Politics trumps economics in an election year

By Peter A. Buxbaum, AJOT

It used to be a familiar pattern. The European Union (or its predecessor) would petition the World Trade Organization (or its predecessor) for a ruling that United States international tax rules were illegal because they subsidized exports. The WTO would find in favor of the Europeans and Congress would amend the law, presumably to conform to world trade rules. Then the cycle would start all over again.

This year is different, however. After the WTO ruled in favor of the Europeans for the upteenth time, Congress did not rush to amend the law. So the Europeans asked for and received WTO authorization to impose $4 billion worth of trade sanctions against the US on January 1, 2004. New Year’s Day came and went and still, there was no new legislation. So the Europeans warned that they would impose sanctions on March 1, 2004. Still no Congressional action.

On March 1, the Europeans made good on their threat and imposed restrictions on imports of US agricultural, textile, steel, construction equipment, wood and other products. They say they will impose additional sanctions each month until the offending legislation is repealed. Congress appears no closer to reaching that goal than it was at the beginning of the year.

Missed opportunities

Meanwhile, US businesses are starting to sweat. “We hope Congress will get around to passing new legislation as soon as it can,” said John Howard, vice president for international policies and programs at the United States Chamber of Commerce.

Exporters are frustrated over missed opportunities. “It is particularly difficult at this point because the sanctions counteract any incentive the Europeans had to buy US imports because of the weaker dollar,” noted Peter Gatti, vice president for governmental affairs at the National Industrial Transportation League.

At issue is a series of tax regimes dating back to the early 1970s, which allow US exporters to exclude a portion of their export income from taxation provided they meet certain technical requirements. The most recent iteration, the US Extraterritorial Income Exclusion Act of 2000 (ETI), was ruled, like its predecessors, to violate trade rules by a WTO judicial panel in 2000 and again by an appellate body in January 2002.

What’s Congress’ problem this time around? It can probably be summed up in two words: election year.

Last year, there were two competing approaches in the House of Representatives to dealing with the prospect of European trade sanctions. The Crane-Rangel-Manzullo bill would have provided favorable tax treatment specifically for US-based manufacturing activity. The American Jobs Creation Act, sponsored by Ways and Means Committee Chairman Bill Thomas (R-CA) would have provided tax cuts for all US corporations and liberalized the taxation regime for overseas corporate income. (There were also equivalent bills introduced in the Senate.)

As a result of some political horse trading, Thomas incorporated some favorable tax treatment for domestic manufacturers and small businesses in his bill. That was enough for Republicans Crane and Manzullo to drop their bids to push their own legislation. But Rep. Charles Rangel (D-NY), continues to push for what used to be called Crane-Rangel-Manzullo, and he is enjoying growing support in that effort.

Opponents of the Thomas bill can’t abide by the tax relief it provides for overseas operations of US companies. “Congressman Rangel doesn’t believe in spending money on that,” said Jon Sheiner, Rangel’s legislative aid.

“The Rangel bill essentially takes the $5 billion per year in revenue gained by the repeal of ETI and uses that to lower corporate taxes for manufacturers in the United States,” Sheiner continued. “It keeps it neat and clean. The purpose of the Foreign Sales Corporation [predecessor to ETI] in the first place was to help American manufactures export, so let’s help American manufactures and not help them move jobs abroad.”

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