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| October 11th, 2004 |
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Media Contact(s): Peter Carr (202) 224-9854 |
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HATCH: FOREIGN TAX BILL TO CREATE U.S. JOBS
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Washington — The U.S. Senate passed today critical legislation that makes corrections to U.S. tax laws in order to bring them in line with international trade rules, along with provisions to help companies create and maintain jobs.
“This is a must-pass bill,” said Sen. Orrin G. Hatch (R-Utah), a conferee who helped negotiate the final version, which was passed by the House late last week. “American exports are being hit with increasing trade sanctions by the Europeans, and our job is to do everything we can to help our U.S. companies succeed. Whether small, medium, or large, more and more businesses in Utah and around the nation compete in a worldwide market, so we should recognize it and help them deal with it.”
Along with repealing the export subsidies that were declared illegal by a World Trade Organization (WTO) ruling, the American Jobs Creation Act (H.R. 4520) contains a manufacturing deduction provision to lower the tax burden on manufacturing companies hit hard by the recent recession; significant tax reform for S corporations to strengthen small businesses; and simplified international tax law to encourage multinational corporations to remain in the United States. The bill also includes a number of provisions sponsored by Hatch that will benefit Utah companies.
“If we are really concerned about jobs moving overseas, we must be concerned about creating and maintaining the kind of environment in the United States that attracts businesses,” Hatch said. “These changes will go a long way in ensuring that U.S. tax laws do not drive businesses offshore to other nations with more favorable tax laws.”
Hatch praised House and Senate negotiators for making sure the final bill was paid for and does not contribute to the federal deficit.
“We had to make some tough decisions, but I’m grateful we held the line and were fiscally responsible,” Hatch said. “Congress needs to continue to fight to keep spending down while doing everything it can to promote job creation and stimulate business growth to improve the government’s bottom line.”
The bill will next go to President Bush, who is expected to sign it into law.
Hatch's floor statement in support of H.R. 4520 follows:
Statement of Sen. Orrin G. Hatch
before the
United States Senate
October 9, 2004
THE CONFERENCE REPORT ACCOMPANYING H.R. 4520
THE AMERICAN JOBS CREATION ACT OF 2004
Mr. President, I rise today to express my strong support for the conference report for the American Jobs Creation Act. In order to protect our domestic manufacturers, strengthen our economy, better help our U.S.-based multinational firms compete globally, and honor our trade obligations, the Senate must pass this critically important and overdue legislation before recessing for the elections.
I wish to start by congratulating the chairman of the conference committee on this bill, Congressman Bill Thomas, and the cochairman, Senator Grassley, for their leadership and exceptional cooperation in finishing the conference on this bill in time to bring it to the House and Senate floor this week. Many thought completion of this task would be difficult or impossible, given the large differences in the Senate and House versions and the time constraints the conference committee faced.
The innovative conference process developed by the chairman and cochairman made success possible. Conferencing a large and diverse pair of tax bills in the usual fashion could have taken many weeks and led to a likely failure to finish this bill before sine die adjournment of the 108th Congress. Again, I want to recognize the extraordinary achievement of this conference committee and thank its leaders and my fellow conferees for their hard and dedicated work.
Mr. President, this conference report represents what we hope will be the culmination of a very lengthy and fascinating issue that had its genesis decades ago but has festered into a growing problem over the past several years.
I will leave to others to go into detail about the long history of the export subsidies in our tax law that gave rise to this conference report, but the unusual nature of this bill and its difficulty in passing the Congress are reflections of the complexity of this issue.
The crux of the difficulty of the bill is that the rulings of the World Trade Organization on the trade-legality of our export tax subsidies put the Congress in a very tough position. In essence, we found ourselves needing to repeal these export subsidies, known as the Foreign Sales Corporation (FSC) provision and its replacement regime known as the Extraterritorial Income (ETI) exclusion.
By repealing these provisions, which we must do in order to honor our trade obligations, we effectively raise taxes by almost $6 billion per year on thousands of U.S. businesses that manufacture goods for export.
Leaving it at this, Mr. President, is simply unacceptable. Why should we have to convert a provision designed to help U.S. manufacturers compete in an ever-increasingly difficult global marketplace to a situation where they suffer a competitive disadvantage?
Yet, this is exactly the problem the Congress faces now that it is forced to repeal the export tax benefits.
When confronted with a similar problem in 2000 after the WTO ruled the FSC provision to be in violation of international trade rules, Congress passed the ETI in its place. With the ETI, we were able largely to replicate the benefits of the FSC regime, so that exporting taxpayers paid few if any extra taxes with the repeal of FSC. Unfortunately, the WTO subsequently ruled that the ETI provision also was an illegal trade subsidy that also must be repealed.
So, the conundrum facing the Congress with this situation was to find a way to enact other tax cut benefits for exporting manufacturers, to offset the increase from repealing ETI, without violating the WTO rules.
Unfortunately, Mr. President, this has proven impossible, so both the Senate and House bills attempted to find rough justice for business taxpayers by finding other ways to deliver tax benefits besides basing them on exports. Such attempts gave rise to the political and practical difficulties of this bill, including the fact that it took many months of hard effort to reach the point we are today.
For example, my own bill to address the FSC/ETI problem was S. 1475, the Promote Growth and Jobs in the USA Act, which I introduced in July 2003. This bill would have delivered rough justice tax relief in two ways.
First, it would simplify and rationalize the international tax rules that currently harm the ability of U.S. firms to compete globally, and second, it would provide incentives for companies to increase their ability to produce goods by acquiring new equipment and engaging in more research and development.
Other FSC/ETI solution bills were also introduced. On the same day I introduced S. 1475, Chairman Thomas introduced H.R. 2896, the American Jobs Creation Act. The two bills were similar in many ways, and both included international tax reforms. The Thomas bill, however, included a number of other provisions designed to help U.S. businesses create jobs and better compete.
Another bill, introduced last year by Congressmen Crane, Rangel, and Manzullo, offered a different direction still. This bill provided a deduction equal to 10 percent of a company’s production activities.
In the Senate, Senators Grassley and Baucus introduced a bill that included some of the best elements of all the other bills. Even though I preferred the solution set forth in my bill, I cosponsored the Grassley-Baucus bill because it represents a solid and reasonable solution to the problem. This bill, as modified, became the legislation reported by the Finance Committee and passed by the Senate.
After a great deal of travail and adjustments, the House also passed a FSC/ETI bill, and it was quite similar in many respects to the first Thomas American Jobs Creation Act. These are the bills the conference committee had to combine into one.
The result, as we all know, is a bill that is far from perfect. Its enactment will result in a net tax increase for some exporting companies that now use the ETI provision, and in a net tax cut for many other U.S. manufacturing firms that may have not taken advantage of the ETI exclusion.
And while the bill includes many important other provisions, it leaves out some very important provisions that the Senate conferees agreed with me should be in there. Unfortunately, the House conferees disagreed and they were omitted from the final product.
For example, I am personally very disappointed that the House conferees voted against including the CLEAR ACT in this conference report. This bill, which has passed the Senate at least three times and also has passed the House, would transform our auto industry by granting strong tax incentives for consumers who buy alternative fueled and advance technology vehicles, such as hybrid electric cars.
Moreover, it would move us to a more responsible age of cleaner air and less fuel dependency on the Middle East by simultaneously breaking down the three barriers that keep our nation from adopting the already-existing technology to help us meet these goals – the higher cost of such vehicles, the higher cost of alternative fuel, and the lack of a refueling infrastructure.
From a broader point of view, most of my fellow Senate conferees and I would have liked to see the entire set of energy tax provisions from the Senate-passed bill included in the conference report. I believe it was a mistake to omit these important provisions.
I also very much regret that the House conferees refused to adopt the amendment I offered, accepted by the Senate conferees, which would have bolstered our research tax credit. While it is true that the research credit was extended for a short time in the most recently passed tax bill dealing with individual tax cuts, that legislation left out an important element that was contained in the Senate FSC/ETI bill designed to improve the incentives this provision gives for companies to engage in R&D; activities.
Nevertheless, Mr. President, the conference report before us is worthy of our support. As I mentioned, as a nation we must honor the obligations under the World Trade Organization. Of more immediate importance is the fact that the Europeans are levying an increasing level of trade sanctions against certain of our products exported to the E. U. This level is currently at 12 percent and is growing by one percentage point per month and is definitely having a very serious negative effect on certain U.S. industries.
Moreover, the trade sanctions are authorized to continue to increase until next March, when they will have reached 17 percent. After this, the E. U. may authorize even more serious sanctions against us that would surely harm our economic growth.
As all of my colleagues well know, if we do not succeed in passing this conference report before sine die adjournment of the 108th Congress, we must start the process all over again next year.
Will this result in a better bill?
Perhaps, but such an outcome is far from certain. What is more likely is that the resolution to this issue would be delayed for many more months, giving the trade sanctions more time to damage our economy and harm U.S. businesses.
Now, Mr. President, I would like to take a few minutes to discuss some of the specific provisions that did make it into the conference report and why I believe my colleagues should enthusiastically support them.
First, let me express my satisfaction that this conference report has a good balance to it. In addition to the vital repeal of the ETI provision and the quite reasonable transition relief it provides for current ETI users, the bill offers significant provisions for both small businesses and large multinational firms. Mixed in is a generous portion of important tax relief for business interests of all kinds.
Central among these relief provisions is the manufacturing deduction. This provision is designed to lower the tax burden of any business entity that engages in production activities in the United States. I am happy to see that the Senate provision allowing this deduction to be taken by unincorporated businesses was retained in conference.
Also included in the conference report is a significant section of relief designed specifically for small businesses. Foremost in this category are the five sections that would simplify and reform the taxation of S corporations. These are changes I have long sought, Mr. President. Along with my colleagues, Senators Breaux, Smith, and Lincoln, we have attempted to get these and other S corporation improvements passed for several years now. I am gratified to see them included in the conference report.
Other provisions that are very important to the balance of this bill are those designed to simplify and improve the rules by which this nation taxes international business transactions. Quite simply, the current state of our international tax rules is appalling. This part of our tax code generally dates back to the early 1960s, and was designed for a different world from the one in which we live now.
U.S. businesses, whether large, medium, or smaller, that decide to expand their markets beyond the borders of the United States confront a set of tax rules that are not only mind-numbingly complex, but far worse result in double taxation and often leave them on the down side of a tilted playing board when compared with competitors based in most other industrialized nations.
Our rules governing the foreign tax credit, for example, which are designed to eliminate the double taxation of income, often are ineffective, some blatantly so. A provision added to the Internal Revenue Code in 1986 reduces the foreign tax credit by 10 percent to the extent it reduces the alternative minimum tax. There is little or no justification for this double taxation that I can see, and this conference report repeals this unfair provision.
The bill before us includes about two dozen provisions that will help improve the tax law for our companies that have expanded their markets overseas. I have long been interested in getting this type of reform passed by the Congress, having introduced bills to do this since the mid-1990s. It is gratifying to finally see this long-overdue relief come to pass.
Some of my colleagues have incorrectly concluded that improving our rules on international taxation will give an incentive to U.S. companies to move their jobs overseas. This is unfortunate, Mr. President. Cross-border investing is not only a necessity of our modern world, it is usually beneficial to both nations. Most U.S. companies that invest in expansion into markets in other nations do so to compete effectively with other suppliers in those markets and here at home.
A fact of life of our modern economy is that our U.S.-based business enterprises face competition from all parts of the globe. It is unrealistic to think that an American business can simply focus on markets here at home and thrive. Instead, most of today’s businesses must be mindful of both markets and material and labor supplies around the world if they are to stay in business very long.
While no one likes to see U.S. jobs move overseas, we should be more concerned about creating and maintaining in the U.S. the kind of environment that attracts businesses. Part of that environment is ensuring that our tax system does not drive businesses offshore to other nations that tax them in a more favorable fashion. This bill moves our tax system a big step in that direction, and I am pleased to see these changes finally reach the point where they are about to become law.
Mr. President, I would like to now say a few words about the issues regarding tobacco associated with this conference report. I have not forgotten that at the center of the tobacco buyout is the tobacco farmer. I understand that the tobacco price support and tobacco quota programs have helped to secure a reasonable living for many family farmers.
I have also come to the understanding that breaking the dependency of our citizens and especially of our children on nicotine requires us to address the dependency of tobacco growers on the tobacco industry and on the government programs. It will not be an easy transition for many tobacco growers, and we need to help these families to survive it.
Contrary to the belief of some, the United States Department of Agriculture (USDA) does not provide a direct subsidy to tobacco growers. However, the USDA does maintain artificially high prices for tobacco leaf by managing the loan (or price support) program for tobacco growers which serves to maintain artificially high prices for tobacco and cigarettes in this country.
The USDA also manages the tobacco quota system to keep down the amount of tobacco grown each year. This, again, keeps the price of tobacco and cigarettes high. All direct and administrative costs for these two programs are reimbursed to the USDA by tobacco farmers and their trade association. There is no net cost to the government as a result of the tobacco program. In fact, smokers carry most of the burden of the tobacco program through higher costs for the tobacco products they purchase.
Mr. President, shifting tobacco farming away from tight government management toward the free market has risks for our farmers. This proposal does a good job of getting the government out the farming business while making temporary assistance available to farmers as they adjust to the free market.
As far as the provision requiring the Food and Drug Administration to regulate tobacco, let me say that I fully support measures to end tobacco use in the United States.
I can think of few public health dangers worse than tobacco, and this is especially true for young people.
I have heard from many concerned parents and health advocates in Utah who point out the devastating health consequences of tobacco use.
In many aspects, the DeWine/Kennedy language was written to achieve that goal, and in that spirit I supported it in conference. In fact, much of the bill is taken from a measure that I authored several years ago with Senator Dianne Feinstein.
That being said, I am concerned about some aspects of the way the bill was written, and especially the impact of this language on the resources of the Food and Drug Administration.
First, I believe that the Committee of jurisdiction, the HELP Committee, should have the opportunity to consider this legislation before it is brought to the full Senate for a vote the next time. Having been the Chairman of that Committee for several years, I know full well the complexities of the Federal Food, Drug and Cosmetic Act. Three hours of debate on the Senate floor was not enough time to consider legislation that made such dramatic changes to current law.
I also want to make sure that we in the Congress are clear about the impact that such legislation would have on the Food and Drug Administration and whether or not the FDA has adequate resources to regulate tobacco, and, in addition, keep up with its other, extremely important responsibilities, such as the approval of drugs, medical devices, and protecting our food supply.
While I understand that user fees were included in the legislation, I am not convinced that those user fees would have provided the FDA with sufficient resources to regulate tobacco. I am someone who has fought to provide FDA with adequate resources and have led the fight on unifying the FDA campus. I do not want anything to jeopardize the progress we have made in those areas so before we consider similar legislation again. I believe it is imperative to work closely with the FDA to find out exactly how much money is necessary for the agency to regulate tobacco, and whether or not the agency is capable of overseeing the regulation of tobacco.
Again, let me make one thing perfectly clear – I believe that tobacco should be regulated, however, it needs to be a well-thought-out process. Therefore, allowing the proper committees of jurisdiction to review and consider the legislation and consultation with the FDA must take place before similar legislation is voted upon by the full Senate and House of Representatives before we consider another measure.
Finally, Mr. President, I want to touch on some of the revenue offsets included in the conference report. I want to make it clear that I support the principle of keeping this bill revenue neutral, and I congratulate the conferees for doing so. This was a particularly sticky problem with the House members, so I especially recognize their hard work in bowing to the Senate’s demands that this bill be fully offset.
I am very pleased to see that several revenue offset provisions that were in the Senate bill are not part of the conference report. One of these is the codification of the economic substance doctrine. I believe enactment of this provision would have led to a great deal of unnecessary conflicts between taxpayers and the Internal Revenue Service, and would have unfairly penalized companies for engaging in legitimate tax planning techniques.
One provision that did make it into the conference report raises revenue in connection the donation of used vehicles. In essence, the provision requires that taxpayers wait to take a deduction for the donation of a used vehicle until the donee charity has sold the item in an auction. Then, the deduction is limited to the actual purchase price.
While this may appear to be a reasonable requirement, particularly in light of some of the alleged abuse surrounding the charitable donation of used vehicles, I am concerned that these changes will result in far fewer used vehicles being donated to charities. Some charities, such as the National Kidney Foundation of Utah, rely heavily on such donation programs for a great deal of their funding. A chilling effect on the donation of these used cars could leave many worthy charities short of vital funds needed to perform their invaluable services to needy citizens in Utah and elsewhere.
I will keep a watchful eye over the implementation of this change in the law, to make certain it does not harm the charities that have relied on donated vehicles for funding. While I agree that we should preclude any real abuse of the law, I do not think we should create a burdensome new requirement that would discourage charitable giving. It may well be that we need to revisit this area of the law in the future.
In conclusion, Mr. President, the conference report before us represents a good bill that deserves our support.
As I have tried to indicate in these remarks, the bill is far from perfect. But given the very difficult political and other circumstances surrounding the issues this bill addresses, it is remarkable we were able to bring to the Senate floor a product that is as good as it is. I urge my colleagues to support the conference agreement.
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