Opposition Softens on Corporate Tax Bill

After once expressing serious misgivings, the Bush administration has fallen silent on a major corporate tax bill steaming through Congress, effectively giving the green light to legislation that critics say will complicate the business tax code while doling out billions of dollars in tax breaks to special interests.

The House Ways and Means Committee today plans to draft its latest version of the bill, which would repeal an export subsidy ruled illegal by the World Trade Organization and replace it with a bevy of business tax breaks to ease the pain of the repeal. A similar measure passed the Senate in May.

Passage has become imperative: Retaliatory sanctions by the European Union have now tacked 8 percent onto the price of a variety of U.S. exports, from leather and jewelry to timber and thoroughbreds, and the penalty will rise by 1 percentage point a month until the subsidy is lifted.

But what started as an effort to repeal a $5 billion-a-year subsidy has grown into one of the most significant corporate tax measures in years. The Senate bill, 980 pages long, includes more than $167 billion in business tax cuts over 10 years, handing out favors to NASCAR racetracks, foreign dog-race gamblers, Oldsmobile dealers and bow-and-arrow makers, to name a few. The centerpiece is a tax credit to effectively lower the tax rate on domestic manufacturing from 35 percent to 32 percent.

The House version, with $143 billion in benefits over a decade, has a similar centerpiece. But it includes provisions not in the Senate bill, from a $9.6 billion buyout for tobacco growers to a two-year, $3.6 billion measure allowing residents of states with no income tax to deduct state and local sales taxes from their federal income tax. Other provisions grant a $148 million tax break for bank directors, and would single out for help timber owners, human clinical drug trials, bow-and-arrow makers, tackle box companies, and sonar fish finders. Alcohol distillers won two provisions worth $428 million over the next decade.

"There's always a certain amount of grease that's part of getting any tax policy changes through the process, but with this bill, the actual policy seems secondary to the grease," said Dan Mitchell, an economist at the conservative Heritage Foundation.

As recently as February, senior White House officials questioned how the legislation could be implemented, hinting that a special tax bracket for domestic manufacturing would open vast vistas for tax shenanigans. The Economic Report of the President, released that month, noted that mixing water and concentrate to make a soft drink is classified as a manufacturing activity by the Census Bureau. But if the same activity is performed at a snack bar, it is classified as service work.

"Suppose it was decided to offer tax relief to manufacturing firms," the report postulated. "Because the manufacturing category is not well defined, firms would have an incentive to characterize themselves as in manufacturing. Administering the tax relief could be difficult, and the tax relief may not extend to the firms for which it was enacted." That could "inadvertently distort production and have unintended and harmful results."

Lobbyists have already pushed the House bill's definition of manufacturing to include agriculture, food processing, construction, mining, software, movie making, recording, oil refining, and even architectural and engineering services.

In July, Pamela Olson, then the chief tax policymaker at the Treasury Department, raised her own red flags before the Senate Finance Committee. A provision offering a temporary tax holiday for companies to bring untaxed profits home from overseas would likely be less beneficial to the economy than advertised, she warned.