(Bloomberg) Washington is buzzing this summer about inversions, and the chatter has nothing to do with the weather.

This week, Treasury Secretary Jacob J. Lew and Senate Majority Leader Harry Reid became the latest to press for a crackdown against corporate inversions. These are when U.S. companies switch their addresses to low-tax nations like Ireland, often through a takeover of a smaller company, reducing their tax bills while typically keeping their headquarters and listings in the U.S.

Democratic lawmakers were coalescing yesterday around their resistance to these deals, as a possible election-year rallying point. Reid, of Nevada, called for comprehensive rules against such changes of address. A handful of bills working through Congress already include language aimed at cracking down on the practice. White House Press Secretary Josh Earnest said President Barack Obama will discuss the issue more in coming weeks.

Senate Finance Chairman Ron Wyden, who will chair a hearing next week on international taxes and inversions, has also hardened his stance. The Oregon Democrat, who had until recently preferred putting retroactive limits on inversions as part of tax-code changes that could be a year or more off, said yesterday he was exploring how the “inversion loophole” could be plugged sooner, a move that is meeting Republican objections.

The day’s flurry came after Lew called for Congress to prevent companies from “effectively renouncing their citizenship to get out of paying taxes.” The Treasury has previously said that blocking inversions would prevent $17 billion from escaping the U.S. tax system over the next decade.

Campaign Weapon
Democrats are seizing on this potential campaign weapon ahead of their midterm-election bids to defend their control of the Senate in the face of foreign policy crises, a slow economic recovery and sagging popularity of Obama’s health-care law. Any Democratic campaign that targets tax-skirting corporations, and the lawmakers who back them, could echo successful efforts in the last presidential race to portray Republican candidate Mitt Romney as sheltering his wealth in trusts without paying his fair share.

“I’m hearing from businesses that are competing against people who are talking about inverting that will make it very difficult for them to compete, and who are going to be compelled themselves to invert,” said Representative Steny Hoyer of Maryland, the second-ranking House Democrat. “It’s going to very substantially undermine our country, and we need to act.”

Lower Taxes
Republicans generally shrugged off the challenge as a misguided effort to treat a symptom of what they see as a broader disease. The party’s leaders want a new tax code, with lower corporate tax rates than the current 35 percent—the highest in the industrialized world—to keep companies from bolting to lower-cost venues in a bid to stay competitive.

“The administration runs a risk—I mean, here we are well into the president’s second term and he continues to blame others for his own economic failures and underperformance,” said Representative Peter Roskam, an Illinois Republican, in an interview.

Passage of any Democratic-backed tax legislation in Congress will face hurdles amid legislative deadlock. Because Republicans control the House and can block Democratic proposals in the Senate, Republicans have the power to stop Congress from acting on inversions and press instead for revisions to the tax code. They’ve shown no sign of changing their position.

Government Contracts
Democrats led by Connecticut Representative Rosa DeLauro have sought to prevent companies that move their addresses overseas for tax purposes from accessing U.S. government contracts.

An amendment blocking contracts for companies that switched addresses to the Cayman Islands or Bermuda has been tacked on to four House spending bills so far this year. DeLauro plans to expand her focus beyond the island haven nations, she said yesterday in an interview.

“My view is to go whole hog: You’ve got Ireland, you’ve got the U.K., you’ve got the Netherlands,” she said. “We should shut down the opportunity for people to do this. It is un-American.”

Inversion Wave
The controversy over inversions has emerged from obscurity in little over a year, as the number and size of the deals have grown. At least seven companies and counting, including Medtronic Inc., Applied Materials Inc. and Mylan Inc., are working on plans to become foreign. Giants including Walgreen Co., Pfizer Inc., and Monsanto Co. have flirted with the idea this year. In all, some 41 U.S. companies have adopted foreign addresses for tax purposes since 1982.

U.S. lawmakers thought they had clamped down on inversions a decade ago, when they passed a law treating the companies as domestic for tax purposes. But an exception to the 2004 law for companies buying foreign competitors has spawned a second wave of inversions.

In most cases, as Bloomberg News reported earlier this year, the companies’ executives continue to live and work in the U.S.; one is even the chairman of his regional Federal Reserve Bank.

Meanwhile, as another Bloomberg News report showed, a section of the 2004 law meant to punish executives of inverting companies has backfired, in some cases providing new financial windfalls for these managers.

Ineffective Laws
Another set of laws meant to keep government contracts away from inverted companies has also been largely ineffective. Two days after a Bloomberg News report on the matter this month, the Republican-controlled House surprised DeLauro by endorsing new language targeting contracts for inverted companies.

The U.S., unlike most major economies, taxes the worldwide income of American-based companies. After those U.S.-based companies pay taxes to governments overseas for income earned elsewhere, they can defer residual U.S. taxes until they repatriate the money.

That system has created an incentive for companies to find ways to book profits in low-tax jurisdictions and leave them there. U.S. companies such as Apple Inc. have come under scrutiny from lawmakers for assigning profits to subsidiaries in low-tax or no-tax jurisdictions.

U.S. companies have accumulated nearly $2 trillion in profits around the world that haven’t been taxed by the U.S., led by General Electric Co.’s $110 billion.

Failed Measures
Congress and the IRS have been trying for decades to discourage inversions through tax policy. IRS rules to limit the tax benefits of inversions in the 1980’s and 1990’s failed to prevent a wave of them around the end of the millennium.

By 2002, as big companies including Ingersoll-Rand Co. and Stanley Works took steps to shift addresses to Bermuda, the issue captured Congress’s attention. The ranking Senate Finance Committee members from both parties pledged to pass a law to end inversions.

The legislation, which became law in 2004, meant that companies that simply shifted their addresses out of the country would remain domestic for tax purposes. However, there were several exceptions, including if they had “substantial” business in their new home, or if they merged with a foreign company whose shareholders ended up owning at least 20 percent of the combined firm.

By last year, a new group of companies, especially drugmakers, were using takeovers to adopt foreign addresses, with tax-friendly Ireland the new preferred corporate home. Drug companies are well positioned to benefit because they can shift profits to their tax homes by placing patents in subsidiaries there.

Pharmaceutical Inversions
Among the pharmaceuticals announcing inversions this year is Canonsburg, Pennsylvania-based Mylan Inc. Minneapolis-based Medtronic has reached a merger plan with Dublin-incorporated Covidien Plc, which has a clause allowing the companies to walk away if Congress changes the tax law. Pfizer Inc., based in New York, attempted to move its tax address to the U.K. by seeking to purchase London-based AstraZeneca Plc.

The Obama administration and congressional Democrats, including Wyden, are calling for legislation that raises the 20 percent threshold to 50 percent, meaning a U.S. firm couldn’t get a foreign tax address through a purchase of a smaller firm. Lew said at a conference in New York yesterday that the federal government doesn’t have regulatory options to limit inversions, and needs Congress to act.

Competitive Edge
Companies that invert gain a competitive advantage. Drug company chief executive officers have said that when a rival moves its legal address abroad, its lower tax rate can translate into higher earnings that in turn attract investors. With more cash and more freedom to use it, the rival gains an edge over the U.S. competitor in buying desirable assets. As more and bigger companies pursue inversions, these CEOs have said, the remaining firms are vulnerable and less competitive.

“We’re the last in our sector to have announced an inversion or to be domiciled outside the U.S.,” Mylan CEO Heather Bresch said on July 14. With a deal to buy Abbott Laboratories’ generic drugs line, her company will move its legal tax address abroad, as Actavis Plc did last year. “We were the last Mohican.”

Bresch, the daughter of U.S. Senator Joe Manchin, a Democrat from West Virginia, said she didn’t want to make the move.

“The loser in this is our country,” she said in an interview in May, two months before announcing a deal for Mylan to change addresses. “It’s unfortunate that corporate America leaves because Congress couldn’t find it within themselves to make our country competitive.”

Hot Issue
Tax avoidance has the potential, in theory, to be a hot midterm election issue. According to a Gallup poll conducted in April, 66 percent of Americans think corporations are paying too little in taxes, compared with 20 percent who think they are paying their fair share and 8 percent who think they are paying too much.

A focus on corporate transactions may have a limited populist appeal because the issue can be too complex for the campaign trail, said John Pitney, a professor of politics at Claremont McKenna College in Claremont, California. It might find a receptive audience in areas with significant job losses, he said.

Republicans could still loosen their opposition to legislation against inversions if they believe their chances of gaining the Senate majority are threatened because of this issue, said Terry Haines, a policy analyst with ISI Group LLC. With most races turning on local issues—such as fracking in Colorado or coal regulations in Kentucky—that may not be likely, he said.

“I don’t think the Republicans are feeling any heat on it at all,” Haines said in an interview yesterday. “It’s very much an open question as to whether they will.”

Unless inaction on inversions threatens to cost Republicans in the midterm elections, they have an incentive to wait until 2015, when they could control both houses of Congress and push tax policy in their direction.

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