Senate Bill on Tax Breaks Advances
Bush Administration expresses opposition to some provisions
WASHINGTON, DC - The Senate Finance Committee has voted to advance legislation aimed at replacing a US law that gives tax breaks to certain US manufactured exports, a law successfully challenged in the World Trade Organization (WTO).
According to the Washington Wire, the committee has voted 19-2 for the bill, called the Jumpstart Our Business Strength (JOBS) Act, but some members said they would try to amend parts of it when it comes before the full Senate.
The Bush Administration, which submitted no legislative proposal itself, has expressed opposition to certain parts of the bill.
For decades the US provided tax breaks for certain manufactured exports under Foreign Sales Corporation (FSC) law.
Under a challenge brought by the European Union (EU) the WTO ruled in 2000 that the FSC constituted an export subsidy prohibited by WTO agreement. A successor law, the Extraterritorial Income Exclusion Act (ETI), was likewise ruled illegal by the WTO in 2002.
Since then the WTO has authorized the EU to impose retaliatory sanctions on $4 billion worth of US imports a year, sanctions the EU threatens to impose starting January 1 if the US fails to comply with the WTO ruling.
"Our bill replaces a tax incentive that was dependent on exports with a tax incentive that is not dependent on exports," Senator Max Baucus (D-MT), senior committee Democrat, said in a written statement. "This bill will solve the WTO problem."
Although details take up hundreds of pages, the bill's central provision would over time reduce the tax rate for US manufacturers, farmers, miners and foresters - not only corporations, but also partnerships and sole proprietorships - to 32% from 35% while repealing the ETI law.
Assistant Treasury Secretary Pamela Olson told the senators that the administration opposed the way that the bill would tax manufacturing industries at a lower rate than service industries, which would still be subject to a 35% rate.
She said the tax-collecting Internal Revenue Service would face complicated enforcement problems.
Committee chairman Senator Chuck Grassley (R-IA) argued that because the FSC/ETI regime aimed at supporting manufactured exports, any replacement legislation should also target manufacturing, not all US industry.
In the face of committee opposition, Senator Don Nickles (R-OK) withdrew an amendment that would have brought the tax rate down to 33% percent for manufacturing and services industries alike, but only for corporations, not for partnerships and sole proprietorships. He said he would still attempt to get approval for the amendment when the full Senate considers the bill.
One especially controversial provision of the bill, called the Homeland Reinvestment Act, would lower the tax rate for one year to 5.25% on past income from a foreign tax haven of a US parent corporation. The US parent would have to dedicate the tax break for US reinvestment, including worker hiring and training and research and development. It would apply only retroactively, not prospectively.
The Republican sponsors of the provision argue that the one-time tax break for repatriation of this foreign income would generate perhaps half a million new US jobs.
Treasury's Olson sided with Finance Committee Democrats, however, in opposition to the provision.
She said it would treat unfairly those companies lacking foreign tax havens that have been steadily repatriating their income over years at the higher ordinary rate.
Meanwhile, companion legislation in the US House of Representatives has been stuck in a stalemate. A bipartisan group of House members have introduced a bill similar to the Senate Finance bill.
But Rep. Bill Thomas (R-CA), chairman of the House Ways and Means Committee, has proposed a far different bill; it would relax tax rules for US-owned multinational corporations and relax rules for writing off the costs of capital equipment.
Thomas' bill would reduce revenue by about $128 billion over 10 years while the rival House bill would cost only about $126 million, according to Congress' Joint Committee on Taxation. The Senate Finance Committee bill would compensate for all lost revenue.
Treasury Secretary John Snow issued a statement applauding the Finance Committee's action.
"The Administration's top priority is getting a bill enacted that complies with the WTO ruling and avoids triggering $4 billion in EU trade sanctions," Snow said.
"The EU has stated the Congress needs to pass bills out of both houses by the end of the year to avoid such sanctions. We encourage Congress to replace ETI in a way that improves the competitiveness of America's manufacturers and other job creators," he said. "It is critically important that we continue to work together to get legislation enacted."
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