CONGRESS IS preparing an overhaul of corporate taxation that could inflict further complications on the tax code, confirm the belief of corporations that ruthless lobbying pays off handsomely and drain more than $150 billion from federal revenue over 10 years. The Senate has already passed a bill that is heavy with pork for special interests; the House is expected to pass an even worse version in the next few days. The one opportunity to fix this legislation will come during House-Senate conference negotiations. Treasury Secretary John W. Snow, who has sat on the sidelines, needs to support congressional leaders who want to produce something respectable. In the absence of big improvements, the bill should be vetoed.
The spur for the bill is the World Trade Organization, which ruled against a tax break that currently goes to U.S. exporters. Because of the WTO's decision, the European Union has the right to impose 100 percent tariffs on $4 billion worth of U.S. exports to Europe. In March the Europeans started by setting tariffs of 5 percent; they promise to raise them by one percentage point each month to a ceiling of 17 percent. Without legislation, therefore, U.S. exporters would pay the Europeans $660 million in duties next year, and the companies paying those duties wouldn't be the same as those benefiting from the offending export-tax break. As well as being economically costly, the sanctions would stoke the destructive resentment of the WTO that already bubbles in Congress.
Both the House and Senate tax bills begin by repealing the export-tax break: So far, so good. In an ideal world, they would use the resulting revenue either to reduce the budget deficit or as a sweetener for a broad fix to the corporate tax code, which is riddled with loopholes. In a less ideal world, but still a rational one, the extra revenue could be used to reduce the corporate tax rate, an option that would not remove existing loopholes but would at least avoid creating new absurdities. But both the House and the Senate have tried instead to fashion new tax breaks that compensate the same companies that benefited from the old export-tax break.
That approach has opened up a feeding frenzy. Once it became clear that the law would be written with a view to benefiting specific companies, every company with a lobbyist muscled up to the table. The result is a Senate bill that includes special favors to makers of bow-and-arrow sets and fishing tackle boxes and a House bill that smiles upon bourbon distillers and tobacco farmers. The Center on Budget and Policy Priorities reckons that, in the likely event that some of the supposedly temporary giveaways in the House version were extended without being paid for, the bill might cost $180 billion over 11 years; the Senate's price tag is lower, though it's harder to measure.
Both bills would do more damage to the economy than the damage that would result from European trade sanctions. Both would squander an opportunity to do needed tax reform and encourage even more brazen special-interest lobbying next time a tax bill comes up in Congress.
To salvage something from this refuse, House-Senate conferees must do three things. They must strip out all provisions unrelated to corporate taxation: For instance, the Senate bill has a gratuitous section offering tax breaks for the energy industry; the House bill must shed its huge payout for tobacco farmers, which makes sense only if coupled (as several lawmakers have suggested) to a provision allowing the Food and Drug Administration to regulate tobacco. Next, the conferees should drop the idea that the corporate tax cut included in both bills should go only to "manufacturers" rather than to all corporations, a provision that would spawn an industry of lawyers who explain why service firms are really manufacturers. Finally, the conferees should take a hard look at the international tax provisions in both bills. Some are legitimate attempts to simplify the treatment of foreign earnings. Others are expensive giveaways that should be reserved as sweeteners in a future overhaul of provisions governing multinationals.
It will take engagement from the Bush administration to push through these changes, and even President Bush's sympathizers concede that this has been lacking so far. In the absence of such leadership, Mr. Bush will have a duty to exercise his veto, and the nation will have to hope that the Treasury Department and Congress can come up with something respectable next year.