Corporations that have reclassified themselves as “foreign-owned” received approximately $1 billion in federal contracts over the last five years. These companies profit from American tax dollars despite avoiding U.S. taxes themselves.

That could soon change. Two members of Congress have reintroduced legislation that would block these companies from winning lucrative government contracts.

Inversions by federal contractors are particularly egregious because many of the companies continue to operate in the United States and benefit from taxpayer-funded public goods.

Rep. Rosa DeLauro (D-CT), lead sponsor of an inversion reform bill, said in a recent press release:

These companies take advantage of our education system, our research and development incentives, our skilled workforce, and our infrastructure, all supported by U.S. taxpayers, to build their businesses. But when the tax bill comes due, they hide overseas. Yet suddenly, when federal contracts are being applied for, they are all as American as Uncle Sam once again. This has to stop.

Inversions allow corporations to lower their tax bills by merging with a foreign company and then adopting the foreign company’s corporate registration, often in low-tax jurisdictions. In many cases, these restructurings are much more significant on paper than they are in practice. For example, companies are often able to restructure without moving their headquarters. Aside from having to pay less in U.S. taxes on their profits, inversions also allow corporations to escape unpaid (deferred) taxes on profits that they’ve been able to accumulate offshore over the course of many years.

American corporations that reincorporate offshore will cost the United States approximately $20 billion in lost tax revenue over the next decade. Bloomberg calculated that even as corporate tax rates have fallen, corporations reincorporating offshore have been able to lower their effective tax rates even further. Corporations that reincorporated abroad in recent years were able to reduce their effective tax rate by between 6.6 and 17.4 percentage more than their competitors that remained incorporated in the United States. Despite the fact that the vast majority of these companies continue to operate in the U.S., they are able to avoid paying their fair share in taxes, leaving Main Street businesses and individuals to pick up the tab.

Companies with the most profits held offshore have arguably the highest incentives for restructuring as foreign corporations. The recent reincorporation of Medtronic, the Minneapolis medical device maker, in Ireland is an example. Before reincorporating abroad, Medtronic was able to shift more than $1 billion in profits offshore. When it reincorporated in Ireland, Medtronic was able to avoid paying deferred taxes on those profits. In recent years, the rate at which corporations are choosing to restructure abroad has increased significantly. Between 2004 and 2014, 47 corporations underwent inversions, almost double the number that inverted in the previous 30 years. Well-known federal contractors – including Accenture, Tyco Electronics, Pricewaterhousecoopers Consulting, and Medtronic – are among the companies that have reincorporated abroad.

On April 15, two members of Congress introduced identical bills to make inverted companies ineligible for federal contracts. DeLauro introduced the No Federal Contracts for Corporate Deserters Act (H.R. 1809), and Sen. Dick Durbin (D-IL) introduced the American Business for American Companies Act of 2015 (S.975). The proposals echo legislation proposed last Congress by Sen. Carl Levin (D-MI), now retired, and Rep. Sander Levin (D-MI).

Inverted corporations are technically barred from doing business with the federal government, but they continue to receive more than $1 billion in government contracts each year.

This inconsistency appears to be largely the result of a lack of enforcement, as well as the ability of some companies to be grandfathered into contracts and take advantage of other loopholes. For example, Ingersoll-Rand, a manufacturing company that was based in New Jersey until 2001, has continued to receive federal contracts, despite having reincorporated in Bermuda in 2001 and Ireland in 2009.

The new legislation prohibits awarding contracts to inverted companies, as well as joint ventures in which more than ten percent of the venture is held by an inverted company. Additionally, contracts worth more than $10 million (with the exception of contracts for exclusively commercial items) will be required to include language that limits subcontracting to inverted companies. If contracts violate these terms, they can be terminated.  This would apply to all companies which have inverted since May 8, 2014.

The decision to move a corporation’s registration offshore to avoid taxes is not without consequences for society. Businesses making these decisions should face consequences as well, starting with being cut off from profitable public contracts.

For Future Reading:

UPDATE: A Seedy Deal for Americans? Monsanto in Deal Talks with Chemical Giant Syngenta, The Fine Print, 5/7/2015

Offshore Tax Dodgers Jeopardize Long-Term Financial Health of American Small Businesses, The Fine Print, 4/16/2015

General Electric Restructuring Surprise: Company to Pay 20 Times More in Taxes Than It Paid in the Last Decade, The Fine Print, 4/14/2015