What if there were a magic source of free money, sitting just outside the borders of the United States — across the Caribbean in the Cayman Islands, perhaps — just waiting for a sharp politician to come along and enact the right policy to haul those trillions of dollars back to the U.S.?

This, in short, is often how repatriation — or the return of corporate foreign cash to be taxed in the U.S. — is sold to the public: a source of revenue and economic stimulus that, under the right circumstances, can boost desirable but hard-to-fund things like transportation.

But the appeal of the repatriation idea is deceiving. Devising a sound way to bring back the profits that U.S. corporations have filed to foreign subsidiaries — which currently totals around $2.5 trillion — is something that has eluded politicians of both parties for decades.

Presidents George W. Bush and Barack Obama advanced measures of their own; Bush implemented his idea, a temporary tax holiday, but it is remembered as a resounding dud.

Donald Trump is the latest president to take a crack at it: with his party in control of the White House and Congress, he is in a position to enact sweeping tax reform, including changes to how and where U.S. companies are taxed, and what to do with all that cash that’s overseas.

Trump is proposing a one-time tax on that overseas cash — at a rate yet to be officially determined, but reports suggest 10 percent— as part of his tax package, which also includes reworking the tax code to only tax domestic revenue.

Perhaps Republicans and Democrats could agree on a rate at which to tax this corporate money. But where Trump’s plan is vague — and where there is partisan disagreement — is how to eliminate the incentive for companies to keep storing profits overseas in the future.

Can America’s new dealmaker-in-chief finally get the job done? And if he does, what will it mean for the federal bottom line — and for Minnesota?

Trillions overseas

To understand how companies might be enticed to bring their money back to the U.S., it helps to understand why they’re holding the money abroad in the first place. Estimates vary, but it’s accepted that U.S. companies have about $2.5 trillion dollars parked overseas. The explanation for why that is lies in the particular qualities of the U.S. tax code.

For one, the statutory U.S. corporate income tax is 35 percent, the highest among the developed economies in the Organization for Economic Cooperation and Development, or OECD. U.S. companies pay an average of 27 percent tax after credits and deductions, which is below the OECD average, but still far too high in the eyes of many politicians, particularly Republicans.

The structure of the tax code, however, gives companies a way to avoid the U.S. corporate tax rate. Unlike Australia, the United Kingdom, and Japan, the U.S. taxes corporate income no matter where in the world it’s earned. But the U.S. does not tax foreign income as it’s earned — it’s only subject to taxation once that income is returned home to the company, typically as a dividend.

That means that U.S. companies can book earnings through foreign subsidiaries and let the money sit there for years without repatriating it to the parent company on American soil. Tax policy experts, like Harry Stein at the liberal Center for American Progress, also point out that this money can be put to use in the U.S. even if it’s technically offshore for the purposes of tax law.

“The money is not stuffed under mattresses in the Cayman Islands even if it’s held by Cayman entities for tax purposes,” Stein explained in an interview. “The money is offshore for tax purposes, but it is often not offshore in a real economic sense.” Corporations can use “offshore” money through their subsidiaries, he says, to do things like buy Treasury bonds or even stock in other companies.

Even so, the Citizens for Tax Fairness advocacy group estimates that, in this way, U.S.-based corporations are currently avoiding an IRS bill to the tune of $700 billion.

V.V. Chari, a tax policy expert at the University of Minnesota, says the system creates an incentive for tax deferral that works like an individual retirement account. “With IRAs, you don’t pay tax with the income that’s in the IRA plan as it’s generated,” he explains. “You only tax it when you withdraw it. Especially if you plan to withdraw the money a number of years later, it provides a strong incentive to defer taxes.

“Eventually you pay taxes at the U.S. rate, but meanwhile, it accumulates at a lower tax rate, the rate that the foreign country charges.”

Naturally, U.S. companies look to place their foreign profits in jurisdictions with low tax rates, or so-called “tax havens.”

The Public Interest Research Group, a consumer advocacy group, published a report in 2016 about tax havens. It identifies about 50 jurisdictions as tax havens, from Bermuda and the Cayman Islands — places virtually synonymous with balance sheet trickery — to countries like Ireland and Singapore, which have pursued very low tax rates to attract business.

The PIRG report found that nearly three quarters of Fortune 500 companies operate subsidiaries in tax havens, with 14 Minnesota-based companies appearing this list. 3M led the way among them, with $12 billion stored in 14 subsidiaries. It is followed by St. Jude Medical with $5 billion in 21 subsidiaries, and General Mills with $2 billion in 52 subsidiaries.

Best Buy, Target, UnitedHealth Group, and Ecolab also had hundreds of millions of dollars overseas, per the report.

Overall, U.S. tech companies hold the most overseas cash. Apple holds about $180 billion outside American borders, General Electric holds $119 billion, and Microsoft holds $108 billion, according to a report from Oxfam.

Recouping tax revenue

This corporate practice, perfected over decades, has been a significant drag on U.S. government coffers. The Congressional Research Service reported in 2013 that untaxed offshore money costs the federal government anywhere from $30 billion to $90 billion annually.

It also costs state governments significant revenue, as corporations skip out on state corporate taxes, too. The Public Research Interest Group estimates that states lose, in total, about $20 billion annually.

Some states have passed, or considered, legislation to tax overseas money. Montana, the first state to do so, recovered $7 million in state corporate tax in 2010, reports Bloomberg.

Were Minnesota to pursue a similar path, the windfall might be more limited. The Minnesota Department of Revenue says it treats repatriated earnings as corporate dividends, which are eligible for the Minnesota Dividend Received Deduction. This could exempt 80 percent of repatriated earnings from taxable income. (Minnesota has a 9.84 percent corporate income tax.)

For a long time, politicians in both parties have loudly taken issue with companies keeping their money offshore. There is, of course, the basic argument that they are skipping out on their obligations to Uncle Sam; Democrats in particular argue that U.S. corporations benefit from taxpayer dollars while failing to contribute to the system themselves.

Returning that money to be taxed, the argument goes, would stanch the flow of government red ink by increasing revenue, and could be a boost to funding important programs. Politicians often hold up infrastructure projects — which are notoriously difficult to secure agreement on how to fund — as the kind of thing that could benefit from repatriating offshore cash.

Others see broader effects: a popular argument from politicians is that stashing profits overseas stifles job growth and innovation in the U.S., and that returning this money stateside would be a positive for American workers.

The one-page Trump plan

How would Trump tackle this problem? The White House’s one-page memo, distributed to reporters to explain the president’s tax plan, has very little detail on what exactly he’d do regarding offshore cash.

It simply features two bullet points: “territorial tax system to level the playing field for American companies,” and “one-time tax on trillions of dollars held overseas.” (No specific figure for a rate is suggested, though reports have said it will be 10 percent, which is the rate Trump proposed during the campaign.)

That first bullet point is important: it’d change the U.S. corporate tax code to make it like those of Japan or the U.K, which just tax domestic revenue. The second part is what gives tax experts pause, as a “one-time tax” can mean a few different things.

A one-time tax could be mandatory or, as it has been in the past, voluntary. During his presidency, George W. Bush implemented a so-called “repatriation holiday,” in which corporations were invited to repatriate offshore money at a 5.25 percent rate over two years.

Backers claimed the holiday would stimulate job growth, but a U.S. Senate study from 2011 found it did not. Corporations brought back over $300 billion, and avoided $3.3 billion in taxes; instead of spurring hiring and domestic investment, the study discovered that major companies simply bought back stock and increased executive pay.

The idea of the repatriation holiday has had some legs, however. In 2015, Sen. Rand Paul and former Sen. Barbara Boxer proposed a five-year repatriation holiday to boost the Highway Trust Fund, a proposal that was scored to cost the government over $100 billion.

Experts say that though Trump’s plan is vague — “this proposal is not a tax proposal,” the U of M’s Chari says — they agree it’s likely Trump is proposing a mandatory, not voluntary, tax on all offshore money as the U.S. transitions into a different tax system that only targets domestic revenue.

This is sometimes called a transition tax — a one-time levy on past profits, a “toll charge” that “would clean the slate of existing tax liabilities,” says a report from the Center for Budget Policy and Priorities.

What would happen?

If the 10 percent plan moved forward, companies with significant offshore holdings would get a major discount on their tax liability.

3M, for example, would owe $1.2 billion in taxes, as opposed to $4.2 billion at the statutory corporate rate. (It’s also possible that companies could get additional deductions from foreign tax obligations.) It is not clear how much 3M, which is headquartered in Maplewood, would owe in taxes to the state of Minnesota, since it does business in many states.

GOP Rep. Jason Lewis, who sits on the Budget Committee that plays a role in tax policy, said in a statement to MinnPost that he would “support looking at a transition tax in the context of wider reform of our tax code, which we need to do in order to both repatriate overseas profits and make life easier for hardworking Minnesotans.”

Progressives like Rep. Keith Ellison also want to bring those profits back, but bristle at the implications of passing a measure like the one Trump has advanced. “You’re like, I don’t want to pay unless you give me a giant discount other people don’t get? It bugs me and I don’t want to be a part of it,” he told MinnPost. “I’ll never vote for it.”

Experts anticipate that, as with Bush’s tax holiday, workers would see little benefit from the official return of this cash to American soil. “You should not expect that would trigger a lot of business investment,” says Alan Viard, who studies tax policy at the conservative American Enterprise Institute. “Maybe a little,” he adds.

“Informed analysis suggests you should be skeptical of any claim this will lead corporations to end up hiring a lot of American workers and paying them well,” Chari says. As it is, he explains, big companies can essentially borrow against their offshore holdings if they want to make big domestic investments, without returning a single dollar stateside in the short run.

Even a 10 percent rate, though, would raise about $250 billion in revenue for the federal government. (House Republicans have aimed for something closer to eight percent, while Barack Obama failed in his push for a 14 percent rate.)

So, even though it likely would be spread out over some years, repatriation still promises a significant amount of revenue — about a quarter of the federal government’s annual budget. (Experts say this could appear fiscally responsible in the short term but potentially add to deficits in the long term, if paired with major corporate tax reductions.)

There’s popular support for earmarking that quarter of a trillion, or whatever the sum may be, for transportation funding — avoiding a potentially messy fight over raising the gas tax, a politically unpopular move.

“It is like a silver bullet to get out of a tough choice,” Viard says, adding, “there’s no great harm if they do it that way.” For his part, Ellison described the promise of infrastructure investment as the “bait covering up the hook” of corporate tax reform.

The big question mark with repatriation, though, is how it’ll fit into Trump’s broader tax reform plans. A one-time tax solves one problem; how to eliminate the incentive for companies to shift profits abroad is an entirely different one.

For Republicans, the answer is clear: reduce statutory U.S. corporate tax rates, and more money stays here. To that end, Trump has proposed reducing that rate from 35 percent to 15 percent.

For Democrats, many of whom are opposed to such sharp reductions in the corporate tax rate, things are more complicated. Sen. Al Franken told MinnPost he simply doesn’t want to pass any policy that incentivizes future stashing of money overseas.

Loophole-closing is a proposed answer to that: CAP’s Stein says storing money offshore can be made more difficult by cracking down on common methods to shift profits to tax havens, what he calls the “low-hanging fruit.”

With Republicans in control of D.C.’s levers of power, is an end in sight to one of Washington’s most enduring policy problems? Don’t hold your breath, says AEI’s Viard. He gives three possibilities: one is that Congress passes a tax package next year that includes the big changes Trump has talked about.

The second is a bill that doesn’t significantly alter the rules. The third? “Nothing happens. We don’t get a tax bill,” he says. “It’s starting to seem more likely than it used to be.”

IMAGE: U.S. National Economic Director Gary Cohn and Treasury Secretary Steven Mnuchin introduced Trump’s tax-reform proposal last month. The plan was light on details, but it called for a “one-time tax on trillions of dollars held overseas.”

For more on this story go to: https://www.minnpost.com/politics-policy/2017/05/trump-s-tax-plan-seeks-bring-back-trillions-corporate-profits-held-abroad-ca