CONGRESS : When Firm Loses Tax Break, Its Cure Is a Word to the Wise

Whenever Congress revises corporate tax law, the most delicate--and often the most secretive--decisions involve the “transition rules” that govern how companies will be treated during the phase-in period.

So it is not surprising that lobbyists for pharmaceutical and technology companies scrambled for favorable transition rules when Congress decided to abolish a lucrative tax break enjoyed by firms operating in Puerto Rico.

When the dust settled, however, at least one company was noticeably excluded from the deal.

Amgen, the Thousand Oaks-based biotechnology firm that opened a facility in Puerto Rico less than a year ago, would have been deprived of the same protection granted to pharmaceutical firms with longer ties to Puerto Rico under the rules drafted by the House Ways and Means Committee.

Stung by the realization that its competitors were getting a big advantage, Amgen turned to its Washington lobbyist, Pete Teeley. A former adviser to President George Bush who is well-connected with key Republicans in Congress, Teeley persuaded the bill’s drafters to give Amgen a deal every bit as favorable as the one bestowed upon other firms with a long history of manufacturing in Puerto Rico.

While the story of Amgen’s success is nothing out of the ordinary in the world of Washington lobbying, it does illustrate the complexity and difficulty of eliminating tax benefits commonly referred to as “corporate welfare.”

For decades, U.S. tax law has permitted American manufacturers to shelter income earned from facilities in Puerto Rico. And even though it deprived the U.S. Treasury of billions of dollars, it was seen as an effective way to create jobs in the commonwealth.

As the federal budget deficit grew, however, the Puerto Rican tax break became increasingly unpopular. Twice in the last decade, Congress has trimmed the size of these tax breaks.

Then, earlier this year, House Budget Committee Chairman John R. Kasich (R-Ohio) pledged to make elimination of the tax break a centerpiece of the GOP campaign to get tough on corporate as well as social welfare.

Ways and Means Chairman Bill Archer (R-Tex.) initially resisted, committee sources said, adding that he agreed to it only after he was certain the phaseout would be lengthy.

In the reconciliation bill--the budget blueprint now at issue between President Clinton and the Congress--there is a 10-year phaseout.

It is estimated the bill will boost revenues to the Treasury by $3.7 billion over the next seven years.

As originally drafted, the formula to calculate the effective tax break available to manufacturers in Puerto Rico during the phaseout was based on taxes paid during three of the last five years before September, 1995. Companies such as Amgen that did not operate in Puerto Rico during that period were denied any such break.

Teeley said he did not contact any members of Congress directly but simply wrote a letter to the committee staff, explaining that his client had been “inadvertently” excluded by the original proposal.

Congressional sources say the original language was intended to deny benefits to newcomers to Puerto Rico. But Teeley described it as nothing more than a “drafting error.” He said he had convinced drafters that “you cannot have tax policy that discriminates” against one firm.

Teeley also denied that Amgen was a genuine newcomer, noting that its investment there began with the purchase of an existing factory in 1991.

And, he said, Amgen’s late start in Puerto Rico resulted partly from government foot-dragging. The plant was renovated and ready to operate in January, 1994, but did not receive Food and Drug Administration approval until last December.

Archer agreed to provide a more inclusive formula for claiming the tax benefit of operating in Puerto Rico over the next decade. With Amgen specifically in mind, he agreed that a manufacturer could use 1995 as its base year for figuring interim tax breaks.