Tax incentives and domestic investment: an empirical analysis of the repatriation decisions of U.S. multinational corporations following the implementation of the homeland investment act of 2004



Journal Title

Journal ISSN

Volume Title


Texas Tech University


I investigate the reaction of states and multinational corporations to §965 of the Homeland Investment Act of 2004. The Act created a temporary tax holiday for dividends returned to the United States parent corporations from controlled foreign corporations. This was a one-time reduction in the tax rate on these dividends which yielded a window in which to observe reactions to tax incentives by two parties. I first examine the decision process used by states when determining whether to conform to or decouple from federal legislation. Using a logistic regression model, I examine decisions made by states for nine previous federal tax reductions. I find that the only significant predictor of a state’s decision to conform to federal legislation is the amount of any spending overruns at the time of the decision. I then investigate the effects of a state’s decision to conform to §965 on the repatriation behavior of firms headquartered in that state. My results show that any tax burden at the state level is overwhelmed by the magnitude of the federal tax break, thus rendering the decision of the state inconsequential. The next portion of my research considers the sources and uses of funds repatriated by firms under §965. In exploring the sources of funds, I find that firms returned a small portion of funds classified as permanently reinvested in foreign subsidiaries, while the remainder of funds repatriated was simply an acceleration of monies already slated to return back to the U.S. Finally, I analyze the uses of these funds and find that, consistent with prior research, firms who repatriated monies under §965 increased share repurchases, even though this activity was specifically prohibited. I also find evidence that they used the monies to increase congressionally permitted investments, but I am unable to pinpoint specific activities.