By Emily Stephenson and Patrick Temple-West
WASHINGTON (Reuters) - The defeat of House of Representatives Majority Leader Eric Cantor shifted the political ground under U.S. multinational corporations this week, just as they seemed to be gaining traction in their push for a $95 billion tax break on bringing foreign profits home.
With House Republicans in turmoil after their leader's loss, lobbyists and policy analysts said the proposal, known as the offshore corporate income tax holiday, was losing momentum.
The setback underscored the inability of the U.S. Congress to handle difficult tax issues, including renewing dozens of temporary laws that have expired and tackling a long-overdue tax code overhaul.
The offshore income tax holiday had been gathering some support, but Cantor's defeat in the Virginia primary election damaged that, observers said. The proposal, which calls for short-term tax breaks to pay for road repairs, frustrates some conservatives who oppose more government spending and believe tax breaks should be permanent, not a one-time holiday.
Cantor, who was the No. 2 Republican in the House, was defeated on Tuesday by a rival who had the backing of the Tea Party. Republicans now are scurrying for political cover, especially those fearful of angering the conservative wing.
"Any controversial legislation ... is not going to happen in a post-Cantor world because now every single member is afraid of every vote," said Henrietta Treyz, a policy analyst at financial firm Height Analytics.
"Those especially that still have primaries to go through are very, very wary of taking any difficult votes," she said.
At the same time, eBay Inc's bringing offshore profits home in April might deter lawmakers from endorsing the tax holiday, Finance Committee Chairman Ron Wyden, a Democrat, said as he was soliciting feedback for the proposal from colleagues.
“Why have a special tax break when a major American company ... brought (cash) back without a break?” he told reporters.
DEADLOCK ON DISPLAY
The years-long deadlock on tax policy was on display again on Thursday. The Republican-controlled House voted largely along party lines to make permanent three expired, temporary tax laws, including two business tax breaks.
But the Democratic-controlled Senate was expected to reject the proposals because they were not accompanied by offsetting revenue-raising measures and would increase the federal deficit.
Greg Valliere, chief political strategist at Potomac Research Group, said Cantor's exit made bridging this divide less likely. "Chances of a compromise have diminished,” he said.
The offshore profits tax repatriation holiday addressed an unusual situation. U.S. corporations have piled up about $2 trillion in earnings offshore. As long as those profits stay abroad, the multinationals do not have to pay U.S. income tax on them. But many would like to repatriate that money, or bring it home.
Corporations have sought for years to convince Congress to allow a holiday for them to bring cash back at less than the 35 percent top corporate income tax rate. This idea of a temporary offshore profits income tax holiday was attempted before in 2004 under former President George W. Bush, a Republican.
Some U.S. companies are shifting their tax base to other countries, such as the UK, to get lower rates.
SUPPORT NOT OVERWHELMING
This time around, the holiday proposal was expected to resemble the 2004 version - a 12-month, 85 percent deduction for dividends paid by overseas units to U.S. parent corporations.
Congress's non-partisan Joint Committee on Taxation estimated that this structure would generate almost $20 billion in federal revenue as a burst of profits stashed offshore flowed into the economy.
But after the holiday is over, the committee said, corporations would hold onto income earned abroad in expectation of another tax holiday later on. It estimated the cost to taxpayers at about $95 billion over 10 years.
This year's proposal was packaged as a short-term revenue-raiser to help shore up the federal Highway Trust Fund, which covers about 45 percent of the states' spending on roads and bridges. That fund is forecast to go broke by the end of August.
The package has gained some support, but key interest groups have held back. On Wednesday, the top Democrat and Republican on the Senate's tax-writing committee said the repatriation proposal was still being debated, but that they do not support it.
Even some business groups were shying away. Janet Kavinoky, the U.S. Chamber of Commerce's executive director for transportation and infrastructure, said repatriation needed to be part of broader tax reform, not a costly one-time holiday.
Many Republicans share that idea.
"I think that we need to have permanent business tax reform that both lowers the rates and addresses the outdated international tax laws that we have," Representative Dave Camp, chairman of the powerful Ways and Means Committee, said on Tuesday.
(Additional reporting from David Lawder; Editing by Kevin Drawbaugh and Lisa Von Ahn)