In today's emotion-filled climate, it doesn't take much to touch off a controversy about tax policy. All that's needed is a few charges that the government is giving away big tax breaks to multinational corporations. Mix in Big Oil, and you can spark a flap about almost anything.
A case in point is the brouhaha in Congress about the U.S.-British tax treaty negotiated last year. In fact, the document is relatively innocuous, designed to trade some tax benefits for Britons in return for some for the U.S. Any other time, it wouldn't rate much notice at all.
But the treaty has been bottled up in the Senate for months, largely because opponents have managed to scare up images of a government sellout to big British oil interests, ostensibly at the expense of the poor, downtrodden state governments. In truth, that's far from the case.
There's nothing very sinister about the tax treaty. If anything, the provisions are pretty straight-forward:
The United Kingdom would agree to give Americans who invest in British companies about $85 million a year in tax credits on stock shares, which it now allows only to Britons. The credits were designed to help offset "double taxation" of profits and dividents - a step the U.S. has considered.
The British government also would allow American investors some $375 million in refunds for overpayments in earlier years.The tax credits were put into effect in 1973, but foreign investors were barred from claiming them. The treaty in effect would remove the disparity for good.
In return, the U.S. would restrict the reach of state tax collectors in levying taxes on British subsidaries which have installations in their states. Right now, some states base their taxes on the British firm's worldwide income. The treaty would allow them to tax only the earnings made in the state.
In reality, the restriction would affect only a handful of states. The biggest loser would be California, which now claims the treaty will cost its treasury about $20 million a year. Alaska would be next, with a $10 million revenue loss.
But opponents of the treaty have painted the exchange as a rifoff. The main beneficiary, they charge, would be the rich British Petroleum corporation. And the states, stripped of their rightfull taxing power, would lose millions in badly needed tax dollars. As a result, Congress has held up any approval.
On closer examination, however, the charges seem somewhat specious:
For one thing, there's serious doubt among tax experts that states should have the power to tax foreign companies on the basis of their worldwide earnings. States are supposed to have jurisdiction only over what takes place within their borders. Money earned outside should be taxed elsewhere.
Indeed, some tax specialists question whether it isn't some states that are exceeding propriety. California, Oregon and Alaska recently have expanded their assessment procedures to include affiliates that do no business at all within their borders, but simply are related to companies that do.
The potential for abuse by states here is considerable. In the case of BP's Alaska operations, for example, the more liberal procedure would allow Juneau to expand its tax bite to include Standard Oil of Ohio. The reason: BP has a 40 percent ownership share in Standard.
On a more fundamental level, however, there is serious question about the effect of this expanded state taxing power on trade and investment. British firms - or any foreign companies - are unlikely to come here if the tax laws are unfairly restrictive. And American companies won't fare will overseas.
Indeed, while Calfornia's franchise Tax Board has been campaigning to block the U.S.-U.K. treaty, the state's governor, Jerry Brown, who originally opposed the tax pact, has dropped his opposition. Brown came back from a trip to Japan convinced it was discouraging new business for the U.S. - and new jobs.
And at a recent meeting of the National Governors Conference, other chief state executives indicated they had similar second-thoughts about opponents's charges. An effort to push through a resolution condemning the treaty failed to even enough support to make it to the conference floor.
What makes the treaty so important is that, either way, it is bound to have broad impact. If the treaty fails, and states are given the go-ahead to expand their tax reach, it could affect not only the rights of foreign firms, but those of U.S.-based companies doing business across state lines.
Treasury officials are hoping that if the U.S.-U.K. treaty is approved by the Senate, it will serve as a precedent for winning fairer tax treatment for Amerricans from other countries, and will spur more investment and trade. The U.S. agenda now includes negotiations with several other nations.
Viewed from that perspective, the charges by the treaty's opponents seem little more than a tempest in a teacup. For all the loose talk about multinationals and Big Oil the Senate is facing a simple and straightforward vote.