Recently, I had the honor to testify before the Ways and Means Subcommittee on Select Revenue Measures about using changes to repatriation policy as a way to fill the gap in the Highway Trust Fund (HTF).
As I testified, Congress should always makes changes to repatriation policy in the context of tax reform, specifically in conjunction with moving from the current worldwide tax system to a territorial one.
My written testimony is here.
Below are my spoken remarks to the committee:
Good afternoon, Chairman Reichert, Ranking Member Neal, and distinguished members of the committee. Thank you for inviting me here today.
My name is Curtis Dubay. I am research fellow in tax and economic policy at The Heritage Foundation. The views I express in this testimony are my own and should not be construed as representing any official position of The Heritage Foundation.
Changes to repatriation policy have been spoken about often as a way to fill the hole in the Highway Trust Fund, but details have been scant.
There may be confusion because there are usually two distinct options discussed when it comes to using changes to repatriation policy as a way to fill the gap in the HTF.
It is important to differentiate between those options because they would have distinctly different ramifications.
The first option would be Congress either granting a repatriation holiday on the untaxed overseas earnings of U.S. businesses at a lower rate than current law, or deeming those earnings repatriated and taxing them at a lower rate. In this option, repatriation would be a stand-alone policy to fund the HTF.
The second option would be to establish a territorial system in place of our current worldwide one, and deem the foreign earnings repatriated to help facilitate the transition to that better system.
The stand-alone option would not be sound policy.
A territorial system would strongly boost economic growth.
It is badly needed because the current worldwide system is one of the biggest inhibitors of growth for the U.S. economy today.
Moving to a territorial system, no matter in the context of fundamental reform, business-only reform, or a as an independent policy improvement would be a boon for job creation and wage growth for American families.
Under the current worldwide system, with deferral, businesses understandably delay paying U.S. tax on their earnings because paying it would make them highly uncompetitive against their foreign competition.
Regardless of how Congress proceeds on tax reform, changes to repatriation policy should always be handled in conjunction with international reform that switches from the worldwide system to a territorial one.
The worldwide system has caused businesses to compile those earnings abroad. It only makes sense that changes to how they are taxed be used to repair the harm it causes.
Deeming those earnings repatriated and taxing them at a lower rate than under current law would make moving to a territorial system easier. The revenue can be used to offset the tax cut that JCT [Joint Committee on Taxation] is likely to score a territorial system as. And the revenue can also be used to compensate those businesses that stand to lose because of the devaluation of deferred tax assets.
This is not a tax hike because it would be part of broader reform.
Making changes to repatriation policy within tax reform that establishes a territorial system stands in stark contrast to using repatriation changes to fund the HTF without moving to a territorial system.
Taxing the overseas earnings of U.S. businesses to fund the HTF would break the sensible user-pays principle that has long underpinned the HTF. There is no connection between U.S. multinational businesses and domestic highway use.
A repatriation holiday, one of the policies offered by some under the stand-alone option, is unlikely to raise revenue in the traditional 10-year budget window.
To counteract this, some have floated a stand-alone deemed repatriation because it would unambiguously raise revenue.
As a stand-alone measure, deemed repatriation is a tax hike, even though the rate applied to the overseas income would likely be less than under current law. This makes a stand-alone deemed repatriation yet another tax-and-spend scheme. In addition to that, it is also more troubling than a holiday because it is compulsory rather than voluntary.
Either a repatriation holiday or a stand-alone deemed repatriation would be a temporary fix.
Congress should instead focus on other reforms to the highway program that would be sustainable, would not break the user-pays principle, and would not raise taxes.
Thank you again, and I look forward to your questions.