Tax Proposals Differ Substantially

August 6, 2004
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WASHINGTON, D.C. — There are two versions of the same bill, but the National Tooling and Machining Association (NTMA) clearly favors one over the other.

Both measures attempt to repeal the Foreign Sales Corporation/ Extraterritorial Income laws.

Repeal is necessary because the World Trade Organization ruled five years ago that this country's use of foreign sales corporations was illegal — a ruling that stood up under appeal two years ago.

In response to that ruling about FSCs, the European Union imposed a tariff on some U.S. exports, a levy that rises by one percent per month until it reaches 17 percent next March.

One version — passed by the U.S. House in June — would repeal the FSC law and cut the tax rate by 3 percent for domestic manufacturing. The other, ratified by the U.S. Senate in May, combines international tax reforms with a 3 percent tax deduction for U.S. firms.

The House bill proposes to cut taxes by $150 billion over the next decade, while the Senate version promises to chop $180 billion.

The NTMAfavors the Senate bill, and not because it claims to offer a bigger total tax cut. The association feels the House bill panders to large manufacturers, ignoring most tool and die shops.

NTMA President Matthew Coffey told the Business Journal that the House bill sends more work overseas by providing tax incentives to manufacturers abroad, but excludes Subchapter S corporations and limited liability corporations from any domestic tax relief.

"The (House) bill makes it much more lucrative for people like GE and any other large international company to do work overseas, because they get a much better tax break on the return of assets from overseas to the United States than they do from building anything in the United States," said Coffey.

"The way the system is set up now, if you make something in a foreign country and you re-import it into the United States, it's taxed as if it were made in the United States.

"But under the new House version of the bill, which General Electric basically wrote, if they finance work overseas they get the tax break on the financial part of their business, and lose the subsidy (FSC) because it's been declared illegal," he added.

Coffey said the House bill gives corporations that are large enough to finance their own work a big enough tax incentive to do just that. Add to that incentive the cheaper labor costs available in poorer foreign countries and creating jobs to produce goods overseas for import here becomes a subsidized, cost-effective way to do business that pleases shareholders.

The NTMA backs the Senate bill because it provides tax breaks to domestic Subchapter S corporations, a designation that includes most association members.

Coffey noted that of the 355,000 manufacturers in this country, only 15,000 have more than 500 employees. He said the other 340,000 employ 11 million, or 65 percent of the nation's 17 million manufacturing employees.

"Clearly the vast majority of manufacturing in the United States is being done by small- and medium-sized companies, the majority of whom are Subchapter S. So if you make the provision only apply to C corporations, you have, in fact, not really helped domestic manufacturing that much," said Coffey.

"The Senate basically said, if we're going to do a tax cut to benefit manufacturing in the United States and it's going to be 3 percent, then it ought to apply to the sub S's."

Coffey said neither version is likely to emerge untouched. But when it will emerge is anybody's guess. The Senate has named its conferees to discuss the bill. The House has not.

Congress is on summer vacation until next month when the election campaign swings into full gear. Coffey doesn't expect the conference committee talks will proceed smoothly.

"As it has been throughout this whole period of time, this is a very contentious argument because it is the only tax bill moving this year and so all the large corporations have tried to tack on to it every single, conceivable tax break they can. As a result, they've been successful in the House," Coffey said

"They weren't successful in the Senate," he added.

"The House bill, on the other hand, is the Christmas tree of all time.

"It is piled up with every corporate lobbyist tax measure that hasn't been able to be passed because there hasn't been any tax bill for a couple of years," he explained.

"The net result estimated by the Congressional Budget Office," he added, "is that the House bill will lose $35 billion in revenue over a 10-year period, while the Senate bill generates $800 million in revenue."    

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