The House voted 251 to 178 yesterday to replace an export subsidy with a major tax cut for domestic manufacturers and multinational corporations, setting up difficult negotiations with the Senate on one of the most significant corporate tax bills in 20 years.
Passing a corporate tax measure has become imperative. Since the World Trade Organization ruled existing export subsidies illegal, retaliatory sanctions by the European Union have tacked 8 percent onto the price of a variety of U.S. exports, from leather and jewelry to timber and thoroughbreds. The penalty will rise by 1 percentage point a month until the subsidy is lifted.
But the push to repeal a $5 billion-a-year subsidy has allowed lobbyists and lawmakers to dust off tax favors that have languished for years. The centerpiece of both the House bill and the Senate's version would cut the top tax rate for domestic manufacturers from 35 percent to 32 percent, but other provisions have pushed the final House bill to 496 pages and the Senate-passed bill to 930.
The margin of passage was far wider than the House bill's authors expected. Some Republicans had complained that the bill is riddled with special-interest provisions that would further complicate the tax code, send jobs overseas and worsen a federal deficit already at record highs.
But House Ways and Means Chairman Bill Thomas (R-Calif.) secured the votes of 48 Democrats, largely with a $9.6 billion bailout for tobacco farmers and a temporary $3.6 billion measure to allow residents of states with no income tax to deduct state and local sales taxes from their federal income taxes. Those Democrats more than offset the 23 Republicans who voted against the bill.
"The focus of [the bill] is in one word: jobs," Thomas said after passage. "I look forward to quickly resolving differences between the House and Senate versions and sending a bill to the president's desk for his signature, so American businesses can continue to do what they do best -- create jobs."
The House bill would cut business taxes by more than $143 billion over the next decade, although a series of revenue raisers and tax-loophole closures would reduce the cost to the Treasury to $34.4 billion. The measure must be reconciled with a broader Senate version that would hand out $167 billion in tax cuts but more than offset that cost with tax increases and loophole closures.
Critics of both bills say the true costs will be significantly higher, since both phase in some tax cuts over 10 years while Congress is likely to extend other tax breaks set to expire after a short time as the legislation is currently written. If all those temporary provisions were implemented immediately and extended over 10 years, the bipartisan Joint Tax Committee estimated, the cost of the House bill would reach $260 billion.
But the main criticism focused on the special-interest provisions secured by business lobbyists or added in the past few days to secure votes. The House bill includes measures tailored to help restaurant owners, makers of private jets, bank directors, timberland owners, liquor distillers, Native American whalers, commodity traders and shipping conglomerates, to name a few. One last-minute provision, pushed in part by Home Depot, temporarily lifts customs duties on Chinese-made ceiling fans.
"Christmas has come on the 17th of June," said Rep. Jim McDermott (D-Wash.).
House Minority Whip Steny H. Hoyer (D-Md.) declared it the worst tax bill he has seen in his 24 years in the House and "an orgy of self-indulgence."
Thomas defended the measure, saying that "everybody deserves one day every 20 years" to address grievances in the tax code.
"Every lobbyist had one day to get their provisions into this bill," retorted Rep. Charles B. Rangel (N.Y.), the Ways and Means Committee's ranking Democrat. "It's unfortunate that the American people did not get their day."
Much of the criticism focused on the tobacco provision, which has raised the ire of anti-smoking groups, fiscal conservatives and economists inside the White House. They say much of the $9.6 billion will go not to beleaguered farmers but to owners of tobacco-growing allotments who may be generations removed from family tobacco fields.
Anti-smoking groups had hoped to tie any bailout of tobacco growers to long-sought legislation granting the Food and Drug Administration the power to regulate tobacco. If the bailout is granted now, tobacco state representatives will have no incentive to agree to the compromise, said Rep. Martin T. Meehan (D-Mass.).
Conservatives simply saw it as an egregious expenditure of money.
"There are a lot of things that are ugly in this bill, but the tobacco thing is what clearly broke Joe Camel's back," said Rep. Jeff Flake (R-Ariz.). "This is now larded up beyond recognition."
Reaching a compromise with the Senate will not be easy, lawmakers and aides said yesterday. Lobbyists advised clients not to expect a final bill until September at the earliest and probably not until after the elections.
Senators have vowed to pass only a bill that is fully "paid for" through offsetting tax increases and loophole closures. To create that revenue, the Senate included corporate tax reforms, many of which the House avoided, such as measures to prevent companies from moving their headquarters to a post office box in an offshore tax haven.
The Senate bill also legislates the principle that a business deal is legitimate only if it has genuine economic purposes beyond reducing tax payments. And it includes a measure to make chief executives legally responsible for the accuracy of their businesses' income tax returns.
If House members continue to resist such measures, it may be impossible to offset the cost of a final bill, which could doom passage in the Senate, tax lobbyists said. But if they agree to the Senate's loophole closures, they may lose Republican votes in the House.