Thursday, September 4, 2003

U.S. lawmakers this month will step up efforts to fix corporate tax laws that violate World Trade Organization rules, but it is not clear whether the legislation is moving fast enough to stave off a trade war.

Congress is working under the threat of $4 billion in WTO-sanctioned retaliation from the European Union, but key trade and tax-writing lawmakers are offering competing bills and may not be able to find a quick compromise.

“We will move ahead with retaliation if there is not progress by the end of September,” EU trade Commissioner Pascal Lamy said yesterday. The 15-nation European Union has already identified hundreds of products that would effectively be barred from the EU market, though the trade bloc could start with only a few items.

The WTO in August 2002 ruled against a section of the U.S. tax code that allows companies a partial exemption from taxes on some foreign sales and leases. The ruling sparked a fierce legislative and lobbying battle, as lawmakers and companies line up to rewrite corporate tax law.

Congress and the Bush administration agree they must repeal the illegal tax breaks, worth about $50 billion over 10 years. But they have not agreed how to reallocate that $50 billion, who should benefit most or how to revamp President John F. Kennedy-era laws on international corporate taxes.

Sen. Charles E. Grassley, Iowa Republican and chairman of the Senate Finance Committee, this month is expected to introduce a bill that would repeal some tax breaks for exporters, add tax breaks for manufacturers and bring the United States in line with a WTO ruling against the U.S. tax code.

The bill would repeal the offending tax break and instead offer a mix of tax rate reduction for manufacturers and international tax reform. The proposal, which is expected to be revenue-neutral, could be considered by the full committee before the end of the month.

The measure would be the third, and probably last, major proposal to fix the tax problem. The two other bills originated in the House, where lawmakers continue to battle.

Rep. Philip M. Crane, Illinois Republican, and Rep. Charles B. Rangel, New York Democrat, in April introduced a measure that would repeal the offending provision, and then use the revenue to lower corporate taxes for U.S.-based manufacturers.

But the chairman of the House Ways and Means Committee, California Republican Bill Thomas, in July proposed a major rewrite of international tax rules and a new $120 billion, 10-year corporate tax cut.

Largely domestic manufacturers like Caterpillar and Boeing, and other firms that benefit from the existing law support the Crane-Rangel approach. More than 120 multinational companies, including Coca-Cola, General Motors and Wal-Mart have joined a coalition to back Mr. Thomas’ proposal.

The National Federation of Independent Business, a lobby for small firms, this week endorsed Mr. Thomas’ approach.

But Mr. Crane and Mr. Rangel still hope to get a full hearing — in the committee chaired by Mr. Thomas — for their bill.

A letter to colleagues this week said the Thomas bill would encourage companies to move overseas and “just doesn’t make sense.”

The Bush administration has remained vague on which bill it supports. Some officials have signaled support for Mr. Thomas’ approach, but the growing budget deficit calls into question further tax cuts.

“We are committed to bringing our tax laws into WTO compliance and to reforming international tax rules in such a way that preserves the competitiveness of the U.S. business operating in the global marketplace,” White House spokesman Scott McLellan said Tuesday.

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