$128 Billion Corporate Tax Cut?

A proposed $128 billion corporate tax cut is exposing deep disagreements among lawmakers over how to help U.S. manufacturers compete in a global economy.

Congress finds itself forced into a debate over corporate tax laws after the World Trade Organization declared that a $5 billion annual tax break for U.S. exporters amounts to an illegal subsidy. The United States faces $4 billion in sanctions if the tax break is not repealed.

House Ways and Means Committee Chairman Bill Thomas, R-Calif., offered a $200 billion corporate tax cut this past summer to replace the old tax system. He was forced back to the drafting table when GOP lawmakers pressed hard for more direct aid to U.S. manufacturers.

The result is a smaller tax cut that aims two-thirds of its benefits at domestic manufacturers, "even though multinationals currently receive over 90 percent of the (old) benefits and employ over 60 percent of the United States' manufacturing work force," a committee summary said.

The committee is considering the revised proposal Tuesday.

Under the plan, the 35 percent top corporate tax rate would drop to 34 percent next year, then to 32 percent in 2007 for U.S. manufacturing. The tax cut would encompass companies that make items manufactured, produced, grown or extracted, including construction, software, movies and oil and gas.

The revised bill also would drop a short-term tax reduction for companies accumulating earnings overseas, a provision that had drawn criticism from some senators and the Treasury Department.

Despite the changes, 11 Republicans circulated a letter asking members to withhold their support until Thomas reworks the bill again and drops $40 billion in tax cuts for companies with operations overseas. The Republicans also want to eliminate the bill's cost to the Treasury to make it more acceptable to deficit-wary senators.

"We should not be wasting time arguing or playing a game of 'chicken' with the Senate over a foreign tax package that not only encourages jobs to move overseas but contains a cost ensuring its rejection in the Senate and risks trade retaliation sanctions by the EU next January," they wrote.

The panel's top Democrat, who spent much of the year lobbying for a manufacturers' tax cut, leveled nearly identical charges. Rep. Charles Rangel, D-N.Y., said the bill is "headlined as supposedly protecting American jobs, but $40 billion in tax breaks to benefit overseas operations could mean fewer American jobs."

Democrats also said the bill includes giveaways to oil and gas companies, moviemakers and other special interests.

U.S. producers and multinational corporations, sensing a limit on Congress' appetite for corporate tax cuts, have spent much of the year vying for the biggest share of the bill.

U.S. producers won a rate cut, and multinational firms won new rules that would make it easier for them to claim deductions for interest and credits for taxes paid in foreign countries.

The bill also would cut taxes for small businesses beginning next year. By 2012, more than 99 percent of all businesses would see their top tax rate fall from 35 percent to 32 percent.

The legislation also would shut down some corporate tax shelters and includes items to discourage individuals and companies from moving abroad to avoid paying U.S. taxes.

Balancing the items that raise revenue with new tax cuts, the bill would cost $60 billion over the coming decade.

By Mary Dalrymple