08.02.2010 0

The Return of the States Bailout

Not less than a week after a $26.1 billion bailout to bankrupt states like New York and California was stripped from a must-pass war supplemental, it has returned.

Senate Democrats had failed to muster the 60 votes needed for passage of a House version of the war supplemental — which included the funding for the troubled states. So, instead the House passed the Senate version that did not.

But, not to deny one of Barack Obama’s top domestic spending priorities, Senate Democrats are once again bringing the states bailout back.

This time, Senate Majority Leader Harry Reid is attaching the $10 billion for state public teachers unions and $16.1 billion for state Medicaid spending to tax legislation that will enable the government to double-tax U.S. companies that do business overseas. The bill will limit the use of the Section 956 foreign income tax credits for profits generated overseas.

According to a U.S. Chamber of Commerce letter to Congress, Section 956 “allows companies to repatriate cash to the United States in a tax efficient manner.” This prevents companies from paying taxes overseas on profits, then repatriating those profits and having them taxed again by the federal government. The Chamber says that the Section has been “particularly beneficial during the recent economic downturn and ensuing credit crunch when it was necessary for American worldwide companies to repatriate significant funds in order to meet the financial needs of their U.S. businesses.”

As reported by the Hill, closing the foreign income tax credits would raise $9 billion. But, says the Chamber, “The revenue raising estimate for this provision seems to assume that taxpayers would simply bear the additional cost of the provision. However, the Chamber believes that most taxpayers, given the choice, would choose simply to not repatriate the earnings.”

Another obvious result is that many U.S. companies will simply become foreign companies, where they won’t be subject to this sort of double-taxation. Either way, profits made overseas will not be repatriated, leaving the nation with even less capital to help improve the weak economic recovery.

The National Association of Manufacturers does not like the provision either, writing in a letter that the “limitation on the use of Sec. 956 loans removes a greatly needed source of U.S. cash for worldwide American companies”.

Promote America’s Competitive Edge (PACE), a business coalition, agrees, writing to Congress, “A steep corporate tax hike on worldwide American companies will hinder our ability to protect and create American jobs and will slow our nation’s economic recovery.”

Not only would the legislation make the U.S. less competitive, the revenue raised is being used to save a scant number of jobs. Out of the estimated 3.3 million public school teachers nationwide, teachers unions are only expecting 160,000 layoffs this year — just 4.8 percent of all teachers. 38.1 percent of those layoffs are centered in just three states: 9,000 in New Jersey, 16,000 in New York and 36,000 in California.

Of course, these are the states with the most dire budget pictures, the ones that most need to make necessary cuts now to bring spending down in accordance with revenue. California currently faces a $20 billion shortfall. On the east coast, New York faces a more than $8 billion deficit, and New Jersey too faces an $11 billion deficit for 2011.

According to the National Association of State Budget Officers (NASBO), state spending grew from $945.3 billion in 2000 to more than $1.5 trillion 2008, almost a 58.7 percent increase during the 2000’s, where revenues were generally rising because of inflated property values. It was a bubble in which state politicians made the same bad bet investors of mortgage-backed securities made — that property values would never come down.

When the bubble popped, the drop in state revenues was entirely predictable. Nonetheless, state spending still grew by about $100 billion in 2008, the year the market crashed.

These 160,000 state jobs being “saved” are “bubble jobs.” They came about because of the housing bubble, which was the government’s fault through its easy money and mandatory loose lending policies. Now they must be cut because the revenue that came from the economic distortion government caused is not coming back.

Compare that to the U.S. companies that operate overseas, which directly employ 22 million Americans. These companies create nearly half of all U.S. exports. They’re the ones who are going to be hit with the limitation of the foreign income tax credits.

Sadly, Harry Reid thinks it’s a good idea to put 22 million jobs and the capital flows generated by exports at risk all to save 160,000 bloated public sector union jobs that cannot be justified based on the budgets of the states involved.

Bill Wilson is the President of Americans for Limited Government.

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