Senate Bill Would End Tax Break for Overseas Workers

As Congress wrestles over how much to cut taxes, Americans working abroad find themselves facing an unexpected threat: a big tax hike.

As part of a compromise aimed at placating moderate Republicans, the Senate’s $350-billion, 11-year tax cut package calls for repealing a decades-old policy that allows U.S. workers abroad to exclude up to $80,000 of their annual income from taxes.

The proposed repeal has infuriated business lobbyists, who have been a driving force behind President Bush’s economic growth initiative. It has also further strained relations between House Republicans, who last week passed a bill to cut taxes by $550 billion without any offsetting tax increases, and their GOP colleagues in the Senate.

Indeed, the dispute underscores the quandary facing Senate GOP leaders in their effort to fashion a tax bill that costs no more than $350 billion, a demand made by a handful of Republican lawmakers worried about the growing federal budget deficit.

With the Senate scheduled to open debate today on its tax cut bill, Bush on Tuesday wrapped up a two-day, three-city campaign to rally public support for reductions of at least $550 billion. “For the sake of economic vitality, Congress has got to act -- and act boldly -- on this plan to get more of your own money back to you,” Bush told enthusiastic supporters at the Indiana State Fairgrounds in Indianapolis.

But a handful of moderate Republican senators have complained for months that Bush wants more in tax cuts than the government can afford. And in the narrowly divided Senate, any significant tax cut bill likely would need the backing of those senators to pass.

To try to come closer to the president’s target, the Senate bill calls for $442 billion in tax cuts and other measures to stimulate the economy. However, the bill includes $92 billion in offsetting spending cuts and tax increases in other areas to bring its net cost to the $350 billion demanded by the GOP moderates.

Ending the tax break for Americans living abroad is the biggest revenue-raiser in the bill -- it would generate an estimated $35 billion over the next decade. But Sen. John B. Breaux (D-La.) is expected to push as early as today -- with the support of Sen. Trent Lott (R-Miss.) -- to kill it.

Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, cautioned that if the tax hike for Americans living abroad is removed from the bill, lawmakers must find some other way to pay for cuts if they expect a measure to reach Bush’s desk. “We’ve looked at hundreds of items, and we figured [the proposed repeal] was the one we could justify the best,” Grassley said.

Grassley said he was worried that the Breaux amendment might pass with the support of a coalition of Democrats who do not want any tax cuts and Republicans who do not like tax increases. “That could cause real problems,” Grassley said.

Robert Bixby, executive director of the Concord Coalition, a budget watchdog group, said: “Congress has got to start making hard choices again.”

More than 4 million Americans live abroad, although government officials could not say how many would be affected by repealing the “foreign earned income exclusion.” According to the Treasury Department, 358,391 taxpayers claimed the break in 2000.

Opponents of ending the provision say it could lead to double taxation of a broad range of Americans working abroad -- from oil and gas workers on rigs in the North Sea, to engineers and construction workers on their way to help the rebuilding effort in Iraq.

The opponents say Americans working abroad already may be taxed in the country where they work. They also say businesses need the tax break to lure workers to overseas jobs.

“This is a provision that benefits U.S. workers,” Dorothy B. Coleman, vice president of tax policy for the National Assn. of Manufacturers, said. “The ability to have U.S. citizens working overseas very often generates jobs in the U.S.”

A Grassley aide said Americans living abroad can claim a credit on their U.S. taxes for taxes paid to foreign countries.

To corporate lobbyists who say the tax break is needed to lure workers to foreign locations, the aide said the senator’s response is: “Pay them more. Don’t expect domestic taxpayers to subsidize your work force.”

The aide also said corporate lobbyists are warning that ending the tax break would hurt teachers and missionaries working abroad. The aide said that could be addressed by limiting the tax break to people earning less than $40,000 a year.

But R. Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce, said in a letter to senators that repealing the tax break would “reduce the incentive for Americans to work abroad and would result in U.S. companies having to hire foreign workers to replace them.”

Americans working in faraway places also have weighed in, contending that repealing the tax break would hurt the U.S. economy by discouraging Americans from taking jobs to pitch U.S. products abroad.

“The less attractive you make it for Americans to be overseas, the less American products are going to get sold. It’s just foolish,” said Leigh Gribble, an American business consultant based in Kuwait.

The tax break -- which dates to the 1920s -- has long been controversial. Former Sen. William Proxmire (D-Wis.) once gave it one of his “Golden Fleece” awards, calling it a “nice reward for working in London or Paris or other hardship posts favored by big multinational corporations.”

“This tax break should be repealed because the era of globalization has made this provision into an employment subsidy for American corporations with significant overseas work forces,” said Keith Ashdown, vice president of policy for Taxpayers for Common Sense. But Gribble said the tax break helps offset the hardship of living overseas.

Lott predicted the provision would be dropped either on the Senate floor or in negotiations with the House on the different versions of tax-cut legislation.

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Times staff writer Edwin Chen contributed to this report from Indianapolis.