Written on: August 21st, 2014 in Job Creation
Like most Governors, I focus every day on how my state can successfully compete in a global war for jobs. Delaware is not just competing for jobs with Maryland, Pennsylvania, or even California. We compete for jobs with economies from Bangalore to Berlin.
The war for economic growth and prosperity is not a fair fight. And one major source of unfairness, one major hindrance to our growth here in America, is our own U.S. Tax Code.
In recent months, numerous American companies like Walgreens, Pfizer, and Chiquita have explored merging with foreign competitors so that they can move their headquarters – and their tax payments – overseas.
This is the so-called “tax inversion” wave, in which companies seek to merge with foreign companies so that they can reduce their overall corporate tax burden. The economics of these deals are not that complicated. U.S.-headquartered companies pay the highest corporate income taxes in the developed world. If they can reduce their tax burden, that frees up millions of dollars to pay to shareholders or reinvest in their businesses.
One of the easiest ways to reduce that tax burden is to merge with a foreign company in a jurisdiction with a lower tax rate. In essence, a U.S.-headquartered company acquires a foreign rival, transfers its legal headquarters to the foreign country, and keeps huge tax savings.
In many of these cases, the tax savings from leaving the U.S. behind becomes part of the financing for the deal. In one recent proposed merger involving a company with a large presence in Delaware, news reports revealed that as much as 60% of the purchase price could be funded by reduced taxes. In a case involving a company based in Minneapolis, these reported tax savings equated to over 32% of the purchase price of the foreign company.
These tax inversions come at a significant cost for the rest of us. The federal government loses significant corporate income tax revenues. In Delaware, where many American companies are incorporated, we lose both the income tax on corporate profits and the fees they pay to incorporate here.
But tax revenues are not the most important thing. Moving the headquarters of these American companies overseas means the loss of jobs here in America. As these companies become taxpayers and corporate citizens in places like Ireland and the United Kingdom, the companies will have less incentive to grow here – in the states and communities they used to call home.
Congress and the Obama Administration cannot wait any longer to come to agreement on reforming our corporate tax code to remove the loophole that creates this perverse incentive for sending job overseas and, instead, incentivize job growth at home.
The broad parameters for tax reform are well-accepted by Democrats and Republicans. We must reduce our country’s high corporate tax rates to support our business community while encouraging companies to repatriate foreign profits. And we must close loopholes that allow some companies to pay little taxes by pursuing strategies like inversions as they otherwise benefit from conducting much of their business in the United States. In doing so, we can simultaneously end the motivation for inversions and better support American companies and workers.
The inequities of the current system affect every state – red and blue. So stopping this tax inversion wave should not be a partisan issue.
I am perfectly comfortable competing in a fair fight for jobs. Delaware has much to offer those who make the decisions about where to invest their company’s private capital. We have an experienced and productive workforce, reasonable taxes, a responsive government and an unmatched quality of life. Those things matter to the corporate executives that I talk with. But if they save billions by moving their headquarters to London, they will do so.
More and more companies are embracing these tax inversions with each passing month. While not every deal succeeds, the trend is unmistakable and will continue until we see reform from Washington. Our choice is simple. Change our tax policies or expect to see more jobs and needed revenue crossing our borders, headed the wrong way.