The Bush Administration wants Congress to consider a corporate tax cut, a permanent research tax credit, increased small business expensing and other tax benefits to replace a controversial U.S. export tax break.
The recommendations came Feb. 2 in the President’s fiscal year 2005 budget request to Congress. The administration and Congress are under pressure to replace the foreign sales corporations tax break, ruled to be an illegal subsidy for U.S. exporters.
Foreign sales corporations, also known as the Extraterritorial Income Exclusion Act, provides U.S. exporters such as Boeing Co. and Caterpillar Inc. with a nearly $4 billion a year annual benefit.
The World Trade Organization declared the export benefit to be an illegal trade subsidy. The European Union also is set to impose trade sanctions in March unless Congress repeals the benefit.
The Treasury Department, as part of its detailed “Blue Book” description of the administration’s budget proposals, provided Congress with “alternatives deserving consideration.”
It’s unclear whether the Treasury’s recommendations will influence Congress. Two bills are already working through the House and Senate.
Pamela Olsen, the Treasury Department’s assistant secretary for tax policy, said Congress would do better by adopting a broader corporate tax relief than attempting to fashion tax relief for specific industries.
“An across-the-board tax cut would be a good thing,” Olson told reporters. “We’re not enthusiastic about sector-specific provisions because sector-specific provisions have a tendency to distort investment decisions.”
Olson didn’t provide a specific recommendation for size of such a corporate tax cut. The Blue Book said a corporate tax rate cut “would provide significant tax relief to American businesses and increase the attractiveness of the United States as a place to invest.”
Another benefit would be corporate relief from the alternative minimum tax, AMT, originally designed to ensure the wealthy will pay some minimum level of tax. The AMT wasn’t indexed for inflation so it’s capturing an increasing number of taxpayers.
One expert following the dispute said the Treasury proposal illustrates the extent of competing interests fighting for tax breaks to replace the export tax benefit.
“This smorgasbord approach is a reflection of how difficult it has been to get consensus” on what tax benefits should replace the foreign sales corporation benefit, said Todd Malan, executive director of the Organization for International Investment.
One proposal would let businesses depreciate assets under AMT as they do for regular income tax purposes, which the Treasury said would eliminate a disincentive for business investment.
The Treasury Department also is proposing to simplify business tax rules, such as when a company can capitalize an asset for tax purposes, and updating international tax rules, such as the interest expense allocation formula.