Even tackle boxes may get tax break

A bill that started as a tax fix for Boeing and other US multinationals is morphing into a hodgepodge of subsidies for goods ranging from tackle boxes to fish-seeking sonar devices.

If you wonder why, listen in on an exchange during a markup of the corporate tax bill in the House this week: "Are we under some international directive to repeal our excise tax on fishing tackle boxes?...or sonar devices suitable for finding fish?" asked Rep. Earl Pomeroy (D) of North Dakota.

Rep. Bill Thomas, the chairman of the taxwriting House Ways and Means Committee, fielded the question. "If you are going to have a tax change on sonar devices to find the fish, then you probably want a tackle box to assist," he deadpanned, adding that "...If we can just work on some bait made with durum wheat, I think we can pull this thing together" - a reference to leading North Dakota export.

In fact, that's about what happened. To win enough votes to pass the bill, the chairman expanded the range of those who would benefit across the United States - from multinationals to manufacturers, including oil and gas refiners, miners, and even neighborhood diners. In the process, the bill grew to $128 billion in new tax cuts - and will expand even more when cuts are fully phased in.

Around Capitol Hill, Mr. Thomas is known as "the postman," for delivering on the Bush tax cuts and other White House priorities. But he's now at odds with President Bush - and most of his Senate GOP colleagues - on the size and scope of the corporate tax bill he wants to move onto the president's desk.

With deficits for the current fiscal year projected to top half a trillion dollars, Republicans are wary of adding to the shortfall. The president has asked for a revenue-neutral bill. The Thomas bill is expected to cost the Treasury $60 billion over the next 10 years. The Senate bill, which cleared the Finance Committee early this month, nets out at zero.

Ironically, Thomas's bill is also at odds with the European Union, which provided the impetus for the bill by threatening $4 billion in trade retaliation if the US did not eliminate an export-tax benefit known as "foreign sales corporations." If the US does not respond, Europe could raise tariffs on US imports as early as January. Anticipating the Thomas bill, the EU advised the panel that the chairman's approach, including a three-year phase-in, was unacceptable.

Democrats protested: What's the point of a bill if it doesn't meet the European concerns, the impetus of the process? The chairman played hardball: "I think most people ought to take the Europeans' comments about our legislative process in a fashion similar to a president trying to influence the legislative process. ...it may be unacceptable ... but is he going to veto it? ...In dealing with the Europeans, the question is: Will you retaliate?"

Even to get to this point, Thomas had to undermine support for a bipartisan alternative, worked out between ranking Democrat Charles Rangel of New York and the No. 2 Republican on the panel, Rep. Phil Crane of Illinois, a rival for the chairmanship. The bipartisan bill had 150 cosponsors, and, like the Senate bill, was revenue neutral.

"We now have the Europeans threatening to impose $4 billion in trade sanctions on our exports. We need to avoid that. But the bill the chairman proposes is a $140 billion 'solution' to a $4 billion problem," says Mr. Rangel. To get around such objections, Thomas quietly mobilized the business community - and coopted large elements of the Crane-Rangel alternative by including domestic manufacturers. The revised Thomas bill, which passed on a straight party-line vote, gradually reduces the tax rate for domestic manufacturers from 35 to 32 percent, as well as providing $36 billion in tax breaks for multinationals on overseas income.

The bill also delivers on a promise to business groups early in the Bush administration to expect a tax cut every year that President Bush is in the White House. Business groups weren't included in the first rounds of cuts, but still lobbied hard for them. The Thomas bill is their payoff.

"To the extent that [Thomas] had to go out and buy support from other industries, you have a less clean bill and a less defensible bill. That's the deal they are cutting. The bill is not going to be a thing of beauty," says Grover Norquist, president of Americans for Tax Reform, a top antitax activist who is close to Thomas. "But the business community's willingness to be patient has been critical to the success of this administration," he adds.

But critics say a nation with deficits as large as the US has should think twice about digging deeper. "It makes a great deal of sense from an international trade aspect. The bill will be hard to stop, perhaps impossible. But from a budget perspective, it makes no sense at all," says Stan Collender, a federal budget analyst.