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The Politics of Hewlett-Packard Sending Jobs Offshore

Posted on September 17, 2008 by Martin A. Sullivan
Document originally published in
Tax Notes Today on September 17, 2008.

In case you missed it, tech giant Hewlett-Packard announced September 15 that it was laying off an astonishing 24,600 workers -- nearly half of them inside the United States, according to reports in the major news dailies. After its acquisition of rival EDS earlier this year, the Palo Alto, Calif.-based company is trimming expenses as it gears up to challenge IBM for the top spot in the computer services industry.

As The Wall Street Journal interpreted it: "Wall Street analysts have expressed concern too many EDS employees are based in the U.S. at a time when competitors are cutting costs by sending jobs offshore."

Timing matters. What would have been shattering front-page news out of one of America's most respected companies ended up just a footnote to the unfolding financial crisis that triggered a 500-point single-day drop in the Dow.

But when the smoke from the current financial firestorm clears, the Hewlett-Packard story will attract the attention it deserves, and some folks inside the Beltway will be scratching their heads. Isn't Hewlett-Packard the company that back in 1993 and 1994 was lobbying hard for a low-tax repatriation of its foreign earnings? Didn't Congress give this company what it wanted when it passed the American Jobs Creation Act of 2004? And didn't Hewlett-Packard go on to repatriate $14.5 billion in cash?

For Democrats this development is a chance to make some political hay. For years Sens. Carl Levin, D-Mich., and Byron L. Dorgan, D-N.D., have been pleading for cutbacks on tax breaks to U.S. companies that shipped jobs abroad. Democratic presidential candidate Barack Obama of Illinois adopted this as a key component of his economic program, and during the Democrats' brutal primary battle he got no argument on that point from rival Hillary Rodham Clinton. What's the point of tax breaks for multinationals if they are going to send jobs offshore anyway?

Even sweeter for the Democrats is that they can point out that Carly Fiorina had been the CEO of Hewlett-Packard when the company lobbied so hard for the change in law. (Fiorina was forced out of that job in 2005.) Now she is a prominent Republican spokesperson on economic issues for Arizona Sen. John McCain's presidential campaign.

The Republican response is likely to be twofold. First, they can note that the Democrats in 2004 supported the repatriation provision almost as fervently as did the Republicans. Second, they point out that it is the remaining uncompetitive aspects of U.S. international tax law -- tough antideferral rules and limitations on foreign tax credits -- that are behind the job losses.

From an economic perspective, the interaction between tax rules and Hewlett-Packard's layoffs is small potatoes. While U.S. international tax rules have a large effect on after-tax corporate profits, they have limited effect on U.S. job creation one way or the other. Nobody ever really expected the repatriation provision to save U.S. jobs, and hence it is no real surprise that jobs are going. Other moves to liberalize international tax rules have had about the same, minimal impact.

But these dull realities are likely to be muffled by what will likely be a loud political debate on the emotionally charged issue of jobs. Fiorina's old company may have just handed Obama and the Democrats some ammunition for influencing an election that increasingly looks like it will be decided on economic issues.