Thomas Locked in New Tax Fight

Posted May 30, 2003 at 5:11pm

Members left town 10 days ago after completing a $350 billion tax-cut package that enjoyed near unanimous support among the White House, business leaders and Republicans on Capitol Hill.

They return today to begin debate on an international tax bill that will split those groups.

At issue is a bill expected to be unveiled as early as this week by Ways and Means Chairman Bill Thomas (R-Calif.) that pits thousands of U.S.-based manufacturers, such as the Boeing Co., Microsoft and Caterpillar, against multinational corporations with large overseas operations, like ExxonMobil, Dow Chemical and Proctor & Gamble.

Though the bill attempts to make U.S. companies more competitive overseas, its approach has the potential to cleave businesses and their Washington trade associations right down the middle.

“It’s splitting trade associations. It’s splitting industries. It’s splitting friends on Capitol Hill,” said Ralph Hellmann, a lobbyist for the Information Technology Industry Council.

The Thomas bill would repeal a complicated U.S. trade subsidy that gives U.S. manufacturers a $4 billion incentive each year to export their products overseas.

The World Trade Organization recently complained that the measure is an illegal trade subsidy — and threatened to impose massive sanctions on U.S. exporters if the law is not changed.

In its place, Thomas plans to propose nearly two dozen changes designed to overhaul international tax law and replicate the incentive for U.S. corporations to export overseas.

Nearly everyone agrees that Congress must repeal the current trade incentive, known as the extraterritorial income exclusion. But they disagree sharply over how to replace it.

Boeing, Microsoft and Caterpillar — some of the biggest beneficiaries of the current system — strongly oppose the Thomas bill because they believe they would be shortchanged.

Chicago-based Boeing, for example, now receives about $200 million in tax subsidies each year to sell its planes overseas, according to company estimates, and believes it would lose 10,000 U.S. jobs if the incentives were eliminated without an adequate substitute.

“Without a replacement that is comparable, we would not be on the same playing field as our foreign competitors,” such Amanda Landers, a Boeing spokeswoman.

As a result, Boeing and other major beneficiaries of the current system are pressing for a competing bill offered in April by Rep. Phil Crane (R-Ill.), the No. 2 Republican on the tax-writing panel, and Rep. Charlie Rangel (N.Y.), the panel’s top Democrat.

Earlier this year, the companies formed an informal alliance and hired the Republican lobbying shop Alexander Strategy Group to advance the bill.

The Crane-Rangel bill would replace the current exporting subsidy by cutting corporate tax rates for all U.S. manufacturers to 31.5 percent from the current 35 percent.

That approach enjoys broad support among U.S. manufacturers, labor unions, Democrats and Industrial Belt Republicans. Speaker Dennis Hastert (R-Ill.) is also said to support the Crane-Rangel bill.

So far, more than 90 House Members have endorsed the bill, including Small Business Chairman Don Manzullo (R-Ill.) and Rep. Mac Collins (R-Ga.).

“The bottom line is that it supports U.S. jobs,” said Katie Himes, a spokeswoman for Illinois-based Caterpillar.

In contrast, opponents charge, the Thomas bill will encourage manufacturers to move jobs overseas because it does not go far enough to replace the current $4 billion trade incentive.

“Congress should not give tax breaks to corporations that choose the low-road strategy of remaining competitive by shipping jobs out of the U.S. to low-wage locations,” Bill Samuel, legislative director for the AFL-CIO, wrote in a letter to lawmakers.

However, the Thomas bill is strongly backed by many large multinational companies that believe the measure makes important strides toward overhauling and simplifying international tax law, something the Crane-Rangel bill largely ignores.

“We believe we benefit more by having international reform,” said Janet Boyd of Dow Chemical.

Dow Chemical has formed the Coalition for Fairness in International Taxation along with more than dozen like-minded businesses, including EDS, Texas Instruments, Proctor & Gamble and ExxonMobil.

The group, run by Washington Council Ernst & Young and lobbyists Phil Moseley and Bruce Gates, plans to sign a letter in support of the Thomas bill once it is unveiled.

A third group of companies, led by Lockheed Martin, Raytheon and much of the defense industry, hopes to find common ground between the approaches endorsed by the Ways and Means Committee leaders.

The Coalition for American Manufacturing Jobs plans to present its proposal to the Senate Finance Committee this week.

The split in Corporate America reflects the rift within the GOP.

While Democrats on the Ways and Means Committee are expected to line up against the Thomas bill, a number of Republicans from heavily manufacturing states are also expected to oppose their chairman.

Crane and Collins have already announced their opposition, while Reps. Jennifer Dunn (Wash.), Sam Johnson (Texas) and Jerry Weller (Ill.) are also considering opposing it.

With Republicans holding a seven-seat advantage on the tax-writing panel, Thomas can afford to lose only four Republican votes to have any chance of moving the bill though his committee.

As a result, he has spent the past few weeks scrambling to add a handful of sweetener provisions to broaden his support.

For high-tech and pharmaceutical companies, Thomas has added language to allow companies to bring earnings from overseas back into the United States at dramatically reduced tax rates. For defense and aerospace interests, he hopes to include an extended tax credit for research and investment.

Thomas even has tried to soften a provision that would penalize overseas corporations that have U.S. subsidiaries.

Still, there is little chance that the changes will lessen the fierce opposition from large manufacturers, like Caterpillar and Boeing, whose millions of employees can hold tremendous sway over the way lawmakers like Hastert vote.

Referring to the two Illinois-based companies, Hastert spokesman John Feehery said the Speaker “is a representative of the people who work for them.”

To resolve the dispute, Feehery said, “Chairman Thomas will have to work with us. And we will have to work with the chairman.”