Senator Levin Presents Ideas for Sequester Replacement
Last week, Senator Carl Levin (D-MI) introduced legislation that would increase taxes on multinational companies, and suggested that the revenue should be used as part of a sequester-replacement package. According to Sen. Levin's office, the bill S. 1533 will raise $220 billion over 10 years, which could replace two years of the sequester in full or two-thirds of the sequester over three years. Senator Levin touts his bill as a way to improve fairness and undo the harmful effects of the sequester:
We should end these loopholes regardless of our budget situation, because they are blatantly unfair. But surely now, with sequestration continuing to damage military readiness, education, life-saving medical research and more, we should end these offshore tax avoidance schemes and use the revenue as part of a balanced plan to replace sequestration.
Levin's bill would take a number of steps. One of the bigger changes is requiring multinationals to defer deductions for overseas operating and moving expenses until they repatriate profits currently held offshore (in other words, a company cannot deduct expenses until it pays tax on the associated income). The bill would also change the way the foreign tax credit is calculated, requring companies to "pool" credits they receive, ending the practice of claiming more credits in high-tax countries to count against income in low-tax countries.
The bill would decrease tax benefits associated with transferring intellectual property to other countries by taxing "excess" returns related to those agreements, and it would prevent domestic parent companies from repatriating income tax-free using loans from foreign subsidiaries. It would also eliminate the "check the box" tax break, which was originally put in place for administrative simplification purposes and allows multinationals to escape taxation on the income of certain associated entities.
This table contains the known estimates for provisions in Senator Levin's bill, along with our very rough estimates based on similar policies which have already been scored.
| Savings in S. 1533 (billions) | |
| Policy | 2014-2023 Savings |
| Eliminate "check the box" tax treatment | $35 billion |
| Determine foreign tax credit on a "pooling" basis | $45 billion |
| Tax excess returns to overseas intangible property | $20 billion |
| Defer overseas expenses deductions until income is taxed | at least $50 billion |
| Give IRS greater authority to fairly assess value of intangible property | less than $5 billion |
| Other Provisions | up to $70 billion |
| Total | $220 billion |
Source: JCT, Senator Levin, and CRFB Calculations
We appreciate Senator Levin's contribution to the debate on how to address the sequester in a fiscally responsible way. Though the sequester is poor policy, and there is a strong argument for repealing and replacing it, policymakers must follow Senator Levin's example and ensure that any sequester fix does not add to the deficit.
In the coming days, weeks, and months, Congress must work together to address a number of important fiscal issues. Senator Levin's bill provides a number of helpful ideas which could be considered in the context of sequester replacement, deficit reduction, or tax reform. Policymakers should work on a bipartisan basis to achieve all of these goals, which will require putting all ideas on the table.
