*EPF306 05/12/2004
Senate Passes Bill to End Export Tax Breaks Ruled Illegal by WTO
(Focus shifts to House, where Republicans remain divided) (720)

By Bruce Odessey
Washington File Staff Writer

Washington -- After two months of bitter partisan wrangling, 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.

By a 92-5 vote late May 11, senators passed the bill, which would replace the existing tax breaks with scores of new business tax cuts worth $160-170 billion over 10 years, many of them aimed at specific industries, most favorably the energy industry.

The focus now shifts to the House of Representatives, where a rival bill pushed by Republican leaders has long been stalled. That bill has divided the majority Republican members, a group of them balking because they say the bill offers too many tax breaks to multinational corporations and too few to domestic U.S. manufacturers.

For the bill to become law, a final version must be passed by the House and Senate and signed by the president.

At issue are two U.S. laws that the WTO has ruled 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 U.S. noncompliance amounting to $4 billion a year. The EU began March 1 imposing tariffs of 5 percent and is prepared to increase the level by one percentage point a month up to 17 percent -- the rate went up to 7 percent May 1.

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 U.S. 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 U.S. 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 over three years repeal FSC/ETI and reduce the tax rate for all U.S.-based manufacturing companies -- not just for certain exporting companies and not for offshore manufacturing -- to 32 percent from 35 percent.

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 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 percent if the money were repatriated to the U.S. 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 United States.

(The Washington File is a product of the Bureau of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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