Congress Approves Massive Tax Increase To Bailout States

On August 10, 2010, the United States House of Representatives approved legislation to increase taxes on U.S. multinational companies by $9.7 billion, in order to help finance a $26 billion spending package that will soon pour dollars into state coffers to be used for Medicaid programs and teacher salaries. Cash strapped states, the National Education Association and the American Federation of Teachers lobbied heavily for the funding. Shortly after Senate passage last week, the House voted to approve H.R. 1586 by a vote of 247-161, the bill was subsequently signed into law that day by President Obama.

Of the $26 billion provided in the bill, $16 billion is designated to extend the increased federal Medicaid matching rate to states through December 2010. Iowa’s portion of that is estimated to be $83 million. The remaining $10 billion is earmarked to supplement teacher salaries. According to several estimates, Iowa will receive approximately $96 million to be spent solely on employee salaries. The money cannot be used for any other purpose, meaning states are not permitted to scale back current budgets and use the funding as a replacement. This means that Iowa will now be facing an even larger budget gap going into FY12 as the state continues the irresponsible practice of relying on one-time federal stimulus dollars to finance ongoing expenses.

Unlike past bailouts and stimulus bills approved by Congress that have saddled Americans with debt, this legislation seeks to offset the $26 billion in spending, in part, by imposing a $9.7 billion tax increase on U.S. employers that do business overseas. When a U.S. company generates income in a foreign country, they are issued a tax credit against U.S. taxes on that income generated abroad equal to the amount of income tax they paid to that county. The new provisions included in H.R. 1586 significantly limits how American firms use these tax credits.

The new law suspends the recognition of foreign tax credits until the related foreign income is taken into account for taxing purposes in the U.S, and prohibits taxpayers from claiming the tax credit as it relates to foreign income that is never subject to U.S. taxation because of a covered asset acquisition. The new changes will increase taxes on Iowa employers like IBM, John Deere and Rockwell Collins. The National Association of Manufacturers (NAM) believes many U.S. manufacturing jobs could be in jeopardy as these changes will put American employers at a disadvantage when competing in foreign markets.

U.S. employers are not the only ones being punished by the bill. Recipient of food stamps will see their assistance reduced as the bill seeks to offset nearly $12 billion in new spending by reducing the Supplemental Nutrition Assistance Program (also known as food stamps). Food stamp advocacy groups in Washington fought hard against raiding $12 billion from the program, but at the end of day Speaker Pelosi and the majority party put priority on providing financial assistance to the teachers unions over hungry low income families.

While the U.S. economy continues to battle against 10% unemployment and struggle through the recession, Washington is approving policies that only exacerbate the current economic problems. Increasing taxes on U.S. employers takes money away from them that would otherwise be invested back into the company to grow their operations and hire new people.