Week ending April 23

TheWeekInCongress.com

Week ending April 23, 2004

S-1637 The Jumpstart Our Business Strength Act. HR 2896 American Jobs Creation Act of 2003 (House)

BRIEF

S 1637 follows the World Trade Organization ruling that some U.S. tax breaks for US exporters gives them an unfair advantage in the European market. Congress developed this revision of national and international tax laws governing corporations as well as some laws governing individual income taxes to correct the problem.

As a tax bill, however, S 1637 is prone to add-ons and riders that have little to do with creating or maintaining jobs in America. One example would establish that a non-resident alien who places and wins a paramutual bet from outside the U.S. on a live horse or dog race inside the U.S.-and wins-is excluded from the tax on gross income earnings. The bill is more so a mechanism for shuffling tax breaks and incentives to major U.S. corporations that do business around the world from either within the U.S. or without. With a few special tax breaks thrown in.

Sponsor: Senator Charles Grassley (R-IA)

Vote: The bill did not come up for a vote this week.

Cost to the Taxpayer: Some elements of the bill will increase revenues or outlays more than the other over the next ten years, but CBO calculated the cost and expenses of the bill are nearly equal through 2013.## All Rights Reserved. No reproduction in any form without written permission from TheWeekInCongress.com.

MORE INFORMATION

The popularized explanation for the bill comes from its’ abbreviation -J.O.B.S. The idea being that this bill, should it become law, will create jobs in the U.S., but there is more in the details that has little to do with creating jobs. The House bill, HR 2896, introduced by Rep. William Thomas (R-Ca) was amended to meet the requirements that it be revenue neutral before the Senate would consider it. Changes made as the result of pressure from Democrats has brought the bill in line to a degree.

Opposition to the Bill’s finances

The Congressional Budget Office has concluded that the bill is budget neutral. Over the next ten years it will cost around $16 billion and take in around the same amount. In that context the bill essentially shuffles revenues and outlays. Where a tax break is removed here, another is created there.

Tax breaks on profits made by a foreign subsidiary could be reinvested in another foreign subsidiary or back in the U.S. but previous legislation made certain foreign investments in one country or the other more tax favorable and made investment inside the U.S. least profitable. S-1637 does little to enhance profits from reinvesting foreign profits back in the U.S. As pointed out by Sen. Bob Graham (D-FL), taxes on corporate profits made from manufacturing inside the U.S. would temporarily be lowered, but other tax mechanisms would still make moving offshore more profitable. As Sen. Graham noted on the floor; a company making a $30 profit in the U.S. would see a tax deduction of $2.70. A company earning $45 off-shore due to lower wages could see a tax break of $4.00. The Senator also claimed that companies moving a percentage of their business off shore would still have greater deductions than ones keeping all production in the U.S..

Although the 'off-shoring' or "outsourcing" of jobs has centered on the tax savings for corporations one opponent to the bill determined that abundant tax breaks already exist for most corporations. Senator Harry Reid (D-NV) also questioned the wisdom of the in-country / off-shore tax mechanisms asking if, essentially, the U.S. isn’t simply giving tax dollars away. “Between 1996 and 2000, 71 percent of the foreign companies doing business in the United States reported no U.S. tax liability at all. Sixty-one percent of U.S.-controlled corporations during that time, those 5 years from 1996 to 2000, also reported no U.S. tax liability,” Sen. Reid said. “In the year 2000, 82 percent of large U.S. corporations reported a U.S. tax liability of less than 5 percent of their income; 76 percent of large foreign-controlled companies reported U.S. tax liability of less than 5 percent of their income. These large corporations are not overtaxed. Some of them are not taxed at all. Now, with these foreign credits that extend forward for 20 years, not only will they not pay taxes, they will be owed rebates.”

Senator Graham introduced an amendment that would eliminate most of the bill’s tax provisions and use the revenue gains to subsidize a percentage of the money that employers pay to Social Security and Medicare through the payroll tax. The same amount would go into the trust funds but part would be paid by the Treasury not the employer. Employers currently pay 7.8 percent in payroll takes for every dollar paid to an employee.

Taxes owed to foreign governments are also deductible from the corporation’s U.S. tax liability dollar for dollar.

Revenue Enhancers

The tax break for out of country income would be repealed. Under the law a corporation can deduct 15 percent of its net income from goods sold, leased, or rented for direct use outside the United States. The provision would solve Europe’s legal challenge and increase U.S. Treasury revenues through 2013, according to Congress’ Joint Committee for Taxation (JCT).

Other revenue enhancers include temporary changes in the treatment of tax shelters. A ten percent tax credit for rehabilitating non-historic building would be repealed. Rules governing deductions for charitable contributions such as patents and similar tangible properties would be modified.

A 75 cent per dose tax on Hepatitis A vaccine (An estimated 50 percent of the vaccine is bought by Medicaid) would be paid with Medicaid appropriation dollars and the revenues would go to the Vaccine Injury Compensation Fund (VICF) to pay claims filed by those who are injured by vaccines. (Current law requires a vaccine be taxed before it becomes eligible for VICF consideration.)

Further increasing revenues-although not in the traditional sense-the bill would allow the IRS to enter into contracts with private collection agencies for the collection of delinquent taxes. The arrangement is calculated to return an estimated $1.3 billion to the U.S. Treasury by 2013. IRS will also charge taxpayers fees for certain rulings, opinion letters, and determinations.

Revenue decreases.

Revenues would be decreased by other parts of the bill. The largest loss predicted by the CBO would come from allowing firms to “deduct a portion of income attributable to certain production activities within the United States.” That is the element believed to create jobs but some believe it is not much of an incentive for the international corporations who, because of much lower labor rates elsewhere would still find it more profitable to manufacture outside U.S. borders.

Companies creating manufacturing jobs in the U.S. would see a reduction in the corporate tax level.

Two provisions would both raise and lower revenues; Changing the tax law relating to carryback of net operating losses is expected to reduce revenues by nearly $10 billion in 2004 but gradually add $7 billion through 2013. The JCT estimates that a temporary reduction in the tax rate for certain dividends from controlled foreign corporations would raise $2.9 billion by 2005 and then decrease receipts by about $6.6 billion through 2013.

There are some unique items in the bill that testify to special consideration.

One item with far reaching impact would increase research and development tax credits from 65% to 100% for many industries.

A non-resident alien who places and wins a paramutual bet from outside the U.S. on a live horse or dog race inside the U.S.-and wins-is excluded from the tax on gross income earnings. An alien present in the U.S. for 183 days or more would benefit from repeal of the 30 % capital gains tax now levied on their investment successes and there is capital gains relief for horse owners. ($64 million*)

A corporation created or organized in Puerto Rico will see a lowering of withholding income tax from 30 percent to 10 percent.

Taxation of unearned income of children at the parent’s taxation rate is modified to apply to children 18 and under rather than the current 14 and under.

Breaks for Oldsmobile dealers would cost $189 million* through 2013.

Distillery’s would see a tax break of $484 million* over ten years.

The bill includes a ten year, $252 million* tax-exempt bond proposal for purchase of forest land.

Railroad track maintenance would see $492 million* in incentives.

$54 million* would be spent for tax breaks on amounts received under the Student Loan Repayment Program for the Nat. Health Service Corps.

Tax revenues would slip $4.2 billion* under a provision extending credit for producing electricity from biomass.

(*Amounts provided from Sen. Graham’s comments)

NOTE: This is a complicated bill when it comes to changes in the U.S. Tax Code. Calculations for revenue or outlay increases or decreases out five and ten years can be affected by any number of events and circumstances that can not be controlled or predicted. Elements of the bill may include changes that could affect you if you own or own interest in a corporation that does business internationally or otherwise. Other areas affected by the bill would include the film industry, forestry and lumber, archery imports, broadband investments, leasing of airplanes and vessels, and distilled spirits. You would be wise to check with your accountant of any changes to your investments or investment opportunities should this bill pass.