Movie Industry Fights to Protect Breaks in Tax Bill

The movie industry, facing a potentially whopping tax increase, is fighting back, thrusting itself into the thick of a brawl in Congress over the biggest business tax bill in years.

Congress is moving to repeal a controversial export tax credit that is worth more than $50 billion over the next 10 years to U.S. businesses -- including some $6 billion in subsidies to the film industry -- and to replace it with a broader corporate tax break.

Businesses are clamoring to protect their interests in the wider bill. Disney chief Michael D. Eisner and other movie moguls are competing with high-tech giants Microsoft and Hewlett-Packard as well as big manufacturers such as Caterpillar and Boeing, all major exporters that stand to lose billions in the repeal of the current system.

Congress did not initiate the business tax bill. It was forced to act in response to a World Trade Organization ruling that the current tax break illegally subsidizes exports and gives U.S. companies an unfair edge in international competition.

But now that corporate taxes are on the table, all manner of businesses -- including multinationals that do not now benefit from the export subsidy -- are looking for their share of cuts. With the manufacturing sector still hemorrhaging jobs, many lawmakers want to keep the new tax breaks focused on that lagging sector of the economy.

But the effort has been hampered by the swelling federal deficit. The red ink has grown so much, and the cost of the Iraq war so large, that even many dedicated tax cutters have been wary of turning this bill into a business bonanza.

Any substantial new tax cuts would be a “heavy lift and hard sell for most of our members,” said Rep. Deborah Pryce (R-Ohio), a member of the House Republican leadership. The Bush administration has indicated that it too would prefer not to add to the deficit.

The Senate Finance Committee has approved a bill that would have no effect on the deficit. It would simply replace the export tax break with a net tax cut of roughly the same amount for all domestic manufacturers.

In the House, Ways and Means Chairman Bill Thomas (R-Bakersfield) this year proposed a more far-reaching bill, benefiting both multinational corporations and domestic manufacturers with no offshore presence, that would add $128 billion to the deficit over 10 years.

But now, worried that such a large tax cut would give deficit-conscious Republicans a case of sticker shock, GOP leaders are aiming to trim the price tag to below $100 billion.

Pressure to provide a broader tax cut for businesses reflects, in part, the pent-up demand among corporate lobbyists who have seen three major tax-cut bills go through Congress during the Bush administration, with most of the benefits going to individuals.

At the center of the debate is a tax break provided to U.S. exporters to help them compete in world markets. Based on the WTO ruling that the tax break is illegal, the European Union has threatened to slap $4 billion in trade penalties on the U.S. in January if the tax break is not repealed.

There is no dispute about the need to repeal. The controversy is over how to replace it and soften the blow to companies that now benefit.

The Senate Finance Committee’s bill steers most benefits to U.S. domestic manufacturers by effectively cutting the corporate rate by 3 percentage points.

A bipartisan House bill, co-sponsored by Reps. Philip M. Crane (R-Ill.) and Charles B. Rangel (D-N.Y.), takes a similar approach. And Thomas wants more aid to multinational corporations as well.

Big movie studios are seeking more than any of the bills provide. They want Congress to not just soften the blow of the export-subsidy repeal but to preserve the full value of their existing benefits.

The stakes are huge because entertainment companies, with all of their exports of films and foreign licensing agreements, are big beneficiaries of the existing export subsidy. The effort to get special concessions has drawn unusually direct involvement from entertainment bigwigs like Eisner.

“There aren’t many occasions when the heads of studios make calls to senators and House members,” said Rep. Xavier Becerra (D-Los Angeles). “They want to make the point that this is that important.”

According to Ken Kies, an influential tax lobbyist who is working on the issue, there are about 80 movie companies that would be hurt by the repeal of the export subsidy. Kies estimates that the repeal would amount to a $6-billion tax increase for those companies over the next 10 years.

Kies argues that movie companies should get special treatment and have the tax benefit preserved because technically movie makers are not covered by the WTO ruling. And he says Hollywood is just the kind of business that should be encouraged at a time when Congress is trying to jump-start the domestic economy. It makes most of its products domestically, brings its offshore earnings back to the U.S. and employs an estimated 600,000 people nationwide, Kies says.

But that argument did not fly in the Senate Finance Committee, though it did make some concessions to the film industry, including a long-sought change in the way the cost of filmmaking is written off. Although that is far short of what the export subsidy is worth, it may be the best the industry can hope for in the House as well, where Thomas’ bill is being revised. The Motion Picture Assn. of America this year endorsed Thomas’ plan to steer more benefits to multinational corporations. But that too would be worth far less than the benefits the industry now receives.

The movie industry faces tough competition from other politically well-connected companies and industries. Caterpillar and Boeing, two of the biggest beneficiaries of the current tax break, are in the home state of House Speaker J. Dennis Hastert (R-Ill.). He withheld his crucial support for the Thomas bill until he was assured the companies’ interests would be addressed.

“There is no way Congress is going to repeal [the export tax break] for Midwestern manufacturers and keep it for those West Coast movie producers,” said a senior Democratic aide.

Also lobbying hard on the bill are high-technology and drug companies, which have secured provisions in both House and Senate bills that would temporarily reduce the tax rate on U.S. companies’ foreign earnings -- a tax “holiday” to encourage firms to bring their earnings back to the U.S. and pay domestic taxes they now avoid by keeping revenue overseas.

Ralph Hellmann, senior vice president for the Information Technology Industry Council, said he was pleased with both bills but worried that action would stall over the big differences between the House and Senate approaches.

“We pretty much got what we wanted,” he said. “Our biggest fear is that nothing will happen.”