While economists ponder the wisdom of a general tax cut next year, Congress is moving toward swift enactment of a retroactive tax cut for a select group of defense contractors.
A House Armed Services Subcommitte has scheduled hearings for today on legislation -- already approved by a Senate committee -- that would suspend application of the Vinson-Trammel Act, a tax statute that requires contractors to repay any excess profits -- defined as more than 10 percent on ships or 12 percent on aircraft -- earned on contracts with the Pentagon.
The bill's passage seems certain, a tribute to the hard work of defense industry lobbyists, who have battled successfuly to keep the government from collecting the profits tax since it went into effect four years ago.
Actually, the lobbyists would have preferred an outright repeal of the profits tax, but that seems politically impossible just four months before every House member must face the voters."The only pressure I know of against outright repeal," said Rep. Paul N. McCloskey Jr. (R-Calif.), "is the concern that in an election year, defense contractors will be perceived as getting a special favor from Congress."
Accordingly, the pending legislation provides only for a temporary suspension of the law until October 1981. By then, McCloskey and other industry allies hope to have convinced the new Congress to repeal the tax for good.
The political concern is so great that the lobbists and their congressional supporters have devised a way to pass the tax-cut bill without the need for a floor vote.
"It's all wired," said Rep. Joseph G. Minish (D-N.J.), the most outspoken House supporter of continued profit controls. "They hold this quickie hearing, and then the House guys use that to go along with the Senate bill in conference."
Translation: When the Senate legislation suspending the profits tax -- an innocuous paragraph buried deep with a $52 billion procurement bill -- goes to a House-Senate conference committee, House conferees will accept the Senate-passed provision. This way no separate House vote on the profits tax will be needed.
On reason legislation suspending the Vinson-Trammel profits tax seems sure to pass is that nobody -- not even advocates of the concept of taxing excess profits -- defends the obscure and inflexible profit-control system incorporated in the statute, which was passed in 1934.
Proponents of defense profit controls -- including the Pentagon's top contracting officers and the Defense Departments's resident gadfly, Adm. H. G. Rickover -- want Congress to pass a revised profits tax to replace Vinson-Trammel. But those who oppose any tax on excess profits seem to have the upper hand in both houses now.
Four years ago, in response to a strenuous grass-roots lobbying drive by defense contractors and subcontractors in every state, Congress acted to kill the Renegotiation Board, a tiny federal agency that was recouping about $40 million annually in excess profits from Pentagon contractors.
The Renegotiation Board was considered an alternative to the Vison-Trammel tax, and so the tax was suspended during the board's lifetime. When the agency was killed, in September 1976, contractors once again became legally bound to pay the profits tax.
But no firm has yet paid a penny of tax, because the Internal Revenue Service and the Defense Department have yet to issue regulations to govern its collection.
Dale W. Church, a deputy undersecretary of defense, explained candidly to a Senate committee this spring why the agencies had spent four years working on the regulations.
"We in the Department of Defense are simply stuck with the Vinson-trammel Act," Church said. ". . . we have been moving rather slowly in trying to look at the many facets of it and trying to come up with a regulation or procedure which is the . . . least onerous on our contractors."
Because the government has not tried to collect the tax, no one seems sure how onerous it would be. Contractors organizations say almost no tax would be collected, because other defense procurement laws prevent firms from earning high profits. But the Defense Department says some form of after-the-fact control of contract profits is needed to prevent profiteering.