A compromise draft of a major manufacturing tax cut has dropped virtually all restrictions on the definition of a manufacturer, cutting taxes instead for any company that produces products in the United States, be they architectural plans, hamburgers, electricity or newspapers.
House Ways and Means Chairman Bill Thomas (R-Calif.) on Wednesday night unveiled what he called a "discussion draft" of the most significant corporate tax legislation before Congress in nearly 20 years. Both the House and Senate have passed versions of the legislation, which would repeal a manufacturing export subsidy ruled illegal by the World Trade Organization and replace it with a variety of business tax breaks. Now, lawmakers are rushing to find a compromise that Congress can approve before adjourning as early as next Friday.
Thomas's proposed compromise has angered allies of traditional manufacturers, whose economic troubles had inspired the legislation. Thomas would phase the tax reduction in over six years, and expand it to include industries not typically considered part of the manufacturing sector, such as entertainment, timber companies and restaurants.
Democratic tax writers say they will try to restore language to narrow the definition of a manufacturer.
"The tax cuts in this bill were supposed to be restoring benefits for American producers," said Rep. Charles B. Rangel (N.Y.), the ranking Democrat on the Ways and Means Committee. "But it seems that stowaway industries have now been given a ticket to ride on this bill."
Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) also pledged that the final version of the bill would include "conference language to ensure that 'burger flippers' are not included."
But House tax aides said Thomas has always favored as broad a business tax deduction as possible, not one targeted at a single economic sector. They said that traditional manufacturers are doing better, and that Thomas is likely to insist that the legislation remain as inclusive as possible.
At issue is a provision that would give a tax credit for income derived from domestic manufacturing activities. The manufacturing sector has lost 2.9 million jobs since July 2000. Compounding those troubles was the WTO ruling against U.S. export subsidies that allowed the European Union to slap punitive tariffs on U.S. exports, many of them manufactured goods. Lawmakers scrambled to aid the politically sensitive manufacturing sector, even as they were forced to repeal the export subsidy.
Under Thomas's compromise, the manufacturing credit would effectively lower the income tax rate on domestic production activities from a maximum of 35 percent to 34 percent through 2006, 33 percent through 2009 and 32 percent thereafter.
Democratic tax aides said that slow phase-in is necessary to hold down the 10-year cost of the provision, largely because it would apply so broadly.
"They're expanding the base but shrinking the benefit," said one Senate tax aide, who spoke on condition of anonymity because the bill is still in negotiations.
House GOP tax aides said that the slow phase-in was necessary because Thomas bowed to Senate wishes to offer the credit not only to traditionally incorporated C corporations, but also to small-business S corporations, sole proprietorships, partnerships and cooperatives.
The Senate bill contained language disallowing the credit for restaurants, oil and gas extractors, electricity generators and utilities, and entertainment companies and media outlets.
But Thomas dropped those restrictions. Without them, a manufacturing tax credit could be claimed, for example, by home builders and architects. Thomas aides noted he also dropped a general reduction in the corporate income tax for any business with income under $20 million.
"They've decided to use the broader House language," said Donald Alexander, a former commissioner of the Internal Revenue Service who lobbied to broaden the definition on behalf of the Bechtel Group Inc., a giant architectural and engineering firm.
Manufacturing groups suggested yesterday they will be willing to go along, if only to ensure that a bill reaches President Bush's desk before the election. Each month that the export subsidy remains in place, the European sanctions grow stiffer, and they are beginning to pinch, said Paul Freedenberg, vice president for government relations at the Association for Manufacturing Technology, which represents machine-tool firms.
"It was our expectation that [the definition] would be broader," he said. "It is after all a tax bill, and being realistic, it's hard to exclude suitors when you're giving out a [tax] break."