Congress Weighs Corporate Tax Breaks Lawmakers Look to Help Manufacturing Sector While Averting Conflict Over Export Subsidy
By Jonathan Weisman Washington Post Staff Writer Tuesday, October 14, 2003; Page E01 Congressional tax writers are rushing to complete legislation that would offer tens of billions of dollars in new U.S. corporate tax breaks, many of them for overseas operations, setting off a lobbying battle between major domestic manufacturers and some of the largest multinational corporations in the world. Driven by a Dec. 31 deadline, lawmakers hope to end a long-standing U.S. export subsidy in time to avert a trade war with the European Union. But several are also seeking to use the repeal of the $5 billion-a-year subsidy as an opportunity to pass new corporate tax cuts worth much more. Most of those would be aimed at earnings from domestic manufacturing, but many new proposals would also shield billions of dollars in earnings from overseas operations. The debate over how to balance the bill's tax breaks between those for domestic and overseas sales has pitted companies including Boeing Co. and Caterpillar Inc. against Coca-Cola Co. and General Motors Corp. The deadline -- coupled with pent-up demand from businesses that felt slighted by the large tax cuts of 2001 and 2003, which were aimed mainly at individuals -- has sent corporate tax lobbyists into a frenzy. "This is a godsend for lobbyists," one of them said yesterday. "You wouldn't be a decent tax lobbyist if you didn't have tons of stuff in these bills." The House and Senate tax committees are still far apart, and there is no guarantee the corporate tax cuts will emerge from either chamber, much less reach President Bush's desk this year. But in recent weeks, senators and House members say they have made remarkable progress. The Senate Finance Committee overwhelmingly approved legislation this month that would cut corporate taxes by $100 billion over 10 years while eliminating $56 billion in export subsidies. The Senate measure is designed to cost the Treasury nothing, since it would scrap the export subsidies and raise additional revenue by curtailing abusive corporate tax shelters and closing tax loopholes. House Ways and Means Chairman Bill Thomas (R-Calif.) hopes to complete a bill this week or next that would reduce the Treasury's revenue by around $100 billion over 10 years, but lobbyists say the true cost could be considerably more than the $130 billion version Thomas drafted this summer. To advocates of the measures, Congress has no choice but to act. Two years ago, the World Trade Organization ruled illegal a U.S. tax provision that allows exporters to exclude 15 percent of their net export income from taxation. The WTO gave the European Union permission to impose $4 billion in trade sanctions on U.S. manufacturing and agricultural exports. The EU has given Congress until year's end to come into compliance. But after 37 months of declining payrolls in manufacturing, lawmakers are not about to slap what they see as a tax increase on the nation's most ailing economic sector. "Jobs are important," said Ways and Means spokeswoman Christin Tinsworth. "That's the focus of this." The Senate bill, co-authored by Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and the committee's ranking Democrat, Max Baucus (Mont.), would replace the export subsidy with a $60 billion tax cut for manufacturers that effectively lowers the tax rate on earnings from domestic manufactured goods to 32 percent from 35 percent. It also includes a dozen smaller measures, worth $39 billion, that would shield corporate overseas income from immediate taxation. Another provision would encourage U.S. companies to bring overseas profits back home by lowering the corporate income tax for one year to 5.25 percent, a measure that supporters say will bring a rush of fresh capital into the country but would also prove a boon to the firms who have lobbied hard for it, like Hewlett-Packard Co., Dell Inc., Eli Lilly and Co., and Merck & Co. The provision would cost the Treasury $4.2 billion over 10 years. The Senate measure would extend specific tax breaks to lumber mills, oil refiners, cooperatives and even independent filmmakers. Thomas's bill would lower the corporate income tax rate to 32 percent for virtually all companies as well as speed up the rate manufacturers could write off new equipment, extend the length of time business losses could be written off future profits and weaken the alternative minimum tax, which was designed to ensure companies pay some income tax. But Thomas's political problems -- even among Republicans on the Ways and Means Committee -- stem from nearly two dozen provisions worth some $84 billion over 10 years that would aid multinational companies and protect overseas income. Thomas has said such measures would amount to a long-overdue reform of the nation's byzantine system of taxing overseas earnings, and most of them are designed to reduce the "double taxation" of income taxed once by a foreign country and again by the United States. Critics fear the measures would encourage companies to ship jobs overseas. Tinsworth said the House plan -- more than the Senate version -- is a comprehensive approach to the U.S. corporate income tax system, designed not to favor any one sector. An approach limiting the tax cuts to domestic manufacturers would be picking winners and losers and would distort the flow of investment, agreed Leonard E. Burman, a former Treasury Department official now with the Urban Institute. "The idea of providing massive new subsidies to the manufacturing sector is the worst sort of industrial policy," said Burman, who hastened to add that Thomas's bill could create distortions of its own by virtually eliminating taxation on foreign earnings and enticing companies to channel income through overseas operations. Critics are becoming more vocal about the entire exercise of cutting corporate income taxes at a time of dramatically falling corporate tax revenue, a rising federal budget deficit and an additional $87 billion for fighting in Iraq and Afghanistan. "They're all awful," Robert S. McIntyre of Citizens for Tax Justice said of all the competing plans. Last week, the Congressional Budget Office reported that corporate tax receipts in the fiscal year that ended last month had fallen by 11.1 percent, to $132 billion. Measured against the size of the economy, corporate taxes fell to the lowest level since 1983, and the second-lowest level since 1936. After tax loopholes and deductions were included, the effective corporate tax rate in 2002 was 24.6 percent, not the official 35 percent, according to a study released last month by the non-partisan Congressional Research Service. Given the threat of trade sanctions, Republicans argue they have to try to address the WTO ruling. But given political concern about manufacturing jobs, a simple repeal of export subsidies is just not an acceptable option, a senior Republican Senate tax aide said. "The worse thing we could do is put a tax increase on exporters right now," he said. "That's the nub of the problem." ==================================== To this day, no one has come up with a set of rules for originality. There aren't any. [Les Paul]
