*EPF211 06/15/2004
Bill to Repeal Illegal Export Breaks Approved by House Committee
(Full House vote expected soon on provisions addressing WTO dispute) (740)

By Bruce Odessey
Washington File Staff Writer

Washington -- A House of Representatives committee has approved a bill to repeal U.S. export tax breaks ruled illegal by the World Trade Organization (WTO), but many obstacles remain to final congressional passage.

The House Ways and Means Committee approved the bill 27-9 late June 14. Yet a close vote is expected when the bill comes before the full House in the next few days, possibly as early as June 17.

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

"Fixing our international tax law is long overdue," said Representative Bill Thomas, Republican chairman of Ways and Means, "and we've balanced those changes with tax relief for manufacturing and small corporations to help create new American jobs."

The Ways and Means bill has some similarities with the bill passed in May by the Senate, but it has significant differences as well. Whether the two sides can resolve those differences in the relatively few weeks left in Congress' 2004 session is unknown.

At issue are two U.S. laws that the WTO has ruled are 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 8 percent June 1.

Both the Senate and House Ways and Means bills contain similar core provisions that would repeal the FSC/ETI export tax subsidies and reduce over time the top income tax rate for corporations from 35 to 32 percent.

Both bills also contain tens of billions of dollars of business tax cuts not connected with the FSC/ETI issue.

One big difference is that the Senate bill is predicted to be revenue neutral while the Ways and Means bill is predicted to increase the federal budget deficit by $34 billion over about 10 years. Senate leaders have asserted that the Senate would most likely reject any bill that increases the already surging budget deficit.

Most House Democrats are viewed as likely to oppose the Ways and Means bill, and House Republicans remain divided. One group of Republicans opposing the bill argues that it would give too much in the way of tax cuts to multinational corporations and too little to domestic U.S. manufacturers.

House Republican leaders have been adding provisions to the Ways and Means bill in an attempt to gain more support for it. Among the U.S. industries targeted for additional tax cuts are shipping, horse racing and timber, plus manufacturers of fish-and-tackle boxes and bows and arrows.

The Ways and Means provision adding the biggest cost, and expected to gain crucial support, would authorize spending $9.6 billion to buy out tobacco farmers in 10 states and end the existing government price support program.

"I want this bill to reach the [House of Representatives] floor as fast as possible because it stinks to high heaven in terms of the fertilizers you put on it ..." said Representative Charles Rangel, the senior Democrat on Ways and Means.

"The last I remembered, we were faced with a World Trade Organization problem and that, because we refused to fix it, we were going to be penalized some $4 billion dollars in tariffs ..." he said. "You have taken this $4 billion problem and turned it into a $140 billion tax cut."

Both the Senate and Ways and Means bills would sharply reduce taxes for one year only on foreign earnings by subsidiaries of multinational corporations that are repatriated --paid to the U.S. corporate parent. The tax rate for those eligible would drop from 35 percent to 5.25 percent for that year, but those corporations, mainly big pharmaceutical and technology companies, would have to invest the savings in U.S. operations.

Opponents of the provision, including officials of the Treasury Department, have argued that it would treat unfairly those companies that have been repatriating their profits all along at the high rate instead of stashing them in tax havens.

(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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