House Majority Leader Tom DeLay (R-Texas) predicted last fall that “The American Jobs Creation Act will keep American jobs in America.”
Despite its title, however, the legislation passed in the final days before Congress adjourned last year isn’t likely to create many jobs, according to critics who say it may end up being among the largest corporate welfare measures enacted in the past half century.
The number of jobs created under the jobs creation act of 2004 will be “trivial,” according to Dean Baker, co-director of the Center for Economic Policy and Research in Washington D.C.
“The idea that firms will invest [and create jobs] because they have more money here is ridiculous. They already have all the money they need here,” he said noting firms have been reporting record profits for the past couple of years.
In the past decade corporate profits before taxes have risen 56 percent to a total of $1.057 trillion in 2004, according to the Federal Reserve Bank of St. Louis (this sentence as published has been corrected in this text).
The “American Jobs Creation Act” will permit corporate America to bring back any portion of the $650 billion in profits earned overseas during the past decade, while avoiding most of the income tax liabilities they normally would have to pay. Estimates are that at least half that money will be brought back to the United States.
Companies can bring the money back in their fiscal 2005.
Currently, corporations pay taxes on the earnings they make outside the United States. But to eliminate issues of double taxation they are permitted to claim a credit on their U.S. income tax returns.
While the money earned overseas is reported in corporate quarterly and annual reports, typically most companies husband the money in overseas accounts to finance their overseas operations and avoid paying U.S. income taxes.
The jobs creation act allows multinational companies a one-year window to return foreign profits to the United States at a 5.25 percent tax rate, a fraction of the normal 35 percent rate. If half of the $650 billion comes back under the act, the government will net about $17 billion. Under standard tax rates it would net $110 billion.
Though billed as a jobs program, rules developed to implement the law by the Treasury Department don’t require companies to create any new jobs with the money they bring back.
To qualify for the tax cut, companies must instead file a “reinvestment plan” showing that they intend to spend an amount equivalent to the profits they bring back on hiring workers, capital investments, research, acquisitions, advertising or debt repayment.
The act appears to promise that jobs will be created, but nothing in the legislation or in the rules that have subsequently been issued by the Department of Treasury requires companies to generate new jobs.
Three Chicago-area companies, Abbot Laboratories, Illinois Tool Works and Sara Lee Corp., say they plan to bring back, in total, as much as $3 billion. ITW, which says it could return as much as $750 million, said it likely would reinvest the money through capital expenditures.
Abbott, which already brought back $600 million, said it used part of the money to fund its pension plan.
Sara Lee, which is repatriating $928 million, plans to use the money for non-executive employee compensation.
Julie Ketay, a spokeswoman for the Chicago-based food company, said Sara Lee hopes the money will help it retain employees as it proceeds with a restructuring announced in February. She said the money might also be used for job creation.
While companies are exploring similar beneficial uses, some economists doubt it will have a measurable affect on the fiscal health of the nation.
“As an economic stimulus package, this will have little bearing,” said Mark Zandi, chief economist with Economy.com. “This is more of an accounting exercise for the CFO.”
If it doesn’t significantly increase the number of jobs, Jack Ablin, chief investment officer for Harris Bank, said the legislation could boost the value of the dollar–a move that could also help drive down the price of oil.
“It is a huge boost for the dollar near-term if we get $300 billion repatriated,” he said noting only $600 billion is traded annually between the world’s central banks.
Much of the money is being held in euros, British pounds or other foreign currency and will have to be converted into dollars before it can be returned to the United States.
As recently as the beginning of this year, the euro was trading at $1.35 to the dollar, but the value of the dollar, which has fallen for the past two years, is expected to rise with increased demand as companies are forced to buy dollars in foreign exchange markets.
Some of the recent strengthening of the dollar against the euro and British pound can be traced to the expectation that most multinational U.S. companies will make heavy use of the act, Ablin said.
However, most companies, including those in the Chicago area, have yet to indicate how much of the money they are holding in overseas bank accounts is eligible for the special tax rate, which ends with the expiration of a company’s 2005 fiscal year.
There will likely be massive amounts of money involved.
Chicago-based Boeing Co., which operates worldwide and has sold most of its multimillion dollar planes in recent years to foreign airlines, has yet to indicate how much money it has in overseas bank accounts.
Other large area companies, such as McDonald’s Corp., Motorola Inc., Wm. Wrigley Jr. Co., Deere & Co. and Caterpillar Inc., say they are still studying the legislation and subsequent rules issued by the Treasury Department.
Pfizer Inc., the New York City-based drug giant, has announced it plans to return $28 billion in foreign profits to the U.S. Under the act it will pay less than $1.5 billion in taxes, instead of the nearly $10 billion it would otherwise be required to pay.
Hewlett-Packard Co. says it plans to return as much as $14.5 billion, for which it will pay less than $1 billion in taxes. The Palo Alto, Calif.-based company said it is still considering how it will use the money. One possibility may be to pay down the $200 million debt on its books from the acquisition of Compaq Computer Corp.
Procter & Gamble Co., which can repatriate as much as $11 billion, may end up using some of the money to pay for its $57 billion acquisition of Boston-based Gillette Co. Rather than creating jobs, that acquisition could result in the loss of jobs.
Some have suggested that the legislation might indirectly lead to the creation of more jobs by freeing up cash that corporations would otherwise have used to fund such things as pensions, research or even advertising. Others disagree.
“It is still an open question as to whether the bill will live up to its name,” said Carl Tannenbaum, chief economist for Chicago’s LaSalle National Bank.
“We could find out this is a wolf in sheep’s clothing,” he said. “If this measure does not pay for itself, taxpayers will have to pay for it.”
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The American Jobs Creation Act, enacted Oct. 22, 2004, allows foreign profit to be repatriated at a reduced 5.25 percent tax rate over one year if the funds are reinvested in the United States, ostensibly to create jobs.
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jschmeltzer@tribune.com
