Negotiators Approve Big Tax Cuts for Business

The New York Times
October 7, 2004
Negotiators Approve Big Tax Cuts for Business
By EDMUND L. ANDREWS

WASHINGTON, Oct. 6 - In an act of pre-election largess, House and Senate negotiators approved a sprawling corporate tax bill on Wednesday that would shower corporations and farmers in politically sensitive states with about $145 billion worth of new tax cuts.

In an attempt to get backing from Southern Democrats, Republican leaders included a $10 billion buyout for tobacco farmers, but they rejected a Senate provision to link that buyout with a requirement that cigarette companies be subject to regulation by the Food and Drug Administration.

Without the F.D.A. link, the bill could be jeopardized on the Senate floor, where opponents have threatened to stretch the debate to run down the clock as Congress tries to adjourn on Friday.

But Republican leaders said they had more than enough votes to stop a filibuster, contending that the overall tax bill has provisions sought by so many different lawmakers that it was almost assured of final passage by the end of this week. President Bush is expected to sign the bill if it reaches his desk.

The agreement involves the cozy deal-making that often characterizes pork-barrel politics, with lawmakers from both parties insisting on breaks for hometown industries in return for their support of the overall measure.

The big winners include General Electric, Exxon Mobil, electric utilities, movie producers and agricultural producers.

Keith Ashdown, vice president for policy at Taxpayers for Common Sense, a public advocacy group in Washington, said, "This legislation is an early Christmas gift for corporate fat cats."

The bill was initially intended to compensate exporters for the loss of $50 billion in tax breaks that the World Trade Organization had declared illegal, but Congressional negotiators approved a 633-page behemoth that doled out tax breaks worth nearly three times the original subsidy.

Supporters said the bill would resolve a trade dispute that has led the European Union to impose tariffs on up to $4 billion worth of American exports, while promoting job creation at American manufacturing companies.

"It also gives a real shot in the arm to U.S. factories and farmers, at home and abroad," said Senator Charles Grassley, the Iowa Republican who is chairman of the Senate Finance Committee. "We need to give permanent relief to the nation's job creators and lift the sanctions burden from our exports."

Not all lawmakers were happy. "This is a disgrace," said Senator John McCain, the Arizona Republican who had backed the proposal to make tobacco products subject to F.D.A. regulation. "They have removed the linchpin in the passage of this legislation in a complete sellout to the tobacco companies."

Displaying candy-flavored cigarettes like Kool's Mocha Taboo and Camel's Twista Lime, a bipartisan group of senators led by Senator Edward M. Kennedy, Democrat of Massachusetts, threatened to drag out debate on the bill as long as possible to prevent the Senate from voting before Congress is supposed to adjourn this weekend.

However, Senator Tom Daschle of South Dakota, the Senate Democratic leader, conceded that he would vote to stop a filibuster because the bill had too many good provisions. For Mr. Daschle, who is in a difficult re-election battle, the bill's most appealing provisions are a series of tax breaks for ethanol that are badly sought by corn farmers in his home state.

The bill also includes $20 billion in tax cuts on the foreign earnings of multinational corporations. Companies that have accumulated billions of dollars in untaxed overseas profits, from computer companies like Hewlett-Packard to pharmaceutical producers like Eli Lilly, would be given a one-year holiday to bring those profits back to the United States at a small fraction of normal tax rates.

Railroad companies like the CSX Corporation, which was headed by John W. Snow before he became Treasury secretary, would get a 50 percent tax credit for the cost of maintaining their tracks. The cost would be $501 million over 10 years.

The overall measure is technically cost-free, because it would also raise money by tightening rules against tax shelters and imposing new customs duties. But Mr. Ashdown and other critics contend that the full costs have been glossed over and disguised by delaying the starting date of some provisions and scheduling others to end after several years. Once Congress passes a tax break, lawmakers typically extend it when it comes up for renewal.

"This bill was three years in the making, and we need to finish the job," Mr. Grassley said. "Every day of delay means more sanctions freezing U.S. businesses out of the European markets, and more jobs in danger."

The centerpiece of the bill would abolish a tax break for American exporters, from Boeing and Caterpillar to Microsoft, that the W.T.O. declared an illegal export subsidy.

The European Union has begun imposing retaliatory tariffs on about $4 billion worth of American exports, from agricultural products to jewelry and leather goods. The tariff rates, which have been climbing monthly since March, are now 12 percent.

To compensate companies for the lost tax break and to provide new incentives for domestic manufacturers, who have shed more than two million jobs over the last three years, the bill would give companies a 9 percent tax deduction on profits from products made in the United States.

That tax break is worth about $76 billion over the next 10 years, and many of its biggest beneficiaries would be companies that never qualified for the original tax break for exporters. The definition of manufacturing, for example, includes oil and gas drilling, as well as mining and timber.

In a curious tussle between House and Senate tax writers, House Republicans dropped and then replaced a provision declaring that restaurants did not qualify as a form of manufacturing. But after replacing the stricture against restaurants, lawmakers added in a provision sought by Starbucks, the giant chain of coffee shops. The bill now declares that coffee roasting, though not coffee preparation, is a form of manufacturing.

With hundreds of business lobbyists circling the House-Senate negotiations this week, lawmakers inserted so many subtle last-minute changes in wording that it will take weeks if not months for even the most skilled tax experts to identify all the deals that took place.

To help pay for all the new tax breaks, the bill would raise about $26 billion over 10 years by closing several major tax shelters, $14 billion from new customs duties and more than $10 billion by reducing the evasion of fuel taxes for aircraft and heavy equipment.

But House Republicans rejected an entire bloc of Senate provisions that were intended to tighten the Internal Revenue Service's grip on tax shelters even more and would have raised more than $40 billion in additional revenue, according to Congressional tax analysts.

The one Senate provision that House Republicans did accept on Wednesday was a move to limit the tax break for small businesses and self-employed people who buy Hummers and other big sport utility vehicles.