The Senate debated a bill on Monday that would give companies a two-year holiday from their share of Social Security payroll withholding for each employee they hire to replace a worker at a foreign-based facility.

The bill, introduced last week by Senate Majority Whip Dick Durbin, D-Ill., and co-sponsored by Senate Majority Leader Harry Reid, D-Nev., Byron Dorgan, D-N.D., and Charles Schumer, D-N.Y., is called the Creating American Jobs and Ending Offshoring Act. The bill would bar companies from taking tax credits or deductions for closing a U.S.-based facility to move the operation overseas, but they would still be able to take deductions for severance and job placement services for employees who lose their jobs from a U.S. plant closing.

“We’re going to take away the incentives corporations have to send our jobs overseas, and give them powerful new incentives to keep American jobs in America,” said Reid. “Right now our Tax Code actually rewards corporations for offshoring jobs. It helps them pay the costs of closing their plants and offers them tax breaks if they move production to other countries. The current system even encourages companies to ask their employees to train their foreign replacements. That’s a slap in the face to hardworking Americans. It’s no way to get our economy back on its feet. And it’s certainly no way to get Americans back to work. Our bill rights this wrong, and it’s going to help revive our nation’s manufacturing industry. We’re giving companies the right kind of tax cut: a payroll-tax holiday as a reward for bringing jobs back home.”

The bill would provide businesses with relief from the employer share of the Social Security payroll tax on wages paid to new U.S. employees performing services in the United States. To be eligible, businesses must certify that the U.S. employee is replacing an employee who had been performing similar duties overseas. The payroll tax relief is available for 24 months for employees hired during the three-year period beginning Sept. 22, 2010.

In addition, the bill would eliminate subsidies that U.S. taxpayers provide to firms that move facilities offshore. It would prohibit a firm from taking any deduction, loss or credit for amounts paid in connection with reducing or ending the operation of a trade or business in the U.S., and starting or expanding a similar trade or business overseas.

The bill would not, however, apply to any severance payments or costs associated with outplacement services or employee retraining provided to any employees that lose their jobs as a result of the offshoring. Firms can apply to the Treasury Secretary for relief from this rule for transactions that do not result in the loss of employment in the U.S.

The bill would also end a federal tax subsidy that rewards U.S. firms that move their production overseas. Under current law, U.S. companies can defer paying U.S. taxes on income earned by their foreign subsidiaries until that income is brought back to the United States. The deferral has the effect of putting these firms at a competitive advantage over U.S. firms that hire U.S. workers to make products in the United States.

The bill would repeal deferral for companies that reduce or close a trade or business in the U.S., and start or expand a similar business overseas for the purpose of importing their products for sale in the United States. U.S. companies that locate facilities abroad in order to sell their products overseas are unaffected by this proposal.

Senate Finance Committee ranking Republican member Charles Grassley, R-Iowa, urged his colleagues to vote against the bill on Monday. “This bill is being sold as somehow having the potential to create American jobs, but it would likely have the exact opposite effect – it would lead to a net decrease in American jobs,” he said.

Grassley argued that deferral is not a new policy and has been a feature of the tax law for a century. He noted that in 1962 President John F. Kennedy had proposed outright repeal of deferral, but the then-Democratic Congress did not agree with him and forged a compromise. For passive kinds of income (such as interest, dividends, royalties and the like) earned by a foreign subsidiary, a U.S. parent company would pay immediate U.S. tax – whether or not the foreign subsidiary sent the earnings back to the parent. However, for active business income of the foreign subsidiary, there would be no U.S. tax until the foreign subsidiary sent such money back to the parent.

“With active business income, there are usually legitimate non-tax business reasons for the income to be earned overseas,” said Grassley. “The reason a U.S. car company sells cars in Hong Kong is not out of some desire to avoid U.S. tax, but rather out of a desire to sell cars to customers in Hong Kong. So, the underlying rationale to the Subpart F compromise is this: If there is a high likelihood that a particular type of income is earned overseas out of a desire to avoid U.S. tax, then deferral will not be allowed. And if there is not a significant likelihood of that, then deferral will still be allowed.”

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