Export Tax Breaks Could Disappear
Corporate tax package divides House members
WASHINGTON, DC - 11/03/03 - A US House of Representatives committee has approved a bill repealing existing tax breaks for US exporters that were ruled in violation of international trade rules, but the bill faces considerable opposition in the full House, reports the Washington File.
The bill (HR-2896), which would sharply reduce corporate taxes for both domestic US and US-based multinational corporations, would not condition the cuts on whether the products were exported or not necessarily even whether they were produced in the US.
The vote in the House Ways and Means Committee was 24-15, completely along party lines. Although Representative Bill Thomas (R-CA), the committee chairman, won united support from fellow Republicans on the committee, other House Republicans have vowed to oppose the bill.
The Thomas bill also differs sharply from a bill approved October 1 in the Senate Finance Committee.
At issue are WTO rulings in 2000 against the US Foreign Sales Corporation (FSC) mechanism and in 2002 against the successor Extraterritorial Income Act (ETI). The WTO said both US laws violated its trade rules against export subsidies.
The European Union (EU), which brought both WTO challenges, has authority to impose trade sanctions of $4 billion a year against US imports in retaliation unless the US repeals the FSC/ETI tax breaks. EU officials have warned they could begin imposing some sanctions as soon as January.
The Thomas bill would go much further than simply repealing FSC/ETI. It would reduce corporate income tax rates for manufacturers, domestic and multinational, in phases from 35% now to 32% in 2007 and thereafter. It would also reduce in phases the tax rate for non-manufacturing income under $20 million a year from 35% to 32%.
It would also reduce in a number of ways US corporate taxes on multinational corporations to offset payment of foreign corporate taxes. And it would relax certain depreciation rules and alternative minimum tax measures for corporations.
According to Congress' Joint Committee on Taxation, over 10 years the Thomas bill would reduce US tax revenue by $128 billion while repeal of ETI and various measures to raise revenue would still leave nearly $60 billion in additional budget deficits.
Democrats opposed the Thomas bill over the increase in the deficit, coming on top of the record deficit in the fiscal year just ended and more deficits forecast for years to come.
Assistant Treasury Secretary Pamela Olsen said at the Ways and Means meeting that the Bush administration seeks a bill close to revenue neutral but did not criticize the Thomas bill and described its cost over 10 years as relatively small.
An alternative revenue-neutral provision submitted by Ways and Means Democrats and aimed solely at giving tax breaks to domestic US manufacturers - close in ways to the bill approved by the Senate Finance Committee - was defeated along party lines.
Yet some Republican House members not on Ways and Means also opposed the Thomas bill, arguing that the international tax provisions, by reducing the cost of doing business overseas, will encourage corporations to move more jobs from the US to China and other countries.
Representative Donald Manzullo, Republican chairman of the House Small Business Committee, and 10 other House Republicans distributed a letter urging defeat of the Thomas bill.
"Nothing in the WTO decision requires the enactment of a foreign tax reform package," the letter says. "The current crisis in US manufacturing mandates that every dollar from FSC/ETI repeal be devoted to its longtime beneficiaries - US manufacturers."
Both Thomas' Ways and Means bill and the Senate Finance bill would substitute new tax breaks for the FSC/ETI scheme over three years. At the Ways and Means meeting, Office of the US Trade Representative (USTR) general counsel John Veroneau acknowledged that the EU trade commissioner has deemed a three-year transition as "unacceptable."
Nevertheless, he said that if Congress passes a bill repealing FSC/ETI that President Bush can sign, then USTR would act to discourage EU retaliation.
Treasury Secretary John Snow, Commerce Secretary Don Evans and US Trade Representative Robert Zoellick wrote an October 27 letter to Republican Speaker of the House Dennis Hastert requesting House passage this year of legislation that repeals FSC/ETI "and avoids triggering trade sanctions by the European Union."
Many obstacles remain, however, to passage either in the House or Senate as Congress' 2003 session moves closer to adjourning for the year.
After the Ways and Means vote, Thomas indicated to reporters he understood that passage by the full House still faced stiff opposition. And no date for the Senate Finance bill has been set so far in the full Senate's crowded schedule.
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