THE narrow escape from a US government shutdown this week clears the way for Congress to grapple with a host of fiscal challenges, including a long-shot deal to pay for highways with tax reforms to deter mergers.

President Barack Obama on Wednesday night signed a bill that averted a shutdown by extending federal funding until December 11.

That gives lawmakers just over two months to search for long-term solutions to budget issues that have fallen victim repeatedly to partisan discord.

A potential deal over highways and tax would link two pressing challenges: crumbling US roads and anger over international mergers called ‘inversions’, which US companies are using to gain low-tax access to earnings parked offshore.

The deal is being pursued by Paul Ryan, a Republican congressman and 2012 vice-presidential candidate, and Chuck Schumer, a senior Democrat who is tipped to be the party’s next leader in the Senate.

While their talks are not advanced and face many hurdles, a deal would encourage US companies to repatriate billions of dollars in overseas earnings and use the resulting tax revenue to replenish diminishing funds for highway investment.

“Schumer and Ryan are discussing a potential deal on a long-term transportation bill paid for by international [tax] reform,” said a congressional aide close to the talks.

US companies have more than $1.1tn of earnings parked offshore, according to Moody’s and, under

current law, they must pay US tax on them when they are brought home.

That deterrent has sparked inversions — deals in which a foreign company acquires a business — as US groups seek low-tax access to the earnings by shifting their tax bases to countries with reduced rates.

Inversions have been roundly criticised by Democrats and Republicans and one person familiar with the Capitol Hill talks said concern about the deals was ‘central’ to the initiative.

“That’s why you’re seeing such a push to do something as soon as possible. ­People have seen investment and jobs flowing out of the US,” the person said.

Terry Haines, managing director at Evercore ISI, an investment research house, said a tax and highways deal was also attractive to policymakers because it would provide an economic stimulus.

“Congress and the Obama administration have concluded that there is no other couch cushion under which you can find this sort of transportation money,” he said.

In a tax plan two years ago, Mr Obama suggested using tax revenue from a mandatory repatriation of foreign earnings to pay for transportation funding.

A spokesman for Mr Ryan, the top tax legislator in the House of Representatives, said his office was in regular contact with the Treasury department on the issues, but added: “If there’s going to be a deal, it will be with Schumer.”

To reach a deal, Democrats and Republicans would need to bridge several divides.

On offshore earnings, Republicans favour voluntary rather than forced repatriation and want to levy a lower tax rate on the earnings than Democrats. On highways, Democrats want to see an increase in transportation funding but Republicans want it to stay at current levels.

Republicans also want to lock in other pro-business tax reforms.

Tackling the debt ceiling

A limit on the federal debt was reset in March, restricting total borrowings to $18.1tn. The Treasury department has used extraordinary measures to avoid violating the debt ceiling, but these are expected to run out this month or next.

Policymakers will need to suspend or increase the ceiling to avert a debt default — something that would have far graver ramifications than the government shutdown that was avoided this week.

Forging a budget deal

Now that a shutdown has been averted, policymakers need to decide how to fund the US government beyond December 11, when the stopgap spending deal agreed this week lapses.

The White House and many lawmakers would like to see a comprehensive, long-term budget deal. The question is on what terms?

President Barack Obama and congressional Democrats want to lift caps on both domestic and defence spending. While some Republicans want defence spending to be treated more generously, they want to stick with the limits on discretionary domestic spending.

Protecting tax breaks

The US persistently runs short of financing for roads and bridges.

A Highway Trust Fund pays for transport infrastructure buts its revenues fall short of what is needed because it depends on meagre inflows from a federal fuel tax.

Congress has been struggling to agree on a way to pay for long-term replenishment. The Department of Transportation says the approval of new projects would have to stop on October 29 when congressional authorisation lapses. It predicts that, in the absence of any remedies, the fund will slip towards insolvency in May.

Congress does not face a firm deadline for altering the tax treatment of overseas earnings, or for coming up with a broader package of tax reforms — a once-in-a-generation ambition that is as desirable as it is difficult.

But lawmakers do face a ticking clock on renewing more than 50 temporary tax breaks, including many that are much loved by big business.

Published in Dawn, Business & Finance weekly, October 5th , 2015

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