Tax Windfall May Not Boost Hiring Despite Claims
Some Companies Plan to Use New Break on Foreign Profits For Debt and Other Needs
By GLENN R. SIMPSON and GREGORY ZUCKERMAN Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- Big companies long lobbied for a tax cut on their overseas profit as a way to spur U.S. job growth. But now that it has been granted, much of the windfall won't go toward hiring but for such uses as strengthening balance sheets, buying back shares and making acquisitions.
The one-year break, included in a sweeping tax bill that cleared the Senate and went to the president this week, will allow hundreds of billions of dollars in overseas profit to be brought home by dozens of U.S. companies at a steeply reduced tax rate. By some estimates, U.S. companies have parked as much as $500 billion in profit abroad to avoid taxes back home.
Companies say the repatriated money, which would be taxed at a 5.25% rate instead of 35%, will provide stimulus and better position them for hiring in the long run. Software company Oracle Corp., for instance, likely will use some of the billions it will bring home to help finance its aggressive acquisition strategy. Computer maker Hewlett-Packard Co. says it may devote a substantial portion of the several billion dollars it plans to bring back to paying down debt from its purchase of Compaq Computer Corp. -- a transaction that led to layoffs.
The Bush administration has been lukewarm about the tax bill, though President Bush, who has been attacked by Democratic opponent Sen. John Kerry over sluggish job growth during his administration, is expected to sign it. The repatriation provision is among the most far-reaching of the many business tax breaks included in the sweeping bill, formally dubbed the "American Jobs Creation Act of 2004." It was an amendment to legislation that began as a corrective to an export tax break for U.S. companies that caused a rift with allies and was ruled illegal by the World Trade Organization.
Last week, Treasury Secretary John Snow wrote that an analysis by the Council of Economic Advisers "indicates that the repatriation provision would not produce any substantial economic benefits." Allen Sinai, the Wall Street economist who was one of the bill's biggest backers, says he thinks the bill might create only 50,000 jobs annually for the next few years, far lower than the 500,000 figure that some politicians have invoked while citing his work.
"Selling the bill based on an increase in jobs is symptomatic of the political silly season," says Michael Holland, chairman of Holland & Co., a New York investment company. "The reality is the repatriation may or may not cause net new jobs; the one thing it does is remove an artificial barrier so U.S. companies can, at the margin, be more efficient with what they do with their capital. Longer term that is good for workers and companies, but to argue that it will immediately lead to jobs is illusory at best."
At Hewlett-Packard, "debt payment and consequent improvement of the balance sheet would certainly be a possible use of the funds, even a likely use," said Vice President Dan Kostenbauder. The company has $14.4 billion in earnings parked offshore.
Similarly, some of the roughly $5 billion that Oracle has invested offshore could allow it to make acquisitions that otherwise could be restrained by its protracted effort to buy rival PeopleSoft Inc. -- a transaction that, like the H-P-Compaq deal, likely would produce layoffs. Currently, Oracle has a $7.7 billion cash bid outstanding for PeopleSoft. An Oracle official said that the funds won't benefit the firm's PeopleSoft bid directly, since it is already financed.
Drug company Schering-Plough Corp., which is sitting on $11 billion overseas, probably will apply some of its foreign cash to a $500 million bill from the Internal Revenue Service for allegedly improper deductions, one analyst said. The firm also has heavy domestic debt and needs the cash -- virtually all of which is offshore, according to regulatory filings. A spokesman for the firm had no immediate comment.
Under current law, U.S. corporations are required to bring overseas profit home for taxation annually. But the law provides a broad exception for profits that are "permanently" reinvested in overseas operations.
Over the past decade, companies have grown increasingly skilled at sheltering foreign profits offshore by labeling them permanent investments, producing a huge pool of capital. U.S. firms have long argued that what they see as high taxes on overseas profit, which most other developed countries do not impose, hamper their ability to compete.
The new law would let American companies bring home for one year, at the 5.25% rate, the total amount of undistributed foreign earnings disclosed to the Securities and Exchange Commission prior to June 30, 2003. The funds can be spent for any purpose other than executive compensation, but companies must create a "domestic reinvestment plan" approved by senior management and directors.
Some companies will almost certainly use repatriated funds for job-creating investments. Intel Corp., which has built several facilities within the U.S. in recent years, hasn't decided what it will do with its potential $7 billion windfall, but more investment in facilities is likely to be one of its top priorities, said company spokesman Chuck Mulloy.
"Acquisitions, dividend increases, share repurchasing, paying down of U.S. debt -- those are high up on the list of possible uses for the funds," said Greg Kelly of Susquehanna Financial Group, who talked to many large firms for an analysis of their plans.
But investing in new facilities and expanding payrolls, he says, are much further down in corporate priorities. "Most tech companies are going to be using it for acquisitions and share repurchasing," he adds.
For every Intel, there's a Bausch & Lomb, which Mr. Kelly said told him that its priorities for the more than $500 million it may repatriate include debt reduction, share buybacks and acquisitions. Bausch's director of communications, Margaret Graham, said it was premature to speculate.
While most American multinationals will benefit from the bill, the legislation is a particular boon to technology and pharmaceutical companies, which sought it most avidly. They are best able to shift earnings abroad due to the sometimes intangible nature of their products, which can be codes and formulas. Proponents and critics of the bill continue to disagree over whether the tax holiday will have any effect on these firms' propensity to send assets and hiring offshore.
For the past two years, a group of mostly tech and pharmaceutical multinationals with huge overseas stashes of profits, calling themselves the Homeland Investment Coalition, argued the law would create "hundreds of billions of dollars in private investment ... allowing U.S. companies to remake themselves and create new and better jobs within the United States."
Several congressional supporters of the bill cited a 2003 study by an economist, Mr. Sinai, of Decision Economics Inc., which argued that the tax bill would lead to more hiring, giving a boost to an economy still struggling to add jobs. Under one scenario, Mr. Sinai wrote, the bill could produce 660,000 jobs in the two years after enactment.
That led Sen. John Ensign, a Nevada Republican, to claim, "One estimate from a very well-respected economist, Allen Sinai, has said 660,000 jobs would be created." Democrats such as California Sen. Barbara Boxer made similar use of the study.
But in an interview, the economist now says he is much more cautious about how much job creation will result from the new bill. He stresses that footnotes to the study suggest that the figures on anticipated new jobs are based on past periods when companies were presented a windfall, and often went on hiring sprees.
This time around, he cautions, companies likely won't do nearly as much hiring, in part because they are keeping a closer eye on costs and are wary of things like health-care and pension obligations.
"I feel comfortable with [a prediction of] 50,000 extra jobs a year," he says, rather than the higher figures cited by supporters of the bill. "Businesses are just reluctant to hire, this bill is no panacea for anemic job creation."
One study, by economists at J.P. Morgan Chase, surveying 28 large companies accounting for about 25% of all unrepatriated foreign profits, suggests that much of the money coming back to the U.S. will be used for purposes that won't aid growth or job creation. Rather, it will be used to strengthen the balance sheets of companies.
More than half of companies surveyed by the bank said they would use the money to improve the financial picture of the companies, and their investors, by buying back debt or shares, or paying dividends. About a third of the companies anticipated spending the windfall, capital expenditures that likely will boost the economy. The results come amid growing evidence of reluctance on the part of U.S. companies to boost capital spending in recent months, despite some signs of improved financial health in some industries.
Bruce Kasman, head of economic research at J.P. Morgan, predicts that the tax bill will add about a half a percentage to the rate of growth of U.S. gross domestic product during the next 12 to 18 months, and lead to an addition of between 400,000 and 500,000 jobs over the next two years.
"That's neither dramatic nor insignificant impact," Mr. Kasman says. He says companies may not show as much reluctance to hire as they have been in recent months, suggesting some job gains will result from the windfall from foreign earnings.
The technology industry, though, still sounds optimistic. "I find it a little premature to start knocking down whether this is going to create jobs, said Rhett Dawson, president of the Information Technology Industry trade group, who notes that most firms are still studying the bill. "It's also a little distracting, because any time you bring money back to this country rather than have it sitting someplace else, it is more likely to be creating jobs," he said.
--David Bank contributed to this article.