This post was also written by Steven D. Tibbets.
In early 2011, Congress passed the James Zadroga 9/11 Health and Compensation Act of 2010 (“9/11 Act”). A last-minute amendment to the statute imposed a two-percent excise tax on foreign contractors to fund health benefits for 9/11 emergency responders. The tax has been much remarked-upon, but we want to highlight a fantastic bit of scholarship that helps to understand the context and fundraising effectiveness of the tax.
In her paper titled “The Revenue Impact of the 2% Excise Tax”, Nicole R. Best sets forth an economic analysis of the statute and concludes that the revenue-generating estimates of a Congressional Budget Office (“CBO”) report – concluding that the tax would be an effective revenue-generator – were incorrect. (The paper apparently was presented as part of an academic conference and copies are available only through a paid subscription service). The reason? CBO completely failed to account for the treatment of foreign contractors under U.S. procurement laws.
Under the 9/11 Act, any “foreign person that receives a specified Federal procurement payment” must pay a tax equal to 2 percent of the amount of a “specified Federal procurement payment.” However, the tax applies only to contracts for goods manufactured outside the United States and outside certain countries that are parties to “non-discrimination” trade treaties with the U.S. (i.e., “designated countries” under the Trade Agreements Act). Now, generally speaking, when the value of a procurement of tangible goods is under a particular dollar threshold, only U.S.-manufactured goods are eligible for the procurement. When the value is over the threshold, only U.S.- or designated country-manufactured goods are eligible. Products from non-designated countries – the only products that trigger the foreign contractor tax – are never eligible. As such, the foreign contractor tax applies to products that the U.S. government would not purchase anyway. Therefore, as a practical matter, contractors from outside the United States can take comfort in the fact that the tax probably does not apply to them.
Best’s paper goes on to point out additional mathematical and empirical errors that were inherent in the CBO’s estimates. From a policy perspective, Best’s arguments invite scrutiny of the flimsiness of the CBO’s calculations processes that led to their use. Why impose a tax that will not raise money? Does the tax serve a symbolic purpose of some sort? What drove CBO’s error – was it just ignorance of the Trade Agreements Act? Why single out foreign contractor’s for a tax in the first place, particularly one tied to September 11? To serve some sort of nationalistic impulse? Neither Best’s paper nor any other source of which we are aware answers these questions. Nevertheless, they are questions that get to the impetus for public policies affecting firms involved in cross-border government contracts work. Such firms would be well-advised to examine these forces that shape the policies with which they must live.