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Tax-Cut Bill Draws White House Doubts

Corporate Provisions Go Beyond 'Core Objective,' Treasury Secretary Says

By Jonathan Weisman and Marc Kaufman
Washington Post Staff Writers
Tuesday, October 5, 2004; Page A04

The Bush administration yesterday raised serious objections about congressional efforts to approve a corporate tax-cut bill this week, warning that the Republican-backed legislation risked growing from a narrow effort to help manufacturers into a complex assortment of special-interest tax breaks.

As members of a House-Senate conference committee met last night to begin discussing a final draft of the proposal, Treasury Secretary John W. Snow wrote that the initial House and Senate versions of the legislation had included "a myriad of special interest tax provisions that benefit few taxpayers."

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The 633-page conference committee draft released last night included 170 provisions that, along with helping old-line industries, give tax breaks to restaurant owners, filmmakers, brewers, distillers, bow-and-arrow manufacturers, tackle-box companies, native Alaskan whalers, NASCAR track owners, and importers of Chinese ceiling fans.

Those sorts of provisions, Snow wrote to Senate Finance Committee Chairman Charles E. Grassley (R-Iowa), went far beyond the bill's "core objective" of replacing a set of export subsidies for manufacturers with equivalent tax relief. The export subsidies have been ruled illegal by the World Trade Organization, and they had led the European Union to impose increasingly punitive tariffs on U.S. goods.

That basic thrust of the legislation, important to those manufacturers who must keep paying the E.U. tariffs until the law is changed, may now be at risk.

Though Snow did not threaten a presidential veto in his letter and offered to help work out a compromise, sources familiar with the administration's strategy on the bill said the letter was meant to slow the legislation down until at least after the election.

The bill is the most comprehensive revision of the corporate tax code in two decades, and it would in its current form reduce by $76.5 billion over 10 years the taxes on profit derived from domestic manufacturing and a wide range of other activities. It also changed the tax treatment of companies that manufacture overseas -- a sensitive issue connected to the debate over the outsourcing of jobs to other countries. As it progressed, the bill also came to include a buyout of the annual quota payments made to tobacco growers, a provision some lawmakers hoped to use to bring the tobacco industry under the regulation of the Food and Drug Administration.

Despite the administration's criticism, House and Senate conferees last night said they still hoped to pass the legislation before they adjourn Friday for the end of the campaign. They noted that some of the items cited in Snow's letter -- including tax penalties on overseas manufacturing that, on one hand, might discourage businesses from relocating abroad, but could also dissuade foreigners from investing in the United States -- were not even included in the proposal that House and Senate Republican leaders introduced to the conference committee last night.

The proposal would reduce corporate taxes by nearly $145 billion over 10 years, but would be more than offset by revenue raised through closing tax loopholes and other measures.

Even before the administration raised its objections, passage was uncertain. The tobacco buyout provision, for example, offers tobacco growers a one-time cash payment, presumably to end their yearly subsidies. But a handful of Republican and Democratic senators are threatening to torpedo the entire bill if the buyout is not amended to include FDA regulation of the tobacco industry.

The compromise leans toward the House version in many ways. The Senate tax bill included tough rules on corporations that move their headquarters to post office boxes in offshore tax havens such as Bermuda. The Senate provision would have raised $3.1 billion over the next 10 years, not only by stopping such moves in the future but by collecting back taxes from companies that recently moved offshore.

Under heavy lobbying pressure, GOP negotiators generally sided with the House version. The nonpartisan Joint Committee on Taxation estimated that the new compromise version would raise $830 million over 10 years, a fraction of the revenue anticipated from the Senate proposal.

Negotiators also dropped a Senate provision that would have written into law a strict new definition of illegal tax shelter activities. Tax courts generally rule against any corporate tax maneuver designed solely to reduce a company's tax bill. By codifying that "economic substance doctrine," the Senate hoped to close tax shelters worth $15 billion over the next 10 years. No such provision emerged in the version unveiled last night.

On the biggest issues, however, Senate tax aides say Grassley won over House Ways and Means Chairman Bill Thomas (R-Calif.). The House wanted a straightforward reduction in the corporate income tax for domestic manufacturing that applied only to traditional corporations, or "C corporations." The compromise bill adopts the Senate tack, offering a tax deduction on income derived from domestic manufacturing to traditional corporations, small businesses, sole proprietorships, partnerships and cooperatives.

Thomas also bowed to Grassley on paying for the bill with revenue-raising provisions. The original House bill would have cost the Treasury $34.4 billion over 10 years.

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