit. Total unrepatriated foreign earnings are reported as of the end of the latest fiscal year for which data are available, usually December 2012, except as indicated.
Boston Scientific and Bank of America are not included in the average because large losses yield unmeaningful ratios when profits are in the denominator.