Democrats don't want to solve tax-inversion issue

President Barack Obama made clear that corporate inversions are on his target list last week. Through what the president brands as an "economically unpatriotic tax loophole," firms use cross-border transactions to reduce their tax burden substantially by re-domiciling outside the United States. Although Obama threatened unilateral action to stop inversions, it is actually in his political interest to keep the issue alive rather than resolving it prior to Election Day.

Barack Obama
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Both Obama and Treasury Secretary Jacob Lew demonstrated willingness to deal with inversions unilaterally last week. Yet, Lew acknowledged just three weeks earlier on July 16 that he did not believe the Treasury Department has the authority "to address this inversion question through administrative action." The only change in the interval between these opposite readings of Treasury's capabilities was a few articles written by law professors making the legal case for executive action.

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The president's political operatives may find these academics' musings persuasive, but Treasury's experienced career personnel are less likely to be impressed. As Treasury's tax policy staff and lawyers have studied this issue for many months already, there is no doubt a long trail of internal emails and memoranda that arrived at Lew's original position. Treasury's professionals will not easily bend to political pressure to reinterpret their authority to impede inversions more broadly, particularly given the context of the ongoing scandal surrounding political interference at the IRS.

If Obama wants to take action within his powers on the inversions issue, he could perhaps refuse to allow inverted companies to receive federal contracts. But as the companies in the pharmaceutical and retail sectors are the ones most likely to benefit from pursuing inversions, such action would do little more than generate headlines. Moreover, the executive order the president is expected to issue in the coming weeks on immigration is sure to overshadow the public attention any unilateral effort to discourage inversions would receive.

Nevertheless, by continuing to harp on the topic and express his desire to curb inversions unilaterally if necessary, Obama is accomplishing two important objectives.

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First, Democrats see inversions as a political winner. They can underscore two of their key election themes — that Republicans are being obstructionist and prioritizing corporations' interests over those of the middle class. As evidence that Republicans are feeling the heat, both House Speaker John Boehner and Senate Finance Committee Ranking Member Orrin Hatch published op-eds last Friday agreeing that inversions need to be addressed, but in the broader scope of comprehensive tax reform.

Second, Obama is using public shaming to discourage announcements of more inversion transactions, at least until Election Day. It played some role in Walgreen's decision to not avail itself of the inversion-related tax benefits in its acquisition of Alliance Boots.

The president's approval ratings have begun to decline in the past few weeks toward the critical 40-percent level as a result of his perceived ineffective handling of a spate of recent geopolitical crises. At that inflection point, the midterm elections risk nationalizing, which would improve the chances for Republicans to gain control of the upper chamber. Obama can ill afford to also be viewed as impotent on a high profile, politically charged domestic issue.

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The most likely action to deal with inversions in the near term will occur in September with Senate Democrats seeking to move legislation. However, even if the Senate bill attracts enough Republicans to pass the chamber's 60-vote threshold — which remains an open question — there is no chance that it will pass in the GOP-controlled lower chamber. Thus, come October when the House recesses for its last month of campaigning before Election Day, Democrats will blame Republicans for blocking a legislative fix.

Companies may continue to shy away temporarily from announcing their pursuit of inversions due to the growing public scrutiny associated with them, but these transactions undoubtedly will regain momentum following the elections as the political value of the issue will dissipate considerably. Any real action to address inversions will have to wait until Congress is capable of tackling comprehensive tax reform.

Ironically, the best chance Obama has for achieving tax reform is if the GOP gains control of the Senate and chooses to pass it through a process known as reconciliation — a legislative tool that can advance controversial bills by just a simple majority through both chambers. Democrats passed portions of Obamacare and Republicans moved the Bush tax cuts via reconciliation, but in both cases, they also controlled the White House. More realistically, tax reform, including a fix for inversions, will have to wait until the next administration to get across the goal line.

Commentary by Stephen A. Myrow, managing partner of Beacon Policy Advisors LLC, an independent policy research firm based in Washington, DC. He served as Chief of Staff to Deputy Secretary of the Treasury Robert M. Kimmitt in 2008-2009. Follow him on Twitter @smyrow.