Chairman McCrery, Ranking Member McNulty, and members of the Subcommittee, thank you for holding this hearing, and thank you for allowing me the opportunity to appear before you today. 

It is my sincere hope that the Subcommittee, and in turn the full Committee, will move quickly to pass HR 3884, the "Corporate Patriot Enforcement Act of 2002" (commonly referred to as the Neal-Maloney bill), bring it to the floor of the House, and end the outrageous corporate expatriation tax dodge, both immediately and permanently.

As I am sure the Subcommittee is aware, on June 18, 2002, the Senate Finance Committee passed The Grassley-Baucus bill, the Reversing the Expatriation of Profits Offshore Act, S. 2119 (REPO).  Clearly, this issue has bipartisan support and deserves quick action in the House.  In fact, the Neal-Maloney bill, which is very similar to the Grassley-Baucus bill, already has over 100 bipartisan cosponsors, and we continue adding more. 

So called "corporate expatriates" are former US companies who set up paper headquarters in tax havens in order to avoid US taxes.  For little more than the cost of a post office box in an offshore tax haven like Bermuda, US companies are trying to avoid millions of dollars in federal income taxes.  Some of these expatriates are even using third countries, with which the US government has tax treaties, in order to avoid paying virtually ALL of their tax obligations. 

These companies continue to reside in the United States, take advantage of our infrastructure, our education system, our water systems, federal, state, and local services such as police, fire, and public schools, and, of course, they still rely on the protection of our courageous Armed Services, here at home, and around the world.  The only difference is: they now get it all for free, while US citizens and loyal US companies are paying the bill.  Some of America's largest corporations have engaged in such transactions, including Tyco, Ingersoll–Rand, and Global Crossings.  Ironically, some of these same companies have large contracts to provide goods and services to the Federal Government.  Now they are saying they don't want to pay their fair share of US taxes.  This is outrageous, and must be permanently stopped. 

These Bermuda tax avoidance schemes are especially unpatriotic in light of our current economic and national security situation.  We are now seeing a major, growing budget deficit.  The Wall Street Journal reported on June 4, 2002, that the federal deficit could total as much as $200 billion next year.  The huge federal surplus we had only a year ago has been wiped-out.  Corporate expatriates contribute to the growing, long-term budget deficit problem.  Critical programs like Social Security and Medicare are in serious jeopardy just as the largest generation in the history of this country is getting ready to retire.  In addition, as our country continues its war on terrorism, and makes efforts to improve homeland security, all or our citizens, elected officials, and corporations should remain united and committed to defending our homeland and eliminating terrorism.  Corporate expatriates are saying that profit gained from tax avoidance is more important than the security and well-being of our country. 

More and more companies are contemplating such abusive tax dodges, as aggressive consultants and legal firms try to sell their clients this unpatriotic scheme.  In an effort to stem the tide, Congressman Richard Neal of Massachusetts and I introduced legislation on March 6, 2002, to close the expatriate tax loophole.  Our legislation is quite simple.  It states that if you are, in fact, a domestic US corporation, you are subject to US corporate income tax, wherever you locate your nominal headquarters.  Importantly, our legislation, with an effective date of September 11, 2001, will end this unfair tax dodge permanently. 

A second important provision of our legislation would restore the tax obligations of those companies that expatriated before 9/11.  Our legislation would give such companies until 2004 to come into compliance.  This provision, in turn, ensures that all US corporations play by the same rules, with no one having a tax advantage. 

The US Treasury Department , while recognizing the problem, has argued that we need to study the issue.  Others have proposed a temporary, stop-gap measure that would only extend through the end of next year.

We must not wait.  Certainly, the tax system needs to be reformed.  But there is no reason that fixing the immediate problem needs to be contingent upon reforming the entire system.  If your house, which may be in need of remodeling, also has a fire in the attic, you don’t do the remodeling first.  Instead, you put out the fire immediately, and then move on to the longer range tasks.  This is precisely the case here: we need to put out the raging fire of this expatriate tax abuse – and then move on to remodel our tax code.  The calls for delay or a study are nothing but sham excuses for failing to take the action so obviously and urgently required. 

So also in regard to any stop-gap measure: a nationally-syndicated Boston Globe columnist recently wrote, ". . . the proposal for a moratorium is so sneaky and pernicious. . . . No one can argue why phony expatriation to avoid taxes is good for the US or good for anybody except the executive officers of companies who do it. So why have a moratorium when a flat-out ban is what's needed?" (May 28, 2002).  I strongly agree.  In addition, a stop-gap bill will not ensure that all US corporations are playing by the same rules.  Indeed, a stop-gap approach actually allows the situation to get worse.  It maintains the disparity in tax treatment, while sending the wrong message -- that the Congress is not really serious about this problem, but is merely trying to let the issue slide until after the election. 

These tax schemes are a cancer on the American tax code.  They need to be eliminated now.  Every day we wait, the situation only gets worse.  And you certainly would not start treatment for cancer and then abruptly stop after 12 months.  You work to get rid of the problem once and for all!  Of course, a stop-gap may seek to serve as an election year gimmick – but it does not solve the problem.  A stop-gap measure is a clear breach of our responsibility to act effectively in the interest of the American people.

In addition, the proposed stop-gap legislation would not apply to those companies that expatriated before September 11, 2001.  Why would we allow those who expatriated before September 11, 2001, to continue to escape their tax obligations?  We certainly should not allow expatriated companies to maintain indefinitely a tax advantage over American companies that are loyal to our country.  In contrast to the stop-gap proposal, the Neal-Maloney bill fixes the problem permanently, and restores all US corporations to a uniform, level tax policy. 

It should be stressed that these expatriate tax schemes are seriously detrimental to many of the companies' own shareholders.  Corporations are supposed to act in the interests of their shareholders; here they are not.  Under these expatriation schemes, individual shareholders will have to recognize capital gains taxes on the value of their shares at the time of reincorporation, and make immediate payment of those taxes to the IRS.  For example, Stanley Works has admitted that if they were to reincorporate in Bermuda it would cost their shareholders $150 million in immediate capital gains taxes.  Thus, Stanley is merely shifting its tax burden to individual shareholders.  The New York Times recently reported on the scope of this slight-of-hand, stating, "[e]ven if their shares rose 11.5 %, they [the Stanley shareholders] will barely break even after taxes"  (May 20, 2002).

For the smaller investors, retirees, and those nearing retirement, this will be an especially onerous burden – one they cannot afford.  One retired Stanley Works machinist shared with me that he would face an estimated tax bill of $17,000.  As any retiree will tell you, having to pay a bill of that magnitude threatens their financial security when they need it most.  For those facing these payments, where will they get the resources to pay the tax? They will be forced to borrow the money from a bank, take out a second mortgage, dip into their 401Ks (thereby incurring additional taxes and penalties), or take other detrimental action.  This tax shift from corporations to individuals is patently unfair and must be stopped now and permanently. 

Finally, the New York Times recently reported that the Stanley Works CEO ". . . stands to pocket an amount equal to 58 cents of each dollar the company would save in corporate income taxes in the first year." (May 20, 2002)  That is $17.4 million of an estimated $30 million in 'savings' out of the US Treasury, and into the CEO's personal checking account.  In the same story, the NY Times reported that the Stanley CEO is also eligible for additional stock options under the current plan, and that he could gain another $385 million by exercising those options. 

Let's close this loophole and stop this unfair shift of taxes from corporations to individuals.  The Neal-Maloney bill is the solution to the problem.  The legislation is straight-forward: if you are, in fact, a domestic US corporation, you are subject to US corporate income tax, wherever you locate your nominal headquarters.  Secondly, our legislation would recapture those companies that have already expatriated by giving them until 2004 to come into compliance.  This provision ensures that all US corporations are playing by the same rules, and that no one has a tax advantage.  Our legislation will end this unpatriotic tax dodge once and for all.  I urge immediate action on HR 3884, the Neal-Maloney bill.