Companies Fight for Tax Breaks and a Senator Fights for Reservists: What Went Down with the Corporate Tax Bill

On October 11, 2004, the Senate passed a corporate tax bill that gives away $137 billion in tax breaks. The legislation now moves to the White House for the president’s signature, and Mr. Bush is likely to sign it, although his administration has frowned at the bill’s many special-interest provisions.

The main objective of the bill was to close a tax-law loophole that violated international trade agreements. An unlawful $5 billion-a-year subsidy to manufacturers caused the World Trade Organization to impose sanctions on the U.S. in the form of extra tariffs for 1,600 American exports to Europe.

Lawmakers planned on ending the illegal subsidy and making up the difference to manufacturers with $5 billion in tax breaks, but that number increased significantly when corporate lobbyists stepped in.

Successful lobbying

Since it’s unusual to have legislation solely dedicated to corporate taxes, lobbyists saw the bill as a good opportunity to push tax breaks for their clients.

For example, large corporations such as Oracle, Hewlett-Packard, and Eli Lilly will be allowed for one year to bring back hundreds of billions of dollars that they’ve been sheltering overseas while paying only a fraction of the normal U.S. tax rate.

And as expected, taxes were cut for manufacturers, but there was an unanticipated twist: Congress changed the definition of "manufacturing" in order to include more types of companies in the tax exemption.

Now, engineering and accounting firms, farms, construction companies, food processing businesses, and even Starbucks coffee are considered manufacturing companies and so eligible for the tax cuts.

How are we going to pay for this?

Chief lawmakers say that the $137 billion bill will save as much money as it spends because the illegitimate manufacturing subsidy has been discontinued and since the bill closes other tax loopholes. Some legislators are calling the bill "revenue neutral," meaning the U.S. treasury will break even; but experts say that tax revenue is hard to predict. In addition, the IRS is not always able to monitor companies and prevent them from taking advantage of new tax laws. If companies abuse the new tax breaks, more money will leave the treasury than return to it, thereby deepening the deficit.

Standing on her own

Most legislators wanted to pass the legislation right away (especially those campaigning for reelection), but one determined Senator held up the bill anyway.

Mary Landrieu, Democrat of Louisiana, insisted that the Senate consider a provision that was included in the original version of the bill but then dropped during conference committee. Landrieu wanted to give companies tax credits up to $15,000 for every armed forces reservist who stayed on the payroll while fighting in Iraq or Afghanistan.

Landrieu threatened to use the full 30 hours available for debate after the Senate had decided to move to a final vote, or, invoked cloture.

When faced with this possible delay, Majority Leader Bill Frist (R-Tennessee) agreed to compromise with Landrieu. Their agreement is as follows: the employer tax credit will be attached to a separate House bill, but it will only apply to companies with 50 employees or less and to reservists who have been deployed for at least six months.

Landrieu fought for the provision because she believed that companies who continue to pay reservists in Iraq and Afghanistan deserve a tax break too. Republican Senator Don Nickles disagreed and suggested that Landrieu found a sneaky way to create a government subsidy for reservists.

What do you think?

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Article Posted on: 10/19/2004