Senate Panel Squabbles Over Special Tax Breaks

Even as lobbyists prepared strategies to poke holes in the sweeping changes of the Senate Finance Committee’s tax bill, some of the committee’s own 20 lawmakers are hoping to toughen it by eliminating other, less noticed provisions of the bill that would generate $5.5 billion in special tax breaks for companies and voters in committee members’ home states.

The breaks are innocuously dubbed “transition rules” because they generally ease the affects of the switch from the old tax law to the new.

Working Out Details

Committee members did not vote publicly for each of the rules. Instead, they merely adopted the $5.5-billion total after privately submitting their own pet proposals to committee Chairman Bob Packwood (R-Ore.). When committee members unanimously approved the far-reaching legislation on May 7, they did not know precisely which transition rules it would include, and the committee staff is still working out the details.

Most of the tax breaks have not yet been made public. One that has--a transition rule aiding Pennsylvania Republican Sen. John Heinz’s beleaguered steel-industry constituents--roused the ire of two other Finance Committee members, David Pryor (D-Ark.) and John H. Chafee (R-R.I.).

Pryor, saying the action “looks bad, smells bad and is bad,” has called for the committee to revoke it.

The 20 pages of proposed transition rules include clauses ensuring the preservation of $28 million in endangered tax credits for Merrill Lynch & Co.’s new Manhattan headquarters building and $64 million in credits for Pan American World Airways, which just bought 16 new jets. Both are headquartered in the home state of Sen. Daniel Patrick Moynihan (D-N.Y.), a Finance Committee member who proudly announced the tax coups in a press release Thursday.

Other rules are widely reported to include benefits for the states of most Finance Committee members, such as Oklahoma Democrat David L. Boren (a reported $100-million tax benefit for Phillips Petroleum), Minnesota Republican Dave Durenberger (Control Data Corp.), Iowa Republican Charles E. Grassley (a Cedar Rapids restaurant) and Maine Democrat George J. Mitchell (hydroelectric utilities).

$500-Million Tax Loss

The rule for the steel industry, which reportedly would cost the federal Treasury $500 million, would allow ailing steel firms to apply half of their unused investment tax credits against corporate income tax payments stretching back 15 years, instead of just three, as current law allows. The depressed steel industry already has so many losses to deduct against future earnings that it would be unable to cash in the tax credits without Congress’ aid.

Pryor said that the rule would effectively force the Internal Revenue Service to refund already-paid taxes to the steel firms.

Despite Pryor’s public anger, transition rules, with their occasional odor of favoritism, are a hallowed tradition in tax legislation. The tax overhaul bill passed by the House last December, for example, included $25 billion in transition rules aiding mass-transit agencies in Chicago and New York, California pipelines and other projects around the country.

“It’s part of the grease that lubricates the political process,” said David Keating, executive director of the National Taxpayers Union, which favors the Senate bill. “Sen. Packwood probably needed a few extra votes to swing the bill.”

Richard Bryers, a Heinz spokesman, said: “You indicate what you’d like to see, and then the staff works it up and gets it back to you.” He said that Heinz sought the steel industry tax breaks “to mitigate in some small way the harsh new treatment of capital-intensive unprofitable industries” in the tax bill.

Trying to Save Jobs

“The senator isn’t going to apologize for trying to keep the jobs of people in those communities,” Bryers said of his boss’s Pennsylvania steel towns.

Keating said some rules that appear to be special-interest tax breaks turn out to be attempts to protect companies and constituents from unintended tax disasters. And other transition rules are aimed not at huge corporations but at nonprofit firms, public utilities, schools and others hit by tax law changes.

A rule of thumb for the righteousness of the tax breaks, Keating said, is whether affected taxpayers “signed contracts or made commitments to do certain things before the legislation was considered.”

Unfair Penalties

“It’s not fair to penalize people for decisions they made under the previous tax code,” a Moynihan aide said. So the rules protect Pan Am, which contracted to buy its jets on the notion that it could redeem investment tax credits stemming from their purchase. The same appears true of Merrill Lynch and its office building, and--to some degree--the steel industry and its tax credits.

Heinz’s office, under growing fire because of the steel rule, said that the senator does not know precisely what benefits steelmakers will reap under the transition rules, which are still being written into legislative language. Heinz intended to require that the industry invest all its tax refunds in new equipment.