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Expiring foreign income deduction gains bipartisan support

Without congressional action, effective tax rate set to rise on overseas profits from U.S.-held intellectual property

Rep. Michelle Steel, R-Calif., arrives for a House GOP meeting at the Capitol Hill Club in Washington on May 23, 2023.
Rep. Michelle Steel, R-Calif., arrives for a House GOP meeting at the Capitol Hill Club in Washington on May 23, 2023. (Bill Clark/CQ Roll Call)

A bipartisan duo plans to introduce legislation this week to make permanent a provision from the 2017 tax law that allows companies to deduct a portion of their earnings from foreign sales related to intellectual property held in the U.S.

Reps. Michelle Steel, R-Calif., and Joseph D. Morelle, D-N.Y., plan to introduce legislation that would leave in place a more generous deduction aimed at encouraging companies to keep intellectual property such as patents and trademarks in the U.S., rather than abroad. A draft of the measure was shared with CQ Roll Call ahead of the formal introduction.

The provision has caught the interest of some heavy hitters in the private sector, including aircraft manufacturer Boeing Co.; defense contractor RTX Corp., formerly known as Raytheon Technologies; biotech company Genentech Inc.; and Google Client Services LLC. 

Absent congressional action, the deduction for foreign-derived intangible income — known as FDII, pronounced “fih-dee” in tax circles — would shrink at the end of 2025, but not fully expire. President Joe Biden proposed eliminating the deduction, which effectively lowers the tax rate for foreign-derived income, as part of his fiscal 2025 budget proposal.

“The TCJA’s competitive FDII rate ensures that American companies are encouraged to invest their profits here at home, creating jobs and developing new technologies that grow our economy,” Steel said in a statement, referring to the 2017 tax law. Steel is the vice chair on the new House Ways and Means GOP “tax team” devoted to exploring policies to encourage innovation. 

[Unfinished bills, tax law preparation push lobbying spending up]

The deduction is likely to be part of the conversation next year as Congress grapples with how to address the expiration of many of the 2017 law’s individual and small business tax cuts at the end of 2025. 

Steel’s legislation would keep in place the 37.5 percent deduction permanently, rather than allowing it to drop to 21.9 percent at the end of next year, as it’s scheduled to under the 2017 law. The current deduction lowers the effective tax rate on foreign-derived intangible income to 13.1 percent, compared to the corporate tax rate of 21 percent. The smaller deduction scheduled to take effect after 2025 would set the effective rate at 16.4 percent. 

Rep. Joseph D. Morelle, D-N.Y., arrives at the Capitol for votes on Nov. 9, 2023. (Tom Williams/CQ Roll Call)

Morelle’s involvement is interesting because his party voted against the 2017 tax law en masse, with most of his colleagues taking aim at the package as a deficit-busting giveaway to the rich and large corporations.

Morelle, who wasn’t in Congress at the time, connected the legislation back to the interests of his district, which is home to several research- and technology-driven educational institutions, including the University of Rochester and the Rochester Institute of Technology, and manufacturers. 

“As the representative of an innovative city like Rochester, New York, I’ve seen firsthand the immense power investment in local and American-based companies can have on cities, towns, and people,” Morelle said in a statement. “When we make it easier for American companies to invest their profits here at home instead of overseas, we bolster our country’s global competitiveness and provide better support for families.”

At least 12 companies and interest groups reported lobbying on the issue in the first quarter of this year, spending nearly $17 million in total on topic areas they’re focused on, including the FDII deduction.

The biggest spenders among those, according to quarterly filings, were South San Francisco, Calif.-based Genentech, which spent $3.3 million on lobbying in the first quarter; Arlington, Va.-based RTX and Boeing, which spent $3.1 million and $2.9 million, respectively; Google Client Services LLC, which spent $3.1 million.

Out of thousands of companies and interest groups filing first-quarter lobbying disclosures, Genentech was No. 20 in overall spending, with RTX, Boeing and Google Client Services not far behind, CQ Roll Call found.

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