A group of Democratic lawmakers in the House and Senate have re-introduced legislation that would ban federal contracts for companies that move their headquarters overseas, but only on paper, in order to avoid paying U.S. taxes.

Senators Dick Durbin, D-Ill., Jack Reed, D-R.I., Sheldon Whitehouse, D-R.I., and Al Franken, D-Minn., joined Rep. Rosa DeLauro, D-Conn., Sander Levin, D-Mich., and Lloyd Doggett, D-Texas, in introducing legislation Thursday would prohibit federal contracts to companies that move do so-called tax “inversions,” in which U.S. companies change their tax domiciles to countries with low-tax rates, typically by merging with a foreign company.

A surge of inversion announcements last year led Democrats in the Senate and House to introduce several different measures to stem the tide (see Congressional Democrats Introduce Bill to Ban Federal Contracts to Companies Moving Abroad). Democrats contend that Republicans in both chambers refused to support the legislation, however, even though similar measures received bipartisan support in the past.

In 2004, a Republican-controlled House and Senate changed the tax code to discourage U.S. companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction as part of the overall transaction. In the past 10 years, though, more than 40 U.S. corporations have found a loophole in the law and nonetheless moved their tax addresses abroad. 

“With every successful inversion, the tax burden increases on the rest of us to pay what the corporate inverter doesn’t,” Durbin said in a statement. “The burden is made worse by allowing companies to profit off of federal contracts paid for by U.S. taxpayers, while those very companies run from their U.S. tax responsibility. We should make permanent the long-standing ban on federal contracts for corporations that have renounced their American corporate citizenship.”

According to Congress's bipartisan Joint Committee on Taxation, inversions could cause the United States to lose about $20 billion in tax revenue over the next decade. While “inverted” companies incorporate overseas, they remain majority-owned by shareholders of the old U.S. corporation and do not have substantial business opportunities in the foreign country in which they are incorporating. Current law defines a company as being inverted if more than 80 percent of shareholders are the same before and after the acquisition. The new legislation would bring that threshold to 50 percent. 

“When millions of Americans are paying their tax bill we are once again reminded that some unscrupulous companies are avoiding their tax obligations at the expense of those paying their fair share,” DeLauro said. “Even worse, the federal government has been subsidizing this bad behavior, by continuing to reward inverted companies with lucrative federal contracts. These companies take advantage of our education system, our research and development incentives, our skilled workforce, and our infrastructure, all supported by U.S. taxpayers, to build their businesses. But when the tax bill comes due, they hide overseas. Yet suddenly, when federal contracts are being applied for, they are all as American as Uncle Sam once again. This has to stop.”

The legislation—introduced in the House as the No Federal Contracts for Corporate Deserters Act and in the Senate as the American Business for American Companies Act—also curbs subcontracting to inverted corporations by allowing federal agencies to ban businesses from holding federal contracts if they subcontract with inverted corporations.

“When American businesses reincorporate abroad, they skirt our tax laws and play by different rules than middle-class families and small businesses,” said Franken. “We need to crack down on the rising trend of corporate inversions, which is costing taxpayers in Minnesota and across the country billions of dollars. One way to do that is by making sure that taxpayer-funded contracts go to American companies who aren’t trying to game the system.”

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