IN JUNE, the House and Senate each passed corporate tax bills. As we wrote at the time, both threatened to inflict further complications on the tax code, widen the budget deficit and affirm the belief of corporations that ruthless lobbying of Congress will be rewarded handsomely. Four months later, the House and Senate have combined their two bills into a single measure. The result is an improvement, but it's insufficient. President Bush should exercise his veto.
The bill began life as an effort to comply with a ruling of the World Trade Organization against a tax break that goes to U.S. exporters. The WTO ruling gave the European Union the right to punish U.S. firms with duties, and the Europeans are planning to collect $660 million next year from American corporations unless the tax break is removed. To avoid these duties and to bolster the principle that WTO rulings should be respected, it's important to get rid of the offending tax break. But this is not enough to justify signing the bill that Congress has produced.
In an ideal world, Congress would have axed the tax break on exports and used the revenue to reduce the deficit. In a second-best world it would have used the revenue to finance a simple reduction in tax rates. Instead Congress produced a bill that is likely to cost $79 billion over a decade, assuming that some of the supposedly temporary measures are extended, as seems likely, and that complicates the tax code rather than simplifying it. Its international tax provisions, designed to reduce an imagined burden on the foreign subsidiaries of American companies, make the tax code more complex. Its special-interest provisions, which include giveaways for supplicants from native Alaskan whalers to tackle-box companies, make the code more complex. So does the bizarre "manufacturing" tax cut, which started out as a dubious effort to target tax relief at manufacturers, then morphed into a tax cut for firms with lobbyists who could persuade Congress to expand the definition of manufacturing. Oil refiners and architecture practices are manufacturers, according to the bill.
Finally, the bill represents a missed opportunity to regulate tobacco. It includes a generous payout to tobacco farmers that at one point had been coupled to a provision allowing the Food and Drug Administration to regulate tobacco. The regulation has been dropped, but the payout remains. This destroys a bargain that might have brought one of the nation's leading health hazards under federal oversight.
Mr. Bush will be tempted to sign this bad bill, since the tobacco payout matters to key congressional Republicans. In so doing he would only fuel cynicism about his seriousness on economic policy. There is no way to argue that avoiding $660 million worth of European duties justifies signing a bill that costs billions and that constitutes bad policy as well.