Peoria Journal Star

October 19, 2003

Congress scrambles to revamp tax policy
Caterpillar-backed bill could help offset loss of export breaks

of Copley News Service

WASHINGTON, D.C. - Congress is running out of time to resolve a trade dispute with the European Union, which has threatened $4 billion in sanctions that could hit Midwest farmers and manufacturers particularly hard.

However, with about 155,000 Illinois jobs at stake, the proposed solutions to that dispute are proving equally painful.

The congressional debate is pitting Caterpillar Inc. and Boeing Corp., two of Illinois' largest exporters, against McDonald's Corp., Deere & Co. and other large multinational companies.

It's also dividing Republicans usually found on the same side of tax issues.

By Jan. 1, Congress must repeal a tax break for exporters deemed illegal by the World Trade Organization, raising taxes on U.S. corporations by $5 billion a year. If it doesn't, the EU will levy tariffs on U.S. exports including agriculture and manufactured goods.

Most Illinois lawmakers favor a bill introduced by Reps. Phil Crane, R-Wauconda, and Charlie Rangel, D-New York, that is endorsed by Caterpillar and Boeing. It would help offset the loss of the tax breaks by reducing the top corporate tax rate from 35 percent to as low as 31.5 percent based on how much manufacturing they do in the United States.

But House Speaker Dennis Hastert, R-York-ville, has come out recently in support of a

proposal by House Ways and Means Chairman Bill Thomas, R-Calif., that would make broader tax changes that would help multinational corporations with extensive overseas operations as well.

Critics say the Thomas bill, which is still undergoing revisions, would send more jobs overseas and is politically unpopular when U.S. manufacturing jobs have been declining over the past three years.

"The Thomas bill encourages manufacturers to move manufacturing from the United States to foreign countries," said Rep. Donald Manzullo, R-Egan, who chairs the House Small Business Committee and is an original co-sponsor of Crane's bill.

"The American people will not tolerate another broad-based effort to cut corporate taxes unless it's just American manufacturers having their taxes being cut to be more competitive," Manzullo said.

The argument appears to be resonating with many House members on both sides of the political aisle. About 150 House members have signed onto the Crane-Rangel-Manzullo bill, including Rep. Ray LaHood, R-Peoria, whose district includes Caterpillar headquarters.

As a result, Thomas has revised his bill twice in the past two weeks, adding benefits for domestic manufacturers and reducing its cost, to try to win over enough Republicans to get a bill out of his own committee.

"This is about jobs, and jobs can't be defined strictly as domestic manufacturing. That's a very small universe," said Thomas spokeswoman Christin Tinsworth, who noted that 60 percent of U.S. manufacturing jobs are provided by U.S. multinationals.

Illinois ranks sixth in the country for exports, sending about $15.7 billion in goods overseas a year. About 155,000 Illinois jobs are directly or indirectly linked to companies that benefit from the current tax break that the WTO wants repealed, according to a study by PriceWaterhouseCoopers.

Losing the tax break - without other tax changes to soften the blow - would hurt Caterpillar's ability to create more U.S. jobs as its exports grow, company officials told Congress last year.

Depending on the approach that Congress takes, Chicago-based Boeing could be forced to cut 9,600 jobs and its suppliers may have to eliminate 23,000 jobs nationwide, company officials said.

And, smaller Illinois companies would be affected as well.

Exports make up 30 percent of the annual sales of Excel Foundry and Machine Inc., in Pekin.

Although Excel President Doug Parsons has gone to Washington twice to lobby for the Crane bill, he said it won't fully replace the tax break that the WTO says must go.

"There are a lot of countries that offer tax subsidies to their manufacturers in similar situations, so when we go compete on foreign soil we are not on a level playing field," said Parsons, who estimated he would have to lay off up to 10 percent of his 100 employees if the tax break is cut without any new tax benefits.

The tax debate has placed Speaker Hastert in a difficult spot. He has 3,000 Caterpillar employees in his northern Illinois district and was instrumental in persuading Boeing to move its headquarters to the state. Yet Thomas' initial bill contained broader tax changes sought by President Bush.

Hastert's position has had to be clarified repeatedly over the last few weeks.

"The speaker supports Chairman Thomas moving forward with the product at hand. The speaker continues to work with Thomas to refine the product. ..." Hastert spokesman Pete Jeffries said this week, referring to the evolving Thomas bill. "He has Caterpillar, Boeing and other Illinois companies at heart because he represents them and their workers."

Aside from Hastert, Rep. Jerry Weller, R-Morris, is the only Illinois lawmaker who hasn't signed on to the Crane bill. He's one of the few undecided Republicans on the House Ways and Means Committee. He has the tough choice of siding with his chairman or with Caterpillar, which is the largest employer in his congressional district with 5,000 workers. Weller wants to see more depreciation write-offs for corporations in the legislation, his aide Ben Fallon said.

Earlier this month, the Senate Finance Committee approved its version of a tax bill that gives special attention to domestic manufacturers. Crane and Manzullo called it a step in the right direction.

Congressional leaders thought they had more time to rewrite corporate tax law. But the European Union warned late last month that simply showing legislative progress would not be enough to avoid a trade war.

However, as Congress rushes to adjourn in November, other high-priority items such as prescription drugs and energy bills may take precedence.

"I don't have a lot of hope that this bill is going to pass the Congress this year," said LaHood.

If not, "then we battle it out with the European Union." Manzullo said. "The penalties could hurt the Midwest big time."