October 13, 2004

How Tax Bill Gave Business More and More

By EDMUND L. ANDREWS

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 | Home | Privacy Policy | Search | Corrections | RSS | Help | Back to Top