- The Washington Times - Thursday, May 9, 2002

This summer, Congress will try to revamp an export-tax subsidy that the World Trade Organization has said violates international rules, but lawmakers seem certain to fall into a debate about "corporate welfare," according to business representatives.
The current system, which provided companies with about $4 billion in tax relief last year, was designed to reduce the trade deficit by encouraging exports. But Congress is now under pressure to pass new legislation that simply reduces corporate taxation, regardless of the impact on exporting, in order to comply with WTO regulations.
Corporate lobbyists say it will be difficult to press their case for major corporate perks with the collapse of Enron in the headlines.
"In this environment, that's not a great situation to be in," conceded Christopher Padilla, a lobbyist for Eastman Kodak Co., which netted $40 million from the tax break last year.
Corporate America's lament stems from a law that allows companies to funnel money they make from exporting through paper companies set up in tax havens such as the U.S. Virgin Islands. These shell companies, known as Foreign Sales Corporations, have shaved billions off major exporters' tax bills since the law was enacted in 1971.
The tax break is a serious bottom-line issue for Boeing Co., which got $1.2 billion from the tax break over the past 10 years, almost 11 percent of its net income.
The European Union successfully challenged the law in the WTO, arguing that it runs contrary to a prohibition on subsidies that promote exports. On June 17, a WTO arbitrator will authorize Europe to retaliate against the United States with as much as $4 billion in sanctions.
President Bush last week vowed to work with Congress to replace the tax law, and Europe has hinted that it will hold off on retaliation provided the United States makes progress toward changing it.
But industry groups have found finding an alternative to be tricky.
All the companies that use the law want to preserve their benefits, but the only thing they have in common is that they export. And that is precisely the criterion that the WTO has said the United States is not allowed to use in defining who gets the tax break.
"It's very hard to target the same companies without running afoul of WTO rules," said Kimberly Pinter, a tax analyst with the National Association of Manufacturers.
The National Foreign Trade Council, an industry group, has drafted a proposal that tries to avoid tax increases on companies ranging from General Electric Co., a massive multinational conglomerate, to Military Truck Parts Inc., a small manufacturer in Many, La.
The council has suggested creating new tax breaks that favor companies, like GE, who have facilities overseas. But it threw in a proposal for wage-based tax credits that has little to do with exporting or international business.
William Reinsch, the group's president, called that provision "the grab bag to cover the companies that were left over," primarily smaller firms.
Looming over the problem of replacing the tax break is the threat of serious conflict between small businesses and large corporations that benefit from it. In 1996, the last year for which data are available, 60 percent of users were small companies.
They have taken a dim view of proposals that would make tax benefits contingent on having operations abroad. Charles Bruce, a Washington tax lawyer who represents a coalition of smaller firms, said the trade council's proposal offers little to his clients.
"If you're a small exporter, being told you get a little wage-tax credit is not the world," Mr. Bruce said, adding that his group would soon offer its own proposal.
Members of Mr. Bruce's coalition told the House Ways and Means Committee last month that they have "no incentive or desire" to move their factories to foreign countries for tax purposes.
"Our representatives in Congress should be as attentive to the views of small and medium-sized exporters as they are to larger exporters," the group stated in testimony to the panel.


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