After once expressing serious misgivings, the Bush administration has fallen silent on a major corporate tax bill steaming through Congress, effectively giving the green light to legislation that critics say will complicate the business tax code while doling out billions of dollars in tax breaks to special interests.
The House Ways and Means Committee today plans to draft its latest version of the bill, which would repeal an export subsidy ruled illegal by the World Trade Organization and replace it with a bevy of business tax breaks to ease the pain of the repeal. A similar measure passed the Senate in May.
Passage has become imperative: Retaliatory sanctions by the European Union have now tacked 8 percent onto the price of a variety of U.S. exports, from leather and jewelry to timber and thoroughbreds, and the penalty will rise by 1 percentage point a month until the subsidy is lifted.
But what started as an effort to repeal a $5 billion-a-year subsidy has grown into one of the most significant corporate tax measures in years. The Senate bill, 980 pages long, includes more than $167 billion in business tax cuts over 10 years, handing out favors to NASCAR racetracks, foreign dog-race gamblers, Oldsmobile dealers and bow-and-arrow makers, to name a few. The centerpiece is a tax credit to effectively lower the tax rate on domestic manufacturing from 35 percent to 32 percent.
The House version, with $143 billion in benefits over a decade, has a similar centerpiece. But it includes provisions not in the Senate bill, from a $9.6 billion buyout for tobacco growers to a two-year, $3.6 billion measure allowing residents of states with no income tax to deduct state and local sales taxes from their federal income tax. Other provisions grant a $148 million tax break for bank directors, and would single out for help timber owners, human clinical drug trials, bow-and-arrow makers, tackle box companies, and sonar fish finders. Alcohol distillers won two provisions worth $428 million over the next decade.
"There's always a certain amount of grease that's part of getting any tax policy changes through the process, but with this bill, the actual policy seems secondary to the grease," said Dan Mitchell, an economist at the conservative Heritage Foundation.
As recently as February, senior White House officials questioned how the legislation could be implemented, hinting that a special tax bracket for domestic manufacturing would open vast vistas for tax shenanigans. The Economic Report of the President, released that month, noted that mixing water and concentrate to make a soft drink is classified as a manufacturing activity by the Census Bureau. But if the same activity is performed at a snack bar, it is classified as service work.
"Suppose it was decided to offer tax relief to manufacturing firms," the report postulated. "Because the manufacturing category is not well defined, firms would have an incentive to characterize themselves as in manufacturing. Administering the tax relief could be difficult, and the tax relief may not extend to the firms for which it was enacted." That could "inadvertently distort production and have unintended and harmful results."
Lobbyists have already pushed the House bill's definition of manufacturing to include agriculture, food processing, construction, mining, software, movie making, recording, oil refining, and even architectural and engineering services.
In July, Pamela Olson, then the chief tax policymaker at the Treasury Department, raised her own red flags before the Senate Finance Committee. A provision offering a temporary tax holiday for companies to bring untaxed profits home from overseas would likely be less beneficial to the economy than advertised, she warned.
And she questioned the whole notion of carving up the tax code to benefit certain activities, such as domestic manufacturing.
"I would prefer to have a set of tax rules that are conducive to international operations and not rules that penalize certain companies," she said. "I think our biggest concern with the proposals that would just penalize certain companies is that we believe that people would quickly find a way around them."
Opposition remains strong among former administration officials. Olson, now a lawyer with Skadden, Arps, Slate, Meagher & Flom, said she still believes the bills will distort investment decisions, reduce national income and create "a lot of difficulties," as businesses try to shift expenses from their manufacturing operations to their service operations, redefine service activities as manufacturing, and restructure to qualify for the lower tax rate.
R. Glenn Hubbard, former chairman of Bush's Council of Economic Advisers, said the bills fly in the face of conservative beliefs that the free market, not government, should guide business growth and investment.
"Let's start from principle," he said. "It's industrial policy."
But recently, the administration has fallen silent. White House officials refused to discuss the legislation, saying the House bill is a work in progress. N. Gregory Mankiw, the current chairman of the White House Council of Economic Advisers, did not repudiate his passage on the matter in the Economic Report of the President--but he would not discuss it either. Treasury, which holds the core of tax policy expertise in the government, also declined to comment at length.
"We want a bill that solves the problem [of the illegal export subsidy], passes Congress, is as close to revenue-neutral as possible, and will strengthen manufacturers and other job creators," Treasury spokeswoman Tara Bradshaw said.
Such reticence has created bitter feelings among critics of the bills, as well as administration allies on Capitol Hill, who favored the White House approach but say they got no support. Ways and Means Committee spokeswoman Christin Tinsworth said the committee's chairman, Rep. William Thomas (R-Calif.), repeatedly pushed for a simpler bill with an across-the-board business rate cut, but could not get it past opponents who preferred a larger cut just for manufacturers.
Rep. Charles Rangel of New York, the ranking Democrat on the Ways and Means Committee, also weighed in: "The biggest manufacturing crisis since the Depression, combined with European sanctions on our goods, cried out for White House leadership. Instead, the Bush administration passed the buck to congressional Republicans. A simple solution was possible, and instead we have a special interest bonanza."
The administration may have good reasons to stay out of the fight, tax lobbyists said. The tussle over the legislation has pitted industry against industry and Republican against Republican.
"The administration didn't want to step into the middle of a food fight and wind up irritating one camp or another," Mitchell said.
A tax lobbyist who helped draft the bills said it became clear last year that political concerns over sharp declines in manufacturing jobs had overwhelmed lawmakers, who wanted to be seen as doing something for that sector. The administration was not going to win the argument with a push for a broader tax cut and simplification of international tax rules.
"If it's very clear from the outset that you're going to get smoked, why pursue it?" said the lobbyist, who spoke on condition of anonymity for fear of angering the White House.
Into that atmosphere rushed an armada of business lobbyists, and the reward has been rich. "Anybody who's a good lobbyist in this town has gotten one or two provisions in it," he said.
The results have made even some of those lobbyists shake their heads, marveling at provisions that have nothing to do with export subsidies, manufacturing or overseas corporate taxes.
"I hate to be this cynical, but I am," said Donald Alexander, a former commissioner of the Internal Revenue Service who has worked on the legislation. "This just shows what can happen if people scream loud enough."
Olson conceded that "most of the statements of administration preference" were ultimately ignored in the legislation, but she defended the administration's reluctance to voice opposition now.
"The most important, No. 1 priority is getting our [export subsidy] books into compliance," she said. "By [August] we'll be at 10 percent duties. We really have to move."