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Senate Passes Big Tax Breaks

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Times Staff Writer

A bill that was conceived as a way to resolve a trade dispute with Europe but became a sanctuary for special-interest tax provisions won final congressional approval from the Senate on Monday.

The $136-billion bill will repeal an export tax subsidy that the World Trade Organization had ruled illegal. But Congress, heavily lobbied by business, added a host of complexities and preferences for politically connected industries, from a $10-billion buyout of tobacco growers to a $4-million tax write-off for Alaskan whaling boat captains.

“It’s not a blow for reform by any means,” said Gary Hufbauer, senior fellow at the Institute for International Economics, a Washington think tank. “It really points in the opposite direction.”

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The Senate passed the bill on a 69-17 vote, four days after the House gave its final approval. It now goes to President Bush, who is expected to sign it.

The controversial $50-billion export tax subsidy targeted by the European Union benefited a relatively small number of large exporters, including Caterpillar Inc., Boeing Co. and Microsoft Corp. The subsidy reduced or eliminated the tax that companies had to pay on their export income. The WTO ruled it an illegal restraint of trade and told the EU it could impose as much as $4 billion in punitive tariffs on U.S. goods.

The EU began imposing tariffs in March on 1,600 American-made products such as wood, jewelry, paper and clothing, starting at 5% and escalating every month. By October, the tariffs had reached 12%.

“We had to fix the problem,” said University of Maryland professor Peter Morici, former International Trade Commission chief economist. “This should do it. But whenever you open up the corporate tax laws, firms go about the business of trying to maximize their interests.”

Sure enough, the legislation will replace the export subsidy with an across-the-board $77-billion corporate tax cut for manufacturers and a $43-billion reduction for companies operating overseas. The bill will lower the corporate tax rate for manufacturers from 35% to 32%.

Among the biggest winners was General Electric Co., which stands to save as much as $8 billion over 10 years on its foreign operations, according to Democrats on the House Ways and Means Committee. Before they were finished, lawmakers went far beyond the original game plan, adding scores of special tax breaks for makers of bows and arrows, operators of NASCAR race tracks and importers of ceiling fans, among others.”All these little parochial provisions -- 276 of them -- have been festering around Washington for years, in some cases decades,” said Keith Ashdown, policy director for Taxpayers for Common Sense, which lobbies against pork-barrel politics. “They finally found a home.”

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One of the biggest was a $10-billion buyout of the holders of coveted tobacco quotas -- in essence, permission from the government to grow certain amounts of tobacco. The quotas, established during the Depression, have become assets that entitle the holders to benefit from the federal price support program for tobacco.

Bush’s signature on the bill will end the quotas and price supports. By itself, tobacco farmers argued, that would be unfair. They demanded the buyout in return.

Opponents of the buyout said tobacco growers had benefited enough at the expense of the taxpayers.

And they warned that the new law would encourage more tobacco farming, not less. Kenneth Cook, president of the Environmental Working Group, said that was because tobacco growing would, for the first time in seven decades, be open to anyone.

The buyout will consist of payments, spread over 10 years, of $7 a pound for quota holders and $3 a pound for growers. (A grower who is also a quota holder will get $10 a pound.) The money will come from an assessment on the tobacco companies.

Cook said many of the quota holders no longer grow tobacco and instead lend their quotas to others.

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The Environmental Working Group, using Agriculture Department records, found that for every working farm, there were nearly eight qualified buyout recipients.

The average buyout will be about $22,000 over the 10-year period. But nearly 500 individuals, companies or estates will get more than $1 million, the working group said.

California is home to about 1,000 of the recipients.

One of them is Jean Crawford Clansky, a Menlo Park interior designer who kept her quota when she moved from North Carolina in 1962 and now stands to get a total payment of about $120,000. She said her brother-in-law runs the farm and uses her quota.

To eliminate the quota system without compensation to the farmers would be to decimate southeastern North Carolina, Clansky said. “The whole economy of the region is built around tobacco,” she said.

Sen. Jim Bunning (R-Ky.) said, “This bill will allow growers to pay off their debts and have more certainty about their future.”

Even better, he said, the final bill excludes a provision previously passed by the Senate to give the Food and Drug Administration authority to regulate, but not ban, tobacco products.

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“A buyout without FDA,” Bunning said, “is the best of both worlds.”

The Altria Group Inc., the parent organization of Philip Morris USA Inc., the biggest U.S. cigarette manufacturer, expressed its disappointment at the “lost opportunity” to regulate such things as advertising claims about cigarettes.

The tax bill will reward constituencies small as well as large. It contains a provision allowing captains of whaling boats in Alaska to claim a deduction that will reduce their taxable income by up to $10,500 a year at a cost to the government of $4 million.

In some cases, specific industries may get stung. Sen. Dianne Feinstein (D-Calif.) said the final version of the bill included an accounting requirement that would cost Hollywood film producers as much as $5 billion over the next decade.

Walt Disney Co., for example, will be required under the bill to offset its losses from the movie “The Alamo” with profits from all of its other operations, instead of being allowed to save money by booking profits and losses by division.

The bill also contains a temporary provision that will allow residents of nine states without an income tax to deduct state and local sales taxes on their federal tax returns, saving them about $5 billion in 2004 and 2005.

Hufbauer, the Institute for International Economics analyst, said some of the bill’s specific provisions were no doubt defensible, but the sum of the parts sent a powerful signal that Congress had little interest in simplifying the corporate tax code.

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“The message going out to lobbyists and CEOs is that broad reform is not in the cards, and what you really want to do is go for your little piece of the pie,” Hufbauer said.

Separately, the Senate passed and sent to Bush a $14.5-billion disaster bill designed to help hurricane victims and farmers hurt by drought and other natural disasters.

Congress attached the disaster aid to a $10-billion military construction bill. The Senate assent was by voice vote. The House had voted unanimously for the package Saturday.

Of the total, $11.6 billion will help Florida and other Eastern states rebuild from Hurricanes Charley, Frances, Ivan and Jeanne.

Congress cut a farmland conservation program to finance the assistance.

The Senate also gave final approval Monday to a $33-billion measure financing the Homeland Security Department.

Congress has now completed four of the 13 annual spending bills for the federal budget year that started Oct. 1. The rest of the government is operating with stopgap spending authority.

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Times staff writers Joel Havemann and Richard Simon contributed to this report.

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