House Republican negotiators yesterday beat back Senate efforts to regulate tobacco more aggressively and to more strictly limit tax shelters as a congressional conference committee moved toward approving the most significant corporate tax legislation in two decades.
The legislation, which began as a modest effort to repeal an illegal export subsidy, now contains 633 pages with nearly $150 billion in tax breaks to be granted over the next decade. The bill would cut taxes for restaurant owners and Hollywood producers; makers of bows, arrows, tackle boxes and sonar fish finders; NASCAR track owners and native Alaskan whalers; even foreign gamblers who win at U.S. horse and dog tracks. Those costs would be offset by closing tax loopholes and with other revenue-raising measures.
The package has raised protests among budget watchdogs, liberal advocacy groups and the Bush administration, which said this week that the legislation has degenerated into a grab bag of special interest provisions that will benefit few and clutter an already bewildering tax code.
But the biggest legislative obstacle facing its final passage appears to be an unrelated buyout for tobacco farmers, tacked on to gain tobacco-state votes in the House. Some Republicans and Democrats in the Senate have threatened to torpedo the bill unless a $10 billion buyout is coupled with a provision to allow the Food and Drug Administration to begin regulating the content and sale of cigarettes.
"This airplane has lost a wing here," said Sen. Tom Harkin (D-Iowa), chastising Republican leaders for dropping the FDA regulatory provision, "and you know what happens to one-winged airplanes. They spin and crash and burn."
A bipartisan group of Senate negotiators approved an FDA regulatory provision yesterday during the House-Senate negotiations. But House Republicans were resolutely opposed.
Rep. Richard Burr (R-N.C.), who is in a tight Senate race in his tobacco-producing state, said tobacco faces enough federal regulation and charged that FDA control would spawn a black market for cigarettes.
"Our founding fathers, many of them grew tobacco," said Rep. Joe Barton (R-Tex.). "If they knew we were trying to regulate one of the first cash crops that made our nation independent, I don't think they would appreciate that."
Rep. Charles B. Rangel (N.Y.), the ranking Democrat on the Ways and Means Committee, retorted, "Maybe we shouldn't do everything our founding fathers did, because that would mean we would have to re-initiate slavery."
The fight over tobacco is likely to continue on the Senate floor, where Sen. Mike DeWine (R-Ohio) has pledged to bring down the entire bill if FDA regulation is not included. DeWine appears to have enough support to thwart passage before Congress adjourns at the end of the week.
House Republican negotiators steadfastly defended the compromise package assembled by Ways and Means Committee Chairman Bill Thomas (R-Calif.) and Senate Finance Committee Chairman Charles E. Grassley (R-Iowa). Grassley tried yesterday to significantly strengthen the legislation's provisions to punish companies that reincorporate in offshore tax havens, to codify the definition of an illegal tax shelter and to hold chief executive officers liable for their companies' internal controls against corporate fraud. The amendment received the support of most of the Senate Republicans on the conference but was trounced by House negotiators.
House Republicans also appeared ready to reject an amendment by Sen. Don Nickles (R-Okla.) to close a loophole that allows small-business owners to deduct the cost of large, luxury sport-utility vehicles from their taxes if they use those SUVs for business purposes.
"This committee should be embarrassed if we don't close it," Nickles said.
But Thomas mocked the proposal, and Rep. Jim McCrery (R-La.) protested that some farmers need such vehicles for their work.
The legislation was initiated after the World Trade Organization ruled that a series of U.S. export subsidies, worth nearly $58 billion over 10 years, is illegal. The WTO ruling authorized the European Union to place tariffs on American goods until the subsidies are repealed. The tariffs now stand at 12 percent, and increase by 1 percent per month -- a fact that has rallied manufacturing groups behind the legislation, which was meant to replace the export subsidy with tax breaks.
Lawmakers have been careful to make sure the bill will not add to the government's record budget deficit over the next 10 years. But budget watchdog groups warned that the legislation could cost the Treasury considerably more than advertised.
The bill's centerpiece tax provision -- a tax cut for manufacturers and other domestic "producers," from newspaper companies to recording studios -- phases in slowly and does not become fully effective until 2010. The long-run cost of the measure would likely be significantly higher than the $76.5 billion estimated for the first 10 years, analysts at the Center on Budget and Policy Priorities said.
Tax writers held down the cost of nearly a dozen other provisions by having them "sunset" as early as 2005 or as late as 2008. If those provisions are extended, the cost of the legislation over 10 years would balloon to $230 billion, according to the Citizens for Tax Justice, considerably more than the $145 billion in offsetting revenue raisers.