By Bernie Becker - 07/16/14 10:29 AM EDT
The Obama administration is dialing up the pressure on Congress to stop companies from slashing their tax bill by moving their headquarters overseas.
Asserting that the U.S. needs "a new sense of economic patriotism," Treasury Secretary Jack Lew sent a letter to lawmakers urging them to pass legislation that would effectively ban the practice known as “inversion” and make it retroactive to May.
In the Tuesday letter to congressional tax writers, Lew said that dealing with the cross-border tax deals through larger reform remained the best solution.
But he added: “As we work to do that, we should prevent companies from effectively renouncing their citizenship to get out of paying taxes.”
The Democratic push on inversions has the added bonus of fitting in with one of the party’s major election-year messages — that Democrats will do a better job of protecting the middle-class than Republicans.
Republican tax writers have said that Democratic proposals fall short because they fail to deal with the underlying problem: an out-of-date U.S. tax code that features the highest corporate rate in the industrialized world, at 35 percent.
House Ways and Means Committee Chairman Dave Camp (R-Mich.) dismissed Lew’s letter on Wednesday, saying he was open to hearing the White House’s plan to deal with inversion through tax reform.
“I have a plan to address it. I’d like to see his plan,” said Camp, who released a broad tax overhaul plan this year. “I’m glad that he agrees with me that an approach to tax reform would be the best solution to this problem.”
Washington began to take note of the inversion deals in May, when the pharmaceutical giant Pfizer made a bid to take over its British counterpart, AstraZeneca.
Just this week, two other pharmaceutical companies, AbbVie and Mylan, took steps toward inversion. Medtronic, a medical device company, and the pharmacy chain Walgreens have also moved toward shifting their address abroad in recent months.
In all, the Congressional Research Service says that close to 50 companies reincorporated abroad over the last decade.
In his letter to congressional tax writers, Lew argued that U.S. companies seeking to change their address often make few changes to their business practices while still benefiting from American property rights and the government’s infrastructure and research support.
Congressional Democrats pushing legislation to combat inversion, including Sen. Carl Levin (Mich.) and Rep. Sandy Levin (Mich.), have made similar arguments.
The Levin brothers have each introduced similar bills that would essentially only allow U.S. companies to shift their legal address abroad if they merge with a corporation of at least the same size.
President Obama’s most recent budget had a proposal along those same lines. Currently, a U.S. company can switch its address if its shareholders control 80 percent of the merged firm.
Wyden, who took over the Finance Committee gavel earlier this year, had previously said that while he wanted a solution to be retroactive to May, his preference was to deal with inversion in tax reform.
The Obama administration has floated overhauling the tax code for businesses, and to use revenue raised from those changes to help pay for infrastructure improvements. But Democrats and Republicans remain divided on even some of the most basic hurdles on tax reform, even whether to include individual taxpayers.
In a Wednesday statement, Wyden insisted “this inversion loophole must be plugged” while stopping short of embracing any of the current stand-alone proposals.
"As the speed of inversions increases, this will only fuel bipartisan urgency to stop companies from deserting the U.S.,” Wyden added. “I’m talking with my colleagues and exploring options for addressing this in the near and long term.”
Rep. Levin said that Lew’s letter and the increased interest from the Senate was a sign of growing momentum and support for their efforts, and predicted that Wyden would get behind the sort of plan that he and his brother are floating.
Sen. Levin’s bill would implement a two-year moratorium on inversions, while Rep. Levin’s measure seeks a more permanent fix.
“I think standing pat when so many companies are moving ahead makes it difficult for Republicans. They can’t simply say wait until tax reform,” said Levin, the top Democrat on the House Ways and Means Committee.
“I think the average citizen is saying is: ‘I can’t change my address and pay no taxes, or not pay taxes I would otherwise have to pay,’” Levin added. “It’s an issue really of fairness.”
But Senate Minority Whip John Cornyn (R-Texas) said the Democratic approach would essentially blame companies for Washington’s inability to rewrite the tax code.
Outside conservative groups sounded a similar note, with the Club for Growth saying it was “shameful” of Lew to question companies’ economic patriotism.
“It just seems to be a logical consequence to our broken tax code,” Cornyn said of inversion. “These sort of rifle-shot or Band-aid approaches, I think, are the wrong way to go.”
Updated at 6:10 p.m.