|956 Amendment Sponsors Propose Tax Cut for Plants in States Too
Representatives Phil Crane (R-IL) and Charles Rangel (D-NY) have proposed a 10 percent cut in the income tax on profits from manufacturing anywhere in the U.S. including Puerto Rico and the U.S. other territories as well as the States and the District of Columbia.
The two have been the lead House supporters of Puerto Rico Governor Sila Calderons ("commonwealth" party/no national party) request that 85-100 percent of profits that companies based in the States receive from the territories but (not the States) be exempted from the income tax.
The two proposals are inconsistent with one another but the Crane-Rangel modest national tax cut proposal is being seriously considered in the Congress, while the much greater Calderon tax exemption has not been seriously considered.
Crane is the second most senior Republican on the House tax-writing committee. Rangel is the most senior Democrat.
Their national tax cut proposal would apply beginning in 2006 -- at the same time that the current, greater tax cuts on corporate income from U.S. territories expire. The bill would also provide lesser tax benefits for profits from manufacturing in foreign countries so that companies have an incentive to continue manufacturing in U.S. areas vs. foreign locations.
The federal corporate income tax rate is 35%. The bill would cut the rate to 31.5% for income from manufacturing in U.S. areas. The Calderon proposal would cut the rate to 0-5.25%.
The inclusion of income from the territories in the national tax cut may be an important signal that the federal government cannot be relied upon to provide much greater tax breaks for manufacturing in territories than are granted for manufacturing in the States.
One reason for the bill is to circumvent World Trade Organization (WTO) objections to U.S. Foreign Sales Corporations (FSCs). Currently, products manufactured in U.S. areas qualify for special tax benefits if sold to foreign purchasers through sales subsidiaries in the territories other than Puerto Rico. These subsidiaries are called "foreign sales corporations" and are primarily just shell companies.
International trade rules prohibit governmental subsidies of products for export only. The WTO has repeatedly ruled that the U.S. FSC law violates the rules. Federal efforts to modify the FSC law to meet WTO rulings have failed.
House Ways and Means Chairman Bill Thomas (R-CA) has introduced legislation to repeal the FSC law and otherwise change U.S. tax laws on international income. It is expected to be acted on this year.
The new Crane-Rangel bill is expected to be added to the Thomas legislation because the chairmans bill would not provide significant help to U.S. manufacturers. The Crane-Rangel bill is co-sponsored by Small Business Committee Chairman Don Manzullo (R-IL) and seven other House members.
61 Others in Congress Propose 956 Amendment for the Whole World
Three bills have been introduced in the Congress that would grant U.S. companies cuts in taxes on profits from anywhere in the world that are similar to the cuts Calderon says she is seeking for profits from U.S. territories.
The congressional proposals would virtually eliminate the advantage over foreign countries that Calderon has said her proposal is intended to give Puerto Rico as a location for manufacturing by companies based in the States.
Calderon has said that her request would exempt from taxation 85% of the profits that companies based in the States receive from U.S. territories. This would effectively lower the 35% corporate tax to 5.25%.
The three bills would exempt from taxation 85% of the profits that companies receive from foreign countries as well as U.S. territories.
There are also some important differences between the new worldwide proposals and Calderons.
One difference between the congressional proposals and Calderons is that the congressional proposals would apply for one year (to stimulate the economy) while Calderons request is for a permanent tax exemption.
Another difference is that Calderons proposal includes an unadvertised provision that would enable companies to avoid taxation on 100% of their territorial profits (lowering the tax rate to 0%).
A third difference is that the congressional proposals are intended to encourage companies to repatriate to the States up to $135 billion in profits now in foreign countries while Calderon says that her proposal is intended to encourage investment in Puerto Rico. (The Congress Joint Committee on Taxation estimated that the result of Calderons proposal would be that companies would pull billions of dollars of profits out of Puerto Rico -- over $4 billion the first year alone).
A final difference is that the taxes that the federal government would lose as a result of the worldwide proposals are only $4 billion while Calderons request would cost $6 billion-$32.1 billion. (The Joint Tax Committee estimated the cost of Calderons request at $32.1 billion over 10 years. Calderon has agreed to changes that would lower this to $6 billion.) The worldwide proposals would cost less than Calderons because they do not include the loopholes in Calderons proposal.
Two bills have been introduced in the House of Representatives and one has been introduced in the Senate. Representative Phil English (R-PA), a member of the Ways and Means Committee, introduced one of the House bills joined by 26 other House members. Rep. Adam Smith (D-WA) and 22 others introduced a similar bill.
Senator John Ensign (R-NV) and seven other senators also introduced a similar bill although theirs would require companies to invest tax-exempt profits in hiring and training workers or other jobs measures, plants, and research and experimentation.
High-tech companies, such as computer manufacturer Hewlett-Packard, are lobbying for the worldwide tax cut.
Congress Cuts Bush Tax Cuts Creating Another Problem for 956 Proposal
Both houses of the Congress were on their traditional Easter break this past week. The district work period began after agreement was reached on a federal budget for fiscal year 2004 that accommodates less than half of the cuts in taxes sought by President Bush.
Bush had proposed cuts that would cost the federal treasury $726 million over 10 years. The Republican majority in the House had agreed to cuts that would cost $550 billion but the Senate only agreed to $350 billion when a couple of Republicans joined with Democrats to force the lower figure despite efforts by Majority Leader Bill Frist (R-TN) and the White House.
While Bush accepted the lower $550 billion figure, he has refused to accept the $350 million number. The lower figure would prevent passage of his priority tax proposal -- ending individual taxation of dividends -- which would cost $396 billion over 10 years.
The President does not act on the federal budget, which simply sets amounts for spending and revenues that the Congress is supposed to follow in passing appropriations of funds and tax laws.
Bush now hopes to win the $550 million in tax cuts in tax legislation, but it will be very difficult. Tax cuts within the amount provided for in the budget can pass the Senate by a simple majority vote. Tax cuts beyond the budget amount will require 60 of the Senates 100 votes to pass.
This would require a substantial number of Democrats joining with Republicans. So far only one Democrat, Zell Miller (GA), has agreed to support a higher amount of tax cuts while a few Republicans have insisted upon a lesser amount of cuts than either Bush or Republican congressional leaders want.
On cost grounds alone, Calderons proposal for tax exemption for income that companies in the States receive from territories faced a very uphill battle when she was hoping to add its cost to the $726 billion in tax cuts proposed by Bush. Now that Bush faces an uphill battle to get congressional approval for more than $350 billion in cuts -- while still wanting $726 billion -- Calderons goal seems all the more impossible. Further, tax policy objections to Calderons proposal outweigh the budgetary objections in the minds of the federal tax policymakers who have already blocked the proposal.
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