A Tax Bill, Full of Breaks, Passes Senate

By EDMUND L. ANDREWS
October 12, 2004

WASHINGTON, Oct. 11 - After nearly three years of jockeying by legions of
business groups, the Senate passed a $137 billion corporate tax bill on Monday
that gave something to almost everyone.

The 69-to-17 vote, which came after similarly lopsided approval by the House
last week, means that the bill will now be sent to President Bush, who has
indicated he will sign the measure despite White House concerns that it is
overloaded with special-interest provisions.

The sprawling bill's main provisions would eliminate a tax break for American
exporters that was declared illegal by the World Trade Organization and replace
it with a tax reduction of about 10 percent for companies that manufacture goods
in the United States.

But the 633-page bill that finally emerged from Congress includes hundreds of
other business tax breaks, which are supposed to be paid for by shutting down
certain kinds of tax shelters and imposing new customs duties.

The numerous new provisions includes more than $20 billion in reductions over
the next 10 years on foreign profits of multinational corporations. It would
also provide a huge one-time windfall to technology companies like Oracle and
Hewlett-Packard and pharmaceutical giants like Eli Lilly, allowing them to bring
hundreds of billions of dollars in untaxed foreign profits back into the United
States at about one-seventh of the normal tax rate.

Other provisions would benefit oil companies, timber producers, movie studios,
accounting firms, cruise ship operators, tobacco farmers and dozens of other
groups.

Senator Charles E. Grassley, Republican of Iowa and chairman of the Senate
Finance Committee, said the bill was necessary to finally resolve a costly trade
dispute with Europe and would provide a badly needed lift to American
manufacturers in their effort to improve global competitiveness.

"Those who want to distort this bill, distort this bill by describing it as a
special-interest bill, are ignoring a couple of things," Mr. Grassley
said. "They are ignoring, perhaps conveniently, perhaps deliberately, their own
efforts to advance their own interests." But critics said lawmakers handed out
scores of unwarranted tax breaks to corporate interests while rejecting
provisions aimed at helping middle-income taxpayers or promoting health.

"It is the worst example of the influence of special-interest groups I have ever
seen," said Senator John McCain, Republican of Arizona, who denounced a decision
to include a $10 billion buyout program for tobacco farmers, but drop a
provision that would have put the Food and Drug Administration in charge of
regulating tobacco products.

Technically, the new law is projected to be revenue-neutral for the Treasury
because it pays for the new tax breaks by closing down many tax shelters,
eliminating some tax preferences and increasing customs fees on imported goods.

One major provision is intended to raise $26 billion over 10 years by outlawing
a popular tax shelter in which cities, including many foreign cities, sell
subways and other public infrastructure to private investors who then lease them
back and take advantage of tax deductions for depreciation.

After months of wrangling, lawmakers also restricted the "Hummer tax break,"
which gave small-business owners as well as many doctors and lawyers the ability
to write off up to $100,000 of the purchase price of sport utility vehicles
weighing more than 6,000 pounds. The new provision would limit most first-year
write-offs to $25,000, raising $372 million over the next three years.

"It's almost impossible to have a perfect tax bill," said Senator John
B. Breaux, Democrat of Louisiana, who was critical of many elements but
supported provisions that favored oil producers and cruise ship operators.

"You have to take the good with the ugly," Mr. Breaux said. "You have to fight
your fight, but in the end you need to get things done."

Republican Senate leaders had badly wanted to vote on the bill last Friday so
they could adjourn on schedule and tend to their re-election campaigns.

But final passage was delayed by two highly charged issues. Objecting to the
tobacco changes, a bipartisan group, including Senator Edward M. Kennedy of
Massachusetts on the Democratic side, invoked Senate procedures to force a delay
in the vote until at least Sunday night. Senate leaders smoothed over that fight
by passing a bill that would put the Food and Drug Administration in charge of
tobacco products, though that bill has no companion measure in the House and is
unlikely to become law.

In another passionate fight, Senator Mary L. Landrieu, Democrat of Louisiana,
delayed a vote until Monday because House Republicans deleted a $2 billion
provision in the Senate bill that would have given tax credits to companies that
keep paying salaries of employees who are military reservists but are called up
to active duty.

"There is $137 billion in this bill, and the only people who aren't in here are
the men and women taking bullets on the front lines," Ms. Landrieu said. "What
is someone going to tell me? That we don't have enough money? What is this?"

In the end, the bill contained so many alluring provisions that most Democrats,
including even Ms. Landrieu, as well as nearly all Republicans, voted in favor
of it.

One provision, whose supporters included Senator Charles E. Schumer, Democrat of
New York, would provide $231 billion in tax breaks for special "green bonds" to
finance four big shopping malls. One of those malls is Destiny USA, a $2.2
billion project planned for Syracuse.

Other provisions benefit corn farmers with big incentives for ethanol
production, one reason that it was supported by Tom Daschle of South Dakota, the
Senate Democratic leader who is engaged in a close re-election fight. A tax
break for shipbuilders, worth $495 million over 10 years, had support from
Mr. Breaux and Senator Olympia J. Snowe, Republican of Maine.

To be sure, some groups got less than they wanted. The Senate bill would have
given television and movie producers about $1 billion worth of tax credits. That
provision was dropped during the House-Senate conference committee, amid word
that House Republicans were angry that the Motion Picture Association of America
had picked as its top lobbyist Dan Glickman, a secretary of agriculture in the
Clinton administration.

But Hollywood will not go away empty-handed. Movie studios still got tax
deductions worth $336 million over the next five years.

Copyright 2004 The New York Times Company


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How Tax Bill Gave Business More and More

By EDMUND L. ANDREWS
October 13, 2004

WASHINGTON, Oct. 12 - Senator Charles E. Grassley needed every possible vote to
pass his mammoth corporate tax bill. So he was more than willing to accept Zell
Miller's plea on behalf of imported ceiling fans.

Senator Miller, the Georgia Democrat who became a Republican hero at the party's
convention with his impassioned denunciation of Senator John Kerry, was
determined to help Home Depot, the home-improvement chain based in Atlanta. And
Home Depot, which sells about half of all ceiling fans in the United States,
wanted an end to the tariff on imported fans, most of them from China.

On Monday, everybody involved was a winner. The Senate gave final approval to
Mr. Grassley's bill, which would shower $137 billion in tax breaks into every
corner of industry. While the bill's primary purpose is to bolster American
manufacturers, it will also help Chinese ceiling-fan companies by eliminating
$44 million in tariffs over the next two years. President Bush is expected to
sign the bill into law shortly.

The Home Depot provision is just one tiny example of how the need to solve a
narrow tax problem in 2002 gave birth to the biggest free-for-all in corporate
lobbying that Congress has experienced in nearly 20 years.

The story began nearly three years ago, with an initial impetus simply to
replace a $5 billion annual tax break for American exporters that the World
Trade Organization had ruled was illegal. It ended this week with a 633-page
behemoth that offers new tax giveaways to everyone from corporate titans like
Boeing and Hewlett-Packard to an array of oil and gas producers, shopping mall
developers, wine distributors, even restaurants. Many companies, like General
Electric and Dell, are likely to end up with far more tax relief under the new
bill than they had ever received from the old tax break. Some, like Exxon Mobil,
never qualified for the old tax break at all but will enjoy tax savings now.

Even the "losers" came away with something. Movie executives are complaining
that they were punished at the last minute, when House Republicans stripped out
about $1 billion worth of tax credits, in part because the industry is closely
identified with the Democratic Party. But they still held on to $336 million in
tax breaks for movies made in areas with high unemployment.

Similarly, the final bill would also raise more than $60 billion by cracking
down on major tax shelters and punishing companies that try to avoid American
taxes by moving their headquarters outside the country. But in a gesture of
mercy to a handful of oil service companies from Texas, House Republicans gave a
green light to companies that moved offshore before March 4, 2003. The
beneficiaries of that decision include the Noble Corporation, Weatherford
International, Cooper Industries and Nabors Industries - all in or near the
district of Tom DeLay, the House majority leader.

"It was a perfect storm for pork, in that they added all these provisions that
were really important to lawmakers in an election year,'' said Keith Ashdown,
vice president of Taxpayers for Common Sense, a nonpartisan public-interest
group in Washington. "It will take days, if not months, to figure out everything
that's in here.''

Within the Washington Beltway, the political logic was in many ways
predictable. What was not predictable was how brazen and open the frenzy would
ultimately become.

House and Senate leaders knew from the start that any attempt to tinker with
corporate taxes would set off intense lobbying, as every major company and every
industry association scrambled to protect existing preferences and push for new
ones.

After nearly two years of feuding among rival interest groups, the House and
Senate both passed bills this year that would essentially replace the old tax
break with rate cuts on profits from domestic manufacturing.

But under heavy pressure from big multinational corporations, both chambers also
included about $42 billion worth of tax reductions on the foreign earnings of
companies based in the United States.

Corporate executives defended the tax cuts on foreign profits, saying that
American companies were at a competitive disadvantage because most other
countries tax profits earned only inside their borders.

To build support for their bills, House and Senate leaders openly invited
lawmakers and industry groups to draw up their own wish lists for special tax
provisions. By last spring, the Senate bill had ballooned to more than 700
pages.

It suddenly included billions of tax breaks for oil and gas companies and
renewable energy that had been in last year's energy bill, which collapsed amid
bitter partisan and industry feuding in November 2003.

One of those provisions was Home Depot's tariff reduction on ceiling fans, which
was slipped into the House's tax bill this summer and agreed to by Mr. Grassley,
Republican of Iowa, to please Mr. Miller.

The bill also greatly expanded the traditional definition of "manufacturing,''
enabling a much greater range of companies to qualify for tax reductions.

Under pressure from the Bechtel Corporation, the engineering contractor, for
example, Senate leaders included engineering as a form of manufacturing. They
also included any companies involved in timber and the "extraction'' of
minerals, which extended fresh benefits to companies like Exxon Mobil and BP
Amoco, as well as electric companies.

Meanwhile, lawmakers pressed hard to win approval for pet tax breaks that had
been lying around for years but rejected on previous occasions. Among the items
that made it into the final bill were a $9 million tax reduction on bows and
arrows; $27 million in tax breaks on gambling income of foreigners at American
horse-racing and dog-racing tracks; and $11 million in reduced excise taxes on
fishing tackle boxes, a longtime pet project of J. Dennis Hastert, the House
speaker, whose district includes a big producer of tackle boxes.

Given the need to pass some sort of bill, if only to spare the costly,
escalating sanctions on exports imposed by the W.T.O. to force compliance, every
tax lobbyist in town was engaged in the fight to win something for their clients
and block changes that might cost them money. That stretched out the process.

"It's always difficult when you have a finite pie that you're trying to divvy
up,'' said Donald G. Carlson, a former chief of staff on the House Ways and
Means Committee who lobbied for numerous provisions in the bill. "When you have
to pick winners and losers within the corporate community, that is always a
messy process that Congress is reluctant to undertake.''

House and Senate leaders were stalled for months by feuding, made all the more
difficult as the combination of tax breaks in both the House and Senate versions
vastly outstripped the money to pay for them.

Representative Bill Thomas, Republican of California and chairman of the House
Ways and Means Committee, rejected most of the energy tax breaks included in the
Senate bill.

But one provision that he included was Mr. Miller's tariff reduction for ceiling
fans. Strictly speaking, the tariff reduction had nothing to do with taxes and
would, if anything, make life harder for American companies competing with the
imports. Mr. Miller argued that the tariff was pointless because there were no
American ceiling fan manufacturers, and that there had not been any for many
years. In the meantime, he contended, retailers like Home Depot were forced to
charge higher prices.

Mr. Thomas, often known for scathingly denouncing "extraneous" provisions in his
tax bills, quietly supported the ceiling fan provision in the certain knowledge
that Mr. Grassley on the Senate side would go along.

One reason may well have been Mr. Miller's passionate denunciation of his own
Democratic Party in a recent book as well as his keynote speech at the
Republican convention.

Amid all the horse trading, the biggest deal involved tobacco farmers and
cigarettes. Knowing he needed at least some Democratic votes, Mr. Thomas added
in a provision in the summer that would create a $10 billion buyout program for
tobacco farmers.

Tobacco state lawmakers had been pushing for such a buyout for years, because
demand for tobacco and the value of tobacco-growing quotas had been declining
for years.

The tobacco deal created a sensation in North Carolina, where Republicans and
Democrats are in a tight race to capture the Senate seat being vacated by John
Edwards, the Democratic vice-presidential candidate.

The Senate, pressed by a bipartisan group of lawmakers, voted to link the
tobacco buyout with a historic change that would subject cigarettes and other
tobacco products to regulation by the Food and Drug Administration. But House
Republicans adamantly rejected any new regulation for cigarettes, omitting the
provision in a conference bill last week and easily defeating Senate attempts to
put it back in.

"I got a lot of calls from people in Ohio who were very concerned that the bill
might not pass,'' said Senator Mike De Wine, Republican of Ohio, who fought for
tobacco regulation. "But to me it was a bigger principle."

It remains unclear how soon all the trouble will actually solve the original
problem, which is that the European Union is imposing punitive tariffs on up to
$4 billion worth of American exports as long as the old tax break remains in
force.

The new bill would eventually eliminate the tax break, but it would provide a
"transition period'' lasting several years, which may leave it still technically
in violation of the trade organization's ruling.

European officials are ultimately expected to go along, but they have been
coy. On Monday, Pascal Lamy, the European Union's trade commissioner, said
simply, "We will now carefully study the details in the final compromise.''

Copyright 2004 The New York Times Company