As talk on Capitol Hill turns toward a possible 'tax holiday' for large corporations with huge sums of money parked overseas, a new report points out that many of the companies that benefit from that congressional largesse may have gained a big subsidy, but also eliminated thousands of jobs. And high on that list are several big drugmakers.
The Institute for Policy Studies finds the 2004 tax holiday enabled 843 companies to reduce tax rates from 35 percent to just over 5 percent. These companies repatriated $312 billion in profits, while avoiding about $92 billion in federal taxes. And 58 companies, which accounted for almost 70 percent of all funds repatriated, slashed nearly 600,000 jobs while saving an estimated $64 billion in taxes.
Drugmakers, however, were singled out as prime beneficiaries - they repatriated more than $100 billion in offshore earnings, and kept an estimated $30 billion in tax savings. In fact, drugmakers accounted for six of the Top 10 tax holiday beneficiaries. Meanwhile, many of these same drugmakers laid off tens of thousands of workers.
Among the Top 10 layoff leaders, two were drugmakers. Pfizer repatriated $40.1 million in 2004 and 2005 and, as of last year, had $48.2 million in offshore funds, while laying off 58,071 people between 2004 and 2011. Merck repatriated $25 million and had $40.4 billion in offshore funds as of last year, and laid off 44,400 employees during the same seven-year stretch.
Further down the list, Johnson & Johnson repatriated $10.8 million and had $37 million in offshore funds as of last year, while announcing 9,900 layoffs between 2004 and 2011. Eli Lilly repatriated $8 million, had $19.9 million in offshore funds in 2010, and disclosed plans to eliminate 5,500 jobs. And Bristol-Myers Squibb repatriated $9 million, had $16.4 million in offshore funds and planned to axe 4,600 jobs.
The think tank - which called its report 'America Loses' - then added that a review of US employment data filed with the US Securities and Exchange Commission found that 13 companies profiled in its report cut their US workforces by 60,700 jobs in the two years following the 2004 tax holiday. Only one drugmaker was among them and that was Lilly, according to IPS.
Pfizer, by the way, was the leading beneficiary of the 2004 tax holiday and, ISP notes, is also a member of WIN America, or Working to Invest Now in America, a coalition of large corporations that is lobbying for another tax holiday. To help the cause, Pfizer was the online ad sponsor of a recent 60 Minutes segment that, ISP maintains, made a case for repatriation (here is the report).
In its analysis, ISP argues that tax holidays simply encourage aggressive profit shifting and cited pharma as an example. To illustrate its point, ISP described a US-based company that has a foreign subsidiary register its patents in countries such as Luxembourg that do not tax income from intellectual property.
The subsidiary then charges the US parent a high price for use of the patents. But the royalties, along cost associated with research and marketing, allow the US operation to report to an artificially small profit, or no profit. This means there is little corporate income tax to pay, while the real profits are parked with the overseas subsidiary.
What to do? ISP suggests that no US company should be eligible for a tax break that promises job creation unless they first disclose US employment data. ISP maintains companies are cloaking this info, because the government does not require distinctions between US and foreign jobs in SEC reports. As a result, it's unclear how many of the 600,00 layoffs by the 58 beneficiaries were based in the US.
One key question is whether a tax holiday is really in the offing. Andy Laperriere, who heads policy research at the ISI Group, does not seem to think so. In an investor note today, he pointed out that two US Senators - Republican John McCain and Democrat Kay Hagan - plan to introduce a bill that is similar to one in the House, although some differences may emerge to reduce the cost.
"Our view, in short, is that nothing has changed. While McCain was the GOP nominee in 2008, few Republicans take their cues from him on economic, especially tax, issues," he notes, adding that neither McCain nor Hagan sit on the tax-writing Finance Committee. "We continue to believe something like the House bill (an 85 percent tax exclusion) is very unlikely.
"Something far less generous to the industry might be included in a jobs bill, but even that is less than 50/50. The only reason this issue is remotely in play is the (Obama) administration is desperate for any kind of stimulus bill, but besides McCain and Kagan, we find few influential champions for the idea in the Senate or the House."