House Tax Bill Includes Tobacco Buyout

Republican tax writers in the House enticed a few Democrats to support a corporate tax cut on Monday, sweetening the bill with a federal deduction for state sales taxes, a $10 billion federal buyout for tobacco farmers (search) and new tax rules for shipping.

In a vote taken near midnight in the House Ways and Means Committee, three Democrats joined Republicans to back the election-year tax cut.

The tax cuts and spending total $155 billion through the next decade. Simultaneous efforts to capture new revenue by closing tax loopholes and reducing tax evasion reduced the bill's cost by $34 billion.

The core of the bill gradually reduces the top tax rate for manufacturers from 35 percent to 32 percent. The tax cut replaces an export benefit ruled illegal in international trade courts. Some U.S. exports to the European Union (search) face a punitive tariff, which ratchets up each month, until the export subsidy is eliminated.

"By ending this tax benefit for American businesses, we would be shortsighted if we did not also provide a tax relief alternative to American producers, both large and small," said Ways and Means Chairman Bill Thomas, R-Calif.

The description of manufacturers that would benefit from the new tax break bothered some Democrats, who asked how businesses would know if they qualified. Rep. Robert Matsui, D-Calif., called it a "big hole" that could make the tax cut more expensive than expected.

Thomas didn't disagree totally. "Based upon the broad interpretation of manufacturing, this bill may come very close to a basic across-the-board corporate tax cut," he said.

The panel approved the collection of tax cuts on a 27-9 vote. The bill could be debated by the House later this week, and it must be reconciled with the Senate's version before becoming law.

Democrat Max Sandlin of Texas voted for the bill, hoping to win taxpayers a two-year deduction for sales taxes (search). Texas and a handful of other states fund government services solely through sales taxes instead of deductible income taxes.

Sandlin tried unsuccessfully to trade $30 billion in tax breaks for multinational corporations for a permanent federal deduction for state sales taxes.

Democrat John Tanner of Tennessee voted "aye" to show support for the tobacco buyout. And Democrat William Jefferson of Louisiana voted to show favor for a provision taxing shipping companies on the tonnage of their fleets, rather than regular income taxes.

Other corporate tax cuts folded into the bill extend expiring tax credits and rewrite rules for multinational corporations, reducing their taxes nearly $30 billion over the next decade.

Over the objections of the Treasury Department (search), the committee left intact a short-term tax reduction designed to entice companies holding profits abroad to bring them back into the United States. Computer and pharmaceutical firms have lobbied for the tax reprieve.

"The administration has serious concerns about the fairness of the proposal," said Treasury official Greg Jenner.

With little hesitation, however, the committee stripped another contentious item that would have lessened penalties on churches that mistakenly mix religious and political activity. Most churches and religious groups are tax-exempt organizations (search), prohibited from taking part in political campaign activity.

"This has no place in this bill," said Rep. Amo Houghton, R-N.Y.

Democrats found themselves powerless to attack one section that some found disagreeable - the program to pay nearly $10 billion over five years to tobacco farmers to give up a federal quota program that has propped up their prices.

The program falls outside the realm overseen by the tax-writing committee, leaving Democrats with no avenue to amend or debate the program. "It's just a back-room deal to give $10 billion in public money away," said Rep. Lloyd Doggett, D-Texas.

Democrats lost an attempt to eliminate a provision granting new authority to the Internal Revenue Service (search) to use private debt agencies to collect some unpaid taxes.

Democrats also poked fun at some tiny tax items, many of which also found their way into the Senate's version of the legislation. Among them are items directed at makers of bows and arrows, fishing tackle boxes and sonar fishing devices.

Thomas couldn't resist making light of his own addition of a new charitable deduction for travel expenses related to Eskimo whaling (search) in Alaska.

"All I'm saying is, if you're engaged in subsistence whaling, you deserve some kind of a break," he said.