Tax Reform Hold Up

Instead of reforming corporate taxation, new legislation could make it more complex.
Joseph McCaffertyAugust 2, 2004

In an election year, congressional tax bills tend to be padded with lawmakers’ pet interests, otherwise known as pork. This year is no different — except that this year, the sheer extent and diversity of the larding may actually sink the legislation to which it is attached.

In May and June, the House and the Senate passed bills intended to repeal a tax break for exporters — called the Extraterritorial Income Exclusion Act (ETI) — that has been declared illegal by the European Union, and replace it with an acceptable incentive. Two proposed alternatives would provide tax breaks to compensate for the repeal of the ETI, such as reducing the tax rate for manufacturers from 35 percent to 32 percent by 2008 and allowing companies to repatriate foreign earnings at a tax rate of 5.25 percent. “There are good things in both bills,” says Robert Willens, a tax analyst at Lehman Brothers. “I like what they’re doing.”

Unfortunately, the bills also contain a hodgepodge of other tax breaks aimed at such narrow interests as cruise-ship operators, tackle-box makers, bow-and-arrow manufacturers, and NASCAR-track owners. “There are too many interests being served,” says George Plesko, an assistant professor of management at the Massachusetts Institute of Technology’s Sloan School of Management.

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And too many discrepancies between the House and Senate versions of the legislation. The House bill, for example, contains a $9.6 billion buyout of a federal quota program for tobacco farmers. A number of senators oppose the buyout. The Senate bill contains provisions that would curb tax shelters and corporate tax loopholes — moves that are unpopular in the House.

Bickering about the different versions could delay passage of a compromise bill before Congress adjourns on October 1. “Everyone is pessimistic about the odds that this gets passed anytime soon,” says Gary McGill, professor of accounting at the University of Florida. That could have consequences for U.S. businesses, as companies continue to face tariffs from EU members over the ETI.

Worse, instead of reforming corporate taxation, the new legislation could make it more complex. “The most troubling aspect of these bills is the numerous provisions that could complicate tax compliance and impose additional burdens on corporate tax departments,” says Timothy McCormally, executive director of the Tax Executives Institute in Washington, D.C.