Senate Begins Debate on Dismantling FSC Program
House Republican leader outlines revised version of companion bill
WASHINGTON, DC - 03/04/04 - The Senate has begun debating a legislative proposal aimed at repealing the offending US export tax breaks that three days ago led to the European Union's (EU) imposition of retaliatory tariffs on imports from the US.
The Bush Administration has urged Congress to pass repeal quickly although it has taken no position in favor of any of the three leading legislative proposals, one in the Senate and two in the House of Representatives.
At issue is the Foreign Sales Corporation (FSC) tax-break mechanism that the World Trade Organization (WTO) ruled as an illegal export subsidy, and the Extraterritorial Income Act (ETI), the FSC successor law, which it ruled illegal in 2002.
The WTO authorized the EU to impose sanctions amounting to $4 billion a year.
After waiting for the US to act, the EU finally began imposing tariffs March 1 worth 5% of the authorized level, with a provision to increase the level by one percentage point a month over the next year up to a cap of 17%.
Before the full Senate is a bill approved in October on a vote of 19-2 by the Senate Finance Committee called the Jumpstart Our Business Strength (JOBS) Act. The main provision would over three years repeal FSC/ETI and reduce the tax rate for all US-based manufacturing companies - not just for certain exporting companies and not for offshore manufacturing - to 32% from 35%.
Other provisions aim at reforming the US international tax regime, including ending double taxation of income and shutting down offshore tax shelters.
"Flaws in our international tax rules seriously undermine America's ability to compete in the global marketplace," said Senator Chuck Grassley, Republican chairman of the Finance Committee.
"International reform is long overdue. Our current system is based on a framework enacted during President Kennedy's administration. We clean up problems that cause foreign earnings to be double taxed by both the US and the foreign country where the profits are earned," he said.
Several members are expected to challenge the bill by amendments.
Some Republicans, in line with administration criticism, want to amend the bill by reducing the top corporate tax rate for all corporations, not just for manufacturers. Grassley said he would oppose such an amendment, arguing that manufacturing, the sector that would be hurt by FSC/ETI repeal, should get any benefits from repeal legislation. He also argued that the proposed amendment would reduce taxes only for the biggest corporations, not for small family-held corporations or partnerships as the JOBS bill would.
Senator Tom Harkin, a Democrat from Grassley's state of Iowa, pledged to propose a potentially controversial amendment that would prevent final adoption of a Bush Administration rule aimed at exempting overtime pay guarantees for millions of US workers. Both the Senate and House of Representative actually passed such provisions in 2003 appropriations bills, but Republican leaders deleted them from the compromise measure given final passage by the two chambers.
Another amendment offered by Democrats aims to restrict foreign outsourcing of US jobs paid for by US federal government spending.
The Bush Administration has opposed one provision of the JOBS bill called the Homeland Reinvestment Act. It would reduce, for one year only, the tax rate to 5-1/4 percent from 35% 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.
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.
Administration officials have argued, however, it would treat unfairly those companies lacking foreign tax havens that have been steadily repatriating their income over years at the higher ordinary rate.
The Senate approved amendments to the Senate Finance bill on the first day of debate. One would extend research and development tax credits.
Another would close a tax shelter that the administration said was open to abuse.
According to Grassley's office, US companies using this shelter receive huge tax deductions by pretending to lease infrastructure such as bridges and dams from tax-exempt agencies in foreign countries and then pretending to lease it back.
"These arrangements have resulted in US taxpayers picking up the tab for a huge portion of Europe's transit infrastructure," Grassley's office said in a press release.
When the Senate would finish work on FSC/ETI repeal was uncertain. The Republican leadership has scheduled debate to begin March 8 on the federal budget whether work on the FSC/ETI bill was finished or not; the Senate is scheduled to take a recess the following week.
Meanwhile, companion legislation in the House of Representatives has been stuck in a stalemate for months.
Representative Bill Thomas, Republican chairman of the House Ways and Means Committee, told reporters he was aiming to bring to the House floor in a few weeks a revised version of a FSC/ETI bill he pushed through committee in October.
The Ways and Means bill would have decreased tax revenue about $60 billion over 10 years while his revised version would cost only about $3 billion, he said. The Senate Finance bill is supposed to be revenue neutral.
Thomas failed to gain support for the Ways and Means bill, however, from about 25 House Republicans who opposed tax breaks for US companies with overseas operations.
In past weeks House members sponsoring a rival to the Thomas bill have pressed Republican leaders to schedule a House vote on their bill, which is closer to the Senate Finance measure.
To become law an FSC/ETI repeal bill would have to be passed in both the House and Senate and signed by the President.
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