Taxing offshore profits could fill lots of potholes

Andrew Harrer | Bloomberg | Getty Images

A staff member carries a copy of President Barack Obama's Fiscal Year 2016 Budget outside the Senate Budget Committee hearing room in Washington, D.C., U.S., on Monday, Feb. 2, 2015.

To help fix America's broken highways, President Barack Obama wants to tax corporate profits held offshore.

Based on recent estimates, there's enough money to fill a lot of potholes.

The proposal is contained in the White House's latest fiscal 2016 budget, which includes a 19 percent tax on companies' future foreign earnings and a one-time 14 percent tax on the estimated $2 trillion of profits current sitting in overseas investments out of the reach of the IRS.

Under current law, corporations don't pay income tax on profits not transferred back to U.S. accounts. The money can be held offshore as long as it's classified as indefinitely invested abroad. The so-called "transition tax" would be paid on profits sitting overseas now, rather than when companies choose to being profits back home.

The pot of money parked offshore has been growing rapidly as corporate profits have recovered since the end of the Great Recession. Last year, research firm Audit Analytics found that offshore profits invested overseas nearly doubled from 2008 to 2013, based on financial filings for companies listed in the Russell 1000 index.

A separate review of financial filings by Citizens for Tax Justice found that more nearly three-quarfters of Fortune 500 companies had set up more than 7800 separate tax havens as of 2013. The 30 companies with the most money booked offshore for tax purposes operated more than 1,300 tax subsidiaries.

The money is sitting in a handful of popular destinations for U.S. companies looking to minimize their tax bill. Two-thirds of companies with tax-haven subsidiaries have set them up in Bermuda or the Cayman Islands. The list of other popular tax havens includes the Netherlands, Singapore, Hong Kong and Luxembourg, according the the CTR analysis.

A separate proposal in Congress would let U.S. corporations bring their profits home by giving them a "tax holiday" that would allow companies to pay a tax rate of just 6.5 percent on corporate income held overseas instead of the current 35 percent rate.

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The plan, offered by Democrat Sen. Barbara Boxer, D-Calif., and Sen. Rand Paul, R-Ky., would also target the money for highway repairs. But it would give companies five years to bring the money home and restrict how they could use the windfall, limiting payouts for executive bonuses, shareholder dividends and stock buybacks.

Proponents of a tax holiday argue that letting companies bring profits back home will spur investment and create jobs. But studies have shown that the last time Congress gave corporations a tax holiday, in 2004, the move did little to boost the economy.

Instead, companies used their overseas profit pool to better manage the earnings they reported to investors, according to a study last year by accounting experts Michaele Morrow of Northeastern University and Robert Ricketts of Texas Tech.

While the corporate tax proposal will be hotly debated in Congress, there's widespread agreement that the Highway Trust Fund is going broke. At current spending levels, the fund is expected to run dry in May, just as the summer road construction season gets underway.

Last year, Congress debated various fixes to the fund it until August, leaving state highway departments unsure of whether they'd be able to pay for projects already under construction. The stop-gap measure deployed a short-term budget gimmick that allowed companies to defer tens of billions of dollars in pension contributions. The fix was designed to boost corporate profits, and increase taxes, in the short run.

Read MoreRough road ahead for 'pension smoothing'

The Highway Trust Fund, established in 1956 to pay for construction of U.S. highways, is funded by fuel taxes—currently 18.3 cents a gallon on gasoline and 24.4 cents on diesel. But the fund has been running on fumes for years as the tax—which hasn't been raised for more than 20 years—has been steadily losing ground to inflation.

Some lawmakers see the recent plunge in plump prices—down more than 40 percent since July—as a timely opportunity to raise taxes at the pump to help pay for the repair of crumbling roads and bridges.

But the idea faces long-standing opposition from both parties. Last July, a bi-partisan proposal to raise the tax gained little traction.

Read MoreGas tax impasse hampers summer road repair

Last month, House Speaker John Boehner said he doubted there were enough votes for a gas tax hike in the new Republican-controlled Congress. "I've never voted to raise the gas tax," the Ohio Republican told reporters.