Corporate tax dodgers might make Congress actually do something
If there’s an epicenter for the new rash of corporate inversions, surely it’s Chicago’s North Shore. Just this year, the wealthy suburban cluster of corporate headquarters has seen several of its own relocate abroad at least in part to dodge their American tax burdens: Walgreen Co., Horizon Pharmaceuticals, and, in a deal announced Friday, AbbVie Pharmaceuticals.
Next door to AbbVie, Abbott Laboratories is selling its generic drug line to Mylan Inc. as part of a deal by the Pennsylvania-based company to move its headquarters to the Netherlands. Actient Pharmaceuticals, another company based in the neighborhood, is seeing its parent Auxilium decamp for Canada under a tie-up it announced last month.
That’s a staggering number of moves, considering nationwide there are only roughly a dozen such deals in the pipeline. With the pace of inversions picking up, there’s fresh momentum in Washington for policymakers to do something about it. Last week, Treasury Secretary Jack Lew wrote Congress calling for a “new sense of economic patriotism,” asking lawmakers to pass legislation immediately that would block inversions hatched since May. The Senate Finance Committee will examine the issue in a hearing Tuesday—with Fortune senior editor at large Allan Sloan, author of a cover story blasting corporate self-deportees, among the expert witnesses. And while Sen. Orrin Hatch (R-Utah), the top Republican on the tax-writing panel, has stopped short of endorsing a specific fix, he’s signaled he’s ready to talk about a targeted measure to bar the exits.
The North Shore offers a clue why such change is in the offing.
Falling within a seven-mile radius of each other, all three corporate headquarters eyeing a transatlantic move share a congressman, freshman Democrat Brad Schneider. He belongs to the New Democrats, the moneyed subdivision of the broader House Democratic caucus that defines itself by its friendliness with corporate interests. And for the group, Schneider is prototypical—a management consultant who won his election as a pragmatic moderate (after fighting off a spirited primary challenge from a well-funded lefty candidate). The district itself—wealthy, suburban, socially progressive but open to pitches from both sides—represents the sort of swing terrain that handed Democrats control of the House eight years ago and remains a weathervane for the party’s efforts to rebuild a governing coalition. Seizing the House remains out of reach for Democrats this election cycle, but capturing the chamber in 2016 or beyond will hinge on the party’s ability to compete in a district like this one, drawn by a Democratic state legislature. Back home, Schneider is fighting for his political life in a nip-and-tuck rematch against Bob Dold, the Republican incumbent he ousted two years ago.
No surprise, then, that in Washington, Schneider has played it safe. He teamed up with a South Carolina Republican in May to launch the Middle Market Growth Caucus. Its mission: to help mid-size companies that are too small to individually wield clout in Washington cut through federal red tape. A Chicago Sun-Times write-up of the effort focused on Horizon Pharma, a company with no lobbyists, as a model beneficiary of this effort. CEO Tim Walbert praised Schneider’s initiative, citing headaches at the SEC and FDA: “We are held to the same standards with the SEC as any other company. We need to have our voice heard.” The story did not mention Horizon’s tax-avoidance maneuver though, in the larger scheme, the company’s $660 million reverse merger with Dublin-based Vidara Therapeutics International ranks as relatively small potatoes.
AbbVie, by contrast, is a very large potato. Its $53.7 billion acquisition of Irish drug maker Shire would make it the priciest inversion deal ever, with the company expecting its effective tax rate to drop from 22% to 13%. Since spinning out of Abbott Laboratories to become a separate, publicly traded company at the start of 2013, AbbVie has quickly built a potent political machine in Washington. It opened its own Washington office inside Abbott’s space, in a building less than a block away from the U.S. Treasury, staffing it with a few veteran Abbott lobbyists and some poached from the D.C. teams of other pharmaceutical giants. The drug maker spent $3.2 million last year rapidly building out an operation with top-flight contract lobbyists. All told, the team now numbers some 30 lobbyists, including a senior advisor to then-Treasury Secretary Robert Rubin, a former top Justice Department official, and many more former Hill staffers from key committees. The company’s political action committee, formed at the end of 2012, has already handed out more than $1 million, with the biggest checks, for $10,000 each, going to Schneider, recently deposed House Majority Leader Eric Cantor, and Pete Roskam, a Republican representing a suburban Chicago district that neighbors Schneider’s.
The company has used its hastily assembled muscle to dive into debates on Obamacare implementation, patent reform, and trade deals, according to disclosure reports. But for the near-term at least, its proposed acquisition will be front and center. With scrutiny over the tax-avoidance scheme heating up in Washington just as the Shire deal goes public, the company is now in “absolute crisis mode,” one source close to AbbVie says. Company brass flew into Washington on AbbVie’s jet two weeks ago for a one-day visit. And AbbVie is now hiring even more outside lobbyists to mount a Capitol Hill offensive on the merits of the deal.
What does Schneider have to say about representing the American inversion capital? Prior to the AbbVie deal, he blamed our messy, antiquated tax code. Since comprehensive tax reform stands no chance of happening any time soon, that argument—embraced by most Republicans, including Schneider’s challenger—amounts to a defense of doing nothing.
When I followed up with Schneider’s office late last week to see if the AbbVie news changed his thinking, Schneider, in a statement, had this to say: “Inversions are a threat to our economic growth and need to be addressed quickly and broadly so that we aren’t forcing American companies to look overseas just because Congress can’t break through the gridlock to modernize our tax system.” No word yet on what, precisely, he has in mind.
The only proposal so far in the House, from Michigan Democrat Sandy Levin, seeks to cork inversion deals by upping the minimum required foreign shareholder ownership from 20% to 50%—and forcing a management change. Schneider is not among the 67 Democrats who have formally added their support to that plan. In fact, out of 55 New Democrats, only five have.
But in the combustible politics of an election year, the instinct among endangered lawmakers to simply keep their heads down can, sometimes, be overwhelmed by a cause that stokes public outrage. This issue isn’t there yet. But it could be soon if more companies join the scramble to relocate, perhaps out of fear that the door is slowly closing.
The House Republican majority would seem to be a solid line of defense for companies seeking inversions against whatever might emerge from the Senate, though the AbbVie source said key House Republicans are “giving themselves just a little wiggle room to realize that this thing could catch fire. Remember, this is not your father’s Republican party. The knee-jerk defense of Fortune 500 companies is not what it was 20 years ago. If this becomes an economic populism issue, in some respects, defending these transactions is a first cousin to defending bailouts.”
This Congress has a demonstrated bias for inaction, so swift, bipartisan agreement to lock the doors on inversions is remote. But it is possible.