Exporters Anxious for Corporate Tax Law

While record trade deficits and lost manufacturing jobs are campaign issues, U.S. exporters are fuming because Congress has yet to change corporate tax laws (search) that threaten their sales in Europe, America's biggest foreign market.

The tax dilemma has produced a varied alliance that includes racehorse breeders; citrus, fruit and vegetable farmers; and manufacturing companies, from small jewelry makers to Detroit's auto giants.

More than 400 companies wrote Congress this past week urging lawmakers to pass legislation that is needed to end penalty tariffs. They are being imposed on more than 1,600 U.S. exports with total annual sales to Europe of nearly $3 billion.

The European Union (search) is increasing the tariffs by 1 percentage point for each month that Congress fails to repeal a tax break for exporters. The World Trade Organization (searchhas ruled that the tax break amounts to an illegal subsidy.

The penalty tariff, which started at 5 percent in March, has risen to 11 percent. At first it was low enough that U.S. companies could absorb the higher tax rather than raise their prices in Europe.

But it has reached the point where it is beginning to bite, and the penalty is set to continue climbing until it hits 17 percent next March.

The American Farm Bureau Federation (search) estimates that U.S. farmers will lose $150 million in sales over the first year the tariffs are in place. That would cut sales to Europe on the targeted farm products by nearly one-fifth.

"When you are looking at this size of losses, the pain is going to be intense unless Congress acts," said Pat Wolff, a tax specialist with the federation.

The farm products range from cheese produced in Wisconsin and Vermont to Florida oranges and California limes and lemons.

Sen. Charles Grassley, chairman of the Senate Finance Committee, is leading the fight to pass the corporate tax bill. Grassley, R-Iowa, said U.S. jewelry manufacturers -- 95 percent of which are small businesses -- face stiff tariffs on many products. Other manufactured goods in the line of fire include steel, toys and clothing.

Stephen Farrar, director of international business for Guardian Industries Corp. (search), said his company is looking at shipping its tinted auto glass to European customers from a plant in Thailand rather than its plants in Pennsylvania and Michigan if the tariffs do not end soon.

Both the Senate and House have passed legislation to repeal the disputed export tax language and replace it with a variety of other tax breaks for corporations.

The two houses differ markedly on how to structure the new tax breaks.

Each chamber also has added a variety of its own tax sweeteners to the pot. They include a multibillion-dollar buyout for tobacco farmers and making state sales tax payments deductible on federal income taxes for states without an income tax.

Both bills have grown unwieldy because most people think rising budget deficits are likely to preclude, for now, any more legislation offering corporate tax breaks.

"This is the last train leaving the station and everybody wants to get on board," said Gary Hufbauer, a trade specialist at the Institute for International Economics (search), a Washington think tank.

Election-year politics have complicated negotiations on a final bill. Tax breaks in both bills for multinational corporations have been branded by Democratic presidential candidate John Kerry as tax loopholes that reward companies for sending American jobs abroad.

Rather than fuel that criticism with a vote on the issue, House Republican leaders have balked at beginning formal negotiations with the Senate to merge the two bills.

Grassley is threatening to hold up final action before the election on a separate bill to extend three expiring middle-class tax breaks if House leaders do not advance the corporate tax bill.

Because of all the hurdles, many observers doubt the corporate tax legislation will be completed until after the Nov. 2 election. Republican leaders already are looking at holding a lame-duck session in mid-November to do it rather than wait until next year. Business is not pleased.

"Our aim is to get this done as soon as possible, ideally before adjournment in October," said Dorothy Coleman, a tax expert at the National Association of Manufacturers (search). "This is something that needs to be addressed right away."