Caught in a Tax and Tariff Stalemate

At one factory in Pawtucket, R.I., the anguish that politicians in Washington are expressing over the outsourcing of U.S. jobs abroad rings hollow.

While Democrats and Republicans bicker over how to resolve a stalemate over taxes and tariffs, time is running out for Bill Feldman’s 58-year-old factory, which makes rhinestone jewelry that is sold here and abroad. The company and its 70 employees, Feldman says, are being jeopardized by what both parties insist is their determination to protect American jobs.

Faced with conflicting demands from affected industries, as well as the pressures of an already bitter presidential campaign, Congress has failed to enact a long-anticipated overhaul of the corporate tax structure in time to head off sanctions imposed last month by the European Union.

The sanctions, which raise the price of American goods such as Feldman’s rhinestone jewelry, were authorized when the World Trade Organization ruled that U.S. corporate tax rules provided an illegal tax break for exporters.

That Congress has failed to resolve a complex issue during an election year may sound like business as usual in Washington.

At the Hord Crystal Corp. in Pawtucket, however, and at other small factories turning out products that range from precious jewelry to shoes and clothes, it sounds more like a death blow, being delivered in the name of protecting workers whose jobs are on the line.

“This town,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce, “is filled with ironies.”

Here’s how this one came to be:

On March 1, the European Union began collecting a 5% tariff on 1,600 U.S. products exported to Europe. The punitive tariff went up another 1% April 1 and will continue to rise 1% each month until it reaches 17% in March 2005. The EU has said it will repeal the tariff as soon as the United States repeals the existing tax break.

Hord may not last that long.

Jewelry and precious stones account for 36% of the products targeted by the EU, according to Tim Grilo, a spokesman for the Manufacturing Jewelers and Suppliers of America. Hord said he was one of many jewelry manufacturers put at risk by the European Union’s penalties.

If Congress fails to repeal the existing tax break act before the tariff escalates to 17%, Grilo said, “it would be devastating, catastrophic” for U.S. jewelers who export about $1.4 billion annually to EU states.

“They would be completely priced out of the European market, and that means less U.S. exports and more loss of manufacturing jobs,” he said.

For years, Feldman said, Hord and other U.S. jewelry manufacturers have struggled to compete with lower-cost producers in Asia and elsewhere. To keep markets in Europe, he said, the company has been forced to operate on a razor-thin margin.

That left it no room to maneuver when the tariffs kicked in March 1. Already, Feldman said, his company has lost orders from European Union members.

With annual sales of less than $20 million and a workforce that at its peak never went beyond 120, the company would have no discernible effect on the national economy or the presidential election if it went under, Feldman said. But he said he finds it hard to understand how Congress could be so thoroughly tied in knots by a law that it has had more than two years to rewrite.

So do many lawmakers.

A few weeks ago, there was broad, bipartisan support for repealing the Foreign Sales Corporation/Extraterritorial Income Act tax break and replacing it with the most sweeping overhaul of corporate tax law in decades. The Senate’s version of the bill passed out of committee in October on a 19-2 vote.

Now, some on Capitol Hill think the tax bill has little chance of passing this year.

“This debate has become all about jobs and the fact that the Bush economy has presided over a huge manufacturing job crisis,” said one senior Democratic aide, who spoke on condition that he not be named. “The outsourcing issue has gotten wrapped up in this.”

Democrats say that the House version of the bill, in particular, offers too many breaks to multinational corporations, which are considered major practitioners of outsourcing.

The bill divides new tax cuts between the foreign operations of multinational companies and domestic manufacturers. It would give multinationals $36 billion in tax breaks and cost $60 billion annually, which would have to be offset by new revenue sources.

Faced with a groundswell of opposition to the bill in the House, Ways and Means Committee Chairman Bill Thomas (R-Bakersfield) has not brought it to the floor. In the Senate, Republicans launched debate on a similar but less-costly bill, only to pull it March 24 rather than allow a vote on overtime pay sought by Democrats.

There is little incentive for Republicans or Democrats to break the impasse this year, the Democratic aide said. The EU’s penalties affect mostly small producers with relatively little political clout. Microsoft, Boeing and other big companies that benefit from the existing tax breaks have not been targeted by the EU with punitive tariffs, the aide said.

“There’s more of a reason for inertia” than for action in this election year, he said.

Republicans want to avoid “these embarrassing votes” on amendments offered by Democrats to highlight what they see as the Bush administration’s economic failures, he said. Democrats want to be able to say Republicans are incapable of finishing the tax structure overhaul.

Both parties think that when it comes to the punitive tariffs, “we can live with it for a year,” the aide said.

Sen. Judd Gregg, a New Hampshire Republican, took the Senate floor last week to excoriate Democrats for blocking the bill after Republicans refused to allow a vote on an amendment to raise the minimum wage. Gregg lamented how politics were overshadowing policy in the Senate this year.

“Yes, we are in a presidential season and, yes, we all are sophisticated enough to understand that much of what happens on the Senate floor and the Congress for the next eight months will have huge political overtures and tinges to it,” Gregg said.

“But on this issue, where there is no legitimate difference of opinion as to the need to pass this bill, or there should not be, on this issue which is going to have an immediate present impact on people whose jobs would be lost as a result of these duties being levied on this bill, we ought to set the politics aside and pass the legislation,” he said.

In Pawtucket, Feldman said he was doing what he could to spur action. He and other jewelers have met with their congressmen, launched a letter-writing campaign and started giving interviews to reporters. “I’m just trying to be a pest,” he said.

But the e-mails and faxes that used to pour in daily from European buyers, who account for one-quarter of his firm’s sales, have stopped. His biggest fear, he said, was that by the time Congress acted, those European customers would have found replacement suppliers.