Jockeying In Senate Endangers Tax Breaks

Trade, Health Issues Stall Vote on Bill

A variety of popular tax breaks held up in Congress for more than a year by political jockeying has been saddled once again with a host of contentious measures, including proposals to expand offshore oil drilling, cancel a Medicare payment cut for doctors and provide more money to clean up abandoned coal mines.

The massive last-minute tax bill, unveiled yesterday by leaders of the Senate Finance Committee, also would create or extend a variety of trade measures, including a plan to grant Haitian clothing duty-free entry into the United States that has sparked criticism from the American textile industry.

Several senators yesterday raised objections to the bill, blocking its path to a full vote in the Senate and raising alarm among business lobbyists concerned about the fate of the largest of the tax breaks, a credit for research and development worth $7.5 billion in this fiscal year alone.

Meanwhile, with time running out on the 109th Congress, Senate negotiators were still trying to resolve differences with the House, which must also approve the package.

Business organizations and their members were waging a fierce lobbying campaign on behalf of the research credit, urging lawmakers to prevent it from expiring. California Gov. Arnold Schwarzenegger (R) and Arizona Gov. Janet Napolitano (D) sent letters adding their support, and former Michigan governor John Engler, now president of the National Association of Manufacturers, warned lawmakers that "failure is not an option."

As of late yesterday, business lobbyists remained hopeful that the research credit would be preserved.

The tax measures would extend until December 2007 breaks that, for the most part, expired last December. If Congress does not act, many businesses and individual taxpayers will be unable to claim them in April. The breaks include a reward for employers who hire former welfare recipients, a personal deduction for state and local sales taxes paid by people who live in states without income taxes, and another personal deduction for elementary and high school teachers who spend at least $250 of their own money on classroom supplies. The bill also includes incentives for businesses that invest in the District.

The tax breaks are popular with members of both parties, but their passage has been complicated by Republican efforts over the past year to use them to attract votes on more disputed measures. In July, for example, the tax extensions were attached to a bill that would have raised the minimum wage and permanently slashed the estate tax. The bill passed the House, but was blocked in the Senate, leaving the tax breaks in limbo.

With lawmakers hurrying to wrap up work by Friday, business leaders learned yesterday that Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) and ranking Democrat Max Baucus (D-Mont.) had tied the tax extensions to a new set of controversial issues, including trade, health care, coal mines and offshore drilling.

The trade measures would grant permanent normal trading relations to Vietnam, a measure that failed last month after a preliminary vote in the House, and extend trade relationships with sub-Saharan and Andean countries, as well as other developing nations.

One of the most disputed provisions would allow some types of clothing made in Haiti to be exported to the United States tax free. The Bush administration has championed the measure as a form of aid to one of the world's poorest countries, but some trade groups have attacked it, focusing on the fact that it would allow a portion of the raw materials used in Haiti to come from other countries. That could give duty-free access to textiles and yarn from China and intensify fears that too much of the global apparel trade is shifting to the world's most populous country.

On health care, the bill would cancel a 5.1 percent cut in payments to physicians scheduled to take effect Jan. 1. The cut is unpopular with doctors, who say it is unfair and will force some physicians to close their doors to Medicare beneficiaries. Congress has blocked similar cuts since 2002; the Senate bill would stave off the latest cut by freezing payments at the current level and allowing doctors to earn bonuses for part of the year if they participate in federal efforts to measure health care quality.

The Senate bill would fund the move, about $12 billion over five years, partly with cash from a special fund created to give private insurers financial incentives to offer Medicare drug plans in rural areas. House negotiators also want to delay the cut in physician payments, but House Ways and Means Committee Chairman Bill Thomas (R-Calif.) has been trying to push some of the costs off into next year, when Democrats will control Congress and the budget process.

The bill also contains a provision to open more than 8.3 million acres on the outer continental shelf to oil and gas leasing. And it would create a mandatory funding stream to reclaim abandoned coal mines and pay health benefits for former mine workers. The mine provision would add $4 billion to the national deficit, according to Senate Budget Committee chairman Judd Gregg (R-New Hampshire), who is demanding that it be stripped out of the legislation.

As House and Senate negotiators met late last night, business lobbyists who were worried about the research credit waited for other battles to be resolved.

"Adding new things always complicates and potentially threatens your core issue," said Ralph Hellmann, senior vice president for government relations at the Information Technology Industry Council. But "they'll sort through it," he said. Otherwise, "they are going to wake up and have angry voters and businesses wondering why" their taxes are going up.

Staff writers Peter S. Goodman in New York and Christopher Lee contributed to this report.