NCPA - National Center for Policy Analysis

Fixing Highways by Taxing Overseas Earnings: A Bad Idea

February 20, 2015

The Highway Trust Fund is slowly going broke, and, true to form, Congress and the president are considering a temporary solution to a long-term problem. The Highway Trust Fund, used to build and maintain America's roads, is funded by revenue from the gas tax. But as American cars have become more efficient, the tax generates less revenue because consumers are purchasing less gas. 

Curtis Dubay, research fellow at the Heritage Foundation, says two tax-related solutions have been proposed to solve this problem:  a tax repatriation holiday and a tax hike on foreign earnings. Both options, says Dubay, are bad policy.  

When American companies operating abroad bring their earnings into the United States, they are taxed on those foreign earnings. A tax repatriation holiday would allow companies a "holiday" from that tax, allowing them to bring foreign earnings (a process known as "repatriation") into the United States at a lower rate than normal.  Supporters contend the holiday would boost the economy, but Dubay says that's not so. Companies made decisions about how to spend, invest and distribute their earnings at the time they earned them, and Dubay classifies the holiday as nothing more than a "retroactive tax windfall" that would increase profits for companies that take advantage of the policy without increasing incentives to invest domestically.

The second proposal is called "deemed repatriation." In short, it's a tax hike, and a much more heavy-handed tactic than the repatriation holiday, as deemed repatriation would be compulsory for all companies.  As Dubay explains, the proposal would impose a one-time tax on foreign earnings of companies as if those earnings had been repatriated, even when they remain overseas and are not actually brought into the United States.  It's a retroactive proposal and poor tax policy.

Moreover, rather than a tax hike, the government could quit spending Highway Trust Fund money on  things like hiking trails, ferries, sidewalks and landscaping. The Wall Street Journal reports that if lawmakers used the Highway Trust Fund solely for highway funding, it would be 98 percent solvent.

Source: Curtis Dubay, "Changes to Repatriation Policy Best Left to Tax Reform," Heritage Foundation, February 17, 2015.


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