By Natalie Olivo

Law360 (May 29, 2020, 7:38 PM EDT ) The novel coronavirus pandemic has some members of Congress discussing tax policies that could entice multinationals to bring manufacturing home, but those measures, including a slash in the corporate rate, may not make much difference in the current uncertain climate.

Lawmakers from both parties on Capitol Hill have recently floated tax incentives to help shore up the domestic supply of items to fight the virus, including personal protection equipment, medical gear, pharmaceuticals and vaccines. But specialists are skeptical about whether lowering the corporate tax rate or offering tax credits for research and development would be enough to prod multinationals to relocate their foreign manufacturing operations to the U.S.

Manufacturing locally involves many challenges, with labor costs as the biggest one, according to Linda Pfatteicher, a managing partner at Squire Patton Boggs LLP.

"It's expensive to manufacture in the U.S.," she said. "If you already have established operations in a lower-cost location, then it doesn't necessarily make a lot of sense to move it out to the U.S. just so your supply chain is more local."

Sen. Lindsey Graham, R-S.C., called for more domestic operations during a visit to textile manufacturer Milliken & Co., which is making fabrics for medical personal protective equipment.

"One of the things that we've got to learn from this episode is how vulnerable America is when it comes to the medical supply chain," Graham said during a May 8 speech at Milliken's plant in Pendleton, South Carolina. "This has been a wake-up call for America."

Rep. Kevin Brady, R-Texas, ranking member on the House Ways and Means Committee, has expressed interest in using tax policy as an incentive for domestic operations. He told Law360 this month that he planned to push for a possible lowering of the 21% corporate tax rate or a tax credit.

The Ways and Means chairman, Rep. Richard Neal, D-Mass., also said he wanted to provide incentives for companies to move factories and jobs into the U.S., though Neal signaled some disagreement with the broad scope of Brady's vision for expanding the 2017 Tax Cuts and Jobs Act as a formula for spurring domestic manufacturing.

Tax specialists, however, aren't convinced that corporate tax cuts are effective in moving production home at a time when the global economy has sputtered to a halt in the wake of the virus, which causes the respiratory disease COVID-19.

"Taxes are not what is preventing investment now," said Kimberly Clausing, a professor of economics at Reed College and senior fellow at the left-leaning Center for American Progress. "In an environment of immense economic uncertainty, this proposal will be ineffective for the vast majority of companies and a windfall for those few that can take advantage of it."

Almost no companies will be paying corporate tax during the worldwide recession, because profits are the base, Clausing pointed out. Those benefiting from the crisis are the exception, she said.

In a similar vein, Pfatteicher said a lower corporate rate isn't a sufficient incentive for relocating manufacturing in the U.S. The TCJA's lowering of the rate from 35% to 21% was "incredibly significant, and yet we haven't seen a huge rush to bring [intellectual property] or manufacturing back into the U.S.," she noted.

Targeted incentives may be effective for some industries, however.

For example, a large research and development tax credit could go toward creating medicines and vaccines, according to Douglas Holtz-Eakin, president of the conservative American Action Forum and a former director of the Congressional Budget Office.

He also suggested treating earnings from global sales in a way that's similar to the TCJA's provision for foreign-derived intangible income. The measure allows companies to claim a 37.5% deduction on earnings in the U.S. tied to the sale of products or services to foreigners for use abroad.

"You could go down the menu of the TCJA and have a targeted advanced medicines initiative that has all those elements in it," Holtz-Eakin said.

The TCJA itself remains subject to debate about whether the overhaul increased the appeal for intangible and physical investment in the U.S., and whether certain elements of the law are keeping manufacturing offshore.

As Holtz-Eakin saw it, the combination of multiple measures — including the move to a more territorial tax system — on balance shifted the incentive toward domestic investment. However, he said it's too early to know the full impact of the overhaul.

Meanwhile, others have said the TCJA's measure for global intangible low-taxed income provides an incentive to leave manufacturing overseas.

The provision was meant to target income earned from intangible assets, such as patents or other intellectual property, in jurisdictions with low tax rates. However, the measure can also affect decisions regarding physical investment, based in part on how it treats foreign tax credits.

Essentially, GILTI allows companies to pool their foreign tax credits from different countries, according to Eric Toder, co-director of the Tax Policy Center, a think tank jointly run by the Urban Institute and the Brookings Institution.

For example, if a business has GILTI income in Germany and accumulates foreign tax credits, it can use them to offset its GILTI income in Bermuda, he said.

"It does give you some incentive to retain money in foreign subsidiaries in other high-tax countries where you're doing manufacturing," Toder said.

Under the formula for GILTI, a company's offshore earnings that exceed 10% of its depreciable tangible assets are immediately pulled into the U.S. for taxation.

Clausing cited this threshold in a paper published in February. This exemption for the first 10% return on assets "means that additional physical investments of plant and equipment in low-tax countries reduces the bite of the GILTI tax, providing a direct incentive for offshoring real economic activity," she wrote.

Regarding possible tax incentives for U.S. manufacturing specifically in response to the coronavirus pandemic, there's a question about how much domestic production is even necessary.

According to Holtz-Eakin, lawmakers should first ask what they want companies to produce in the U.S. and what can come from supply chains elsewhere. Not all manufacturing has to be brought in from overseas — a process that would require businesses to "painfully relocate" capital, he said.

"We might not need all of that for an emergency," Holts-Eakin said. "We might need some fraction of that."

Although Graham called the pandemic a "wake-up call" regarding the need for the domestic manufacturing of medical supplies, the numbers might tell a different story.

The notion that the U.S. needs more self-sufficiency in medical and pharmaceutical products is a fallacy, according to an article Clausing published on May 6 with the Washington Center for Equitable Growth. The U.S. "is already a large producer of medical equipment and supplies," with imports amounting to only 30% of domestic consumption of these products, she wrote.

Clausing told Law360 that "global supply chains are a perfectly normal part of international business operations, and countries trying to perform the entire chain within their own borders risk uncompetitive and inefficient production."

She added, "We do best when high-wage jobs are in the United States, but that doesn't mean every product is made in the United States."

--Additional reporting by Alan K. Ota. Editing by Robert Rudinger and Tim Ruel.

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