Senate Passes Bill to End Export Tax Breaks
The move is aimed at dismantling the FSC/ETI mechanism
WASHINGTON, DC - 05/15/04 - The Senate has passed a bill to repeal export tax breaks ruled illegal by the World Trade Organization (WTO), but many obstacles remain to final congressional passage.
After two months of often bitter partisan wrangling, the Senate voted Tuesday on a vote of 95-5 a bill that would replace the existing tax breaks with scores of new business tax cuts.
Many of the breaks are aimed at specific industries, most favorably the energy industry and could be worth as much as $160 billion-$170 billion over 10 years.
The focus now shifts to the House of Representatives, where a rival bill pushed by Republican leaders has been stalled for more than a month.
According to the Washington Wire, that bill has divided the majority Republican members into two warring camps with one side supporting legislation similar to that just passed in the Senate and the other asserting that the proposed bill offers too many tax breaks to multinational corporations and too few to domestic US manufacturers.
For the bill to become law, a final version must be passed by the House and Senate and signed into law by the President.
At issue are two US laws that the WTO has ruled as illegal export subsidies - the decades-old Foreign Sales Corporation (FSC) and its successor, the Extraterritorial Income Act (ETI).
The WTO authorized the European Union (EU) to impose sanctions for US non-compliance amounting to $4 billion a year. The EU began March 1 with the imposition of tariffs of 5% and has said it will increase the tariff level by one percentage point a month up to 17%.
On May 1, the rate was increased to 7%.
The Senate-passed bill would offset the tax cuts by closing widely abused tax shelters and tax loopholes, including some infrastructure-leasing deals widely regarded as scams. In contrast, the tax cuts proposed in the House Republican leaders' bill would increase the US federal debt by about $60 billion.
House and Senate differences over offsetting the cost could present an obstacle to final passage.
Senator Chuck Grassley, Republican chairman of the Senate Finance Committee, warned that the Senate would pass only a final bill that is revenue neutral.
"It's just a fact of life," Grassley told reporters. "We can't get a tax bill through without offsetting."
Secretary of the Treasury John Snow issued a statement praising the Senate for passing its bill, apparently siding with the Senate on offsetting.
"Passing the FSC/ETI legislation is an important step toward ending the burden of the tariffs currently being imposed on US exports under the WTO sanctions," Snow said.
"We will continue our efforts to work with Congress to ensure that legislation is signed into law that will help us comply with our WTO obligations, is as close to budget neutral as possible, and will strengthen our economy and help manufacturers and other job creators."
The bill's main provision would dismantle the 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% over three years.
The $160-170 billion in tax breaks in the Senate-passed bill is more than twice the amount approved earlier in the Finance Committee and three times the value of the export tax breaks being repealed.
On the final day of debate senators rejected a number of controversial amendments. By 59-40, one vote short of the 60 needed under a procedural rule, senators failed to approve a Democrats' proposed amendment for extending unemployment benefits to workers who had exhausted their benefits.
By a vote of 85-13 they rejected an amendment to strip out about $18 billion worth of tax cuts to the energy industry. By 74-23 they rejected an amendment to remove about $39 billion of tax breaks on overseas income of multinational corporations.
Remaining in the bill is another controversial provision that would lower, for one year only, the tax rate on multinational corporations' foreign subsidiary income to 5.25% if the money were repatriated to the US parent company.
Bush Administration officials and several members of Congress have opposed the temporary provision, arguing that such special treatment is unfair to companies that pay the full corporate rate.
Proponents have argued that it could lead to return of up to $500 billion to the US.
The European Union reacted quickly to the Senate vote saying that it would lift the hefty trade sanctions against the US once a final version of legislation repealing the "contentious" FSC/ETI mechanism passes through the House of Representatives and is signed by the President.
EU Trade Commissioner Pascal Lamy told reporters in Brussels that the Senate had taken "a very important step" towards ending what he called "one of the worst transatlantic trade disputes."
"It goes without saying that the moment WTO-compliant legislation becomes law, the EU will immediately repeal the countermeasures," Lamy said. "I very much hope that the House will soon follow so that an FSC repeal bill is rapidly adopted and signed into law…That will be good news for all involved in transatlantic trade. Let's hope the time has come to put this long-standing dispute behind us once and for all."
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