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Posted on 07/08/2003 6:17:33 PM PDT by greydog
WASHINGTON (AP) - Looking to rewrite an annual $5 billion corporate tax break declared illegal in international trade courts, lawmakers are divided whether to redirect the tax benefits to shore up domestic manufacturers or to simplify tax rules for U.S. companies with overseas operations.
Corporations are lining up on both sides, arguing that the competitiveness of American business is at stake.
Congress must chose a course this year or risk having $4 billion in sanctions imposed by the European Union on U.S. exports to EU member states. John Veroneau, general counsel for the U.S. Trade Representative, told a Senate committee Tuesday to expect a very high likelihood of retaliation next year if Congress does not move toward eliminating the tax break.
The World Trade Organization ruled last year that the tax break amounts to an illegal export subsidy. Faced with eliminating the tax break, Congress wants to ensure the companies that used it do not suffer from its demise and are looking for other ways to help them.
Many of the nation's largest multinationals - including Coca-Cola Co., Exxon Mobil Corp. and McDonald's Corp. - have thrown their weight behind a plan to simplify tax rules for companies with extensive international operations. They argue that current U.S. tax system is outdated, ignoring the global economy and forcing corporations to pay taxes at home and abroad and become vulnerable to foreign competitors.
Manufacturers large and small prefer competing plans that effectively would reduce the tax rate for domestic producers between 3.5 percent and 5 percent, giving them an edge over companies that use cheaper factories overseas. Microsoft Corp., Boeing Co. and Caterpillar have signed onto that approach.
House Ways and Means Committee Chairman Bill Thomas, R-Calif., will offer a bill this year that backs the course favored by multinational corporations, simplification of tax laws.
Committee spokeswoman Christin Tinsworth argues that companies now helped by the tax break will reap as many benefits from simpler tax rules. About 1,800 companies benefit from the current tax break, roughly one-half of 1 percent of manufacturers. Fewer than 200 of largest corporations reap 90 percent of the benefits.
The House's usual partisan split over tax matters has been muddled, and a competing bill to boost manufacturing through the tax code has as many Republican co-sponsors as Democrats.
Manufacturers also count supporters in the Senate. Top lawmakers on the Senate Finance Committee indicated Tuesday they are sympathetic to domestic manufacturers after hearing several companies testify to the pressures to move operations overseas.
"I think it's very clear the detrimental impact that some legislation around the Hill can have on domestic manufacturing, and not putting our manufacturing sector to greater jeopardy would be a goal of mine," said Finance Committee Chairman Charles Grassley, R-Iowa.
"I want to do something on domestic taxation that has the same effect or better effect."
Economists told Grassley and other senators at a Finance Committee hearing Tuesday that manufacturing has suffered worst during the current economic slowdown.
Since July 2000, the nation's factories have cut 2.6 million jobs. Low demand at home and abroad and a flood of imports have slowed production.
Robert E. Hall, and economist at Stanford University, told senators that the United States leads the world in innovation and ideas, and the current shocks to the manufacturing sector are not large by historical standards.
"Workers laid off from industries suffering permanent declines, such as apparel, will be absorbed, but only gradually, in other growing sectors, many outside manufacturing," he said.
But other economists and many lawmakers said they are deeply concerned about U.S. manufacturing jobs steadily moving overseas. Kathryn Kobe, chief economist of Joel Popkin and Co., said the sector is struggling for survival.
"If the U.S. manufacturing base shrinks too much, this innovation process is put at risk," Kobe said.
AP-ES-07-08-03 1950EDT
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