Tobacco Buyout Complicates Tax Bill

WASHINGTON – American companies can be virtually certain they will soon pay double-digit tariffs (search) on some of their exports to Europe, as a tax bill designed to end the problem has become tangled with other legislation.

The European Union slapped punitive tariffs on some American goods this spring after lawmakers failed to drop a tax break judged to be an illegal export subsidy in international trade courts. The punishing levies increase a percentage point each month that the offending tax break stays on the books.

The tariffs have already risen to 9 percent while Congress toils over the tax bill aimed at ending the conflict. They could rise as high as 17 percent next year.

The Senate on Thursday voted 78-15 to add a $12 billion tobacco buyout (search) and regulation package to its bill eliminating the exporters' tax break. The Senate then approved the tax bill on a voice vote, sending it to conference, where negotiators will work out differences between it and a similar House bill.

Lawmakers predicted the delays would continue.

"I used to call them months. Now I call them percentage points," said Ways and Means Committee (search) Chairman Bill Thomas, R-Calif. "We may very well lose the September percentage point."

Senate Majority Leader Bill Frist, R-Tenn., showed more optimism and predicted that the bill could be done by September. Tariffs will have hit 11 percent by then.

Sen. Mitch McConnell, R-Ky., who pushed for inclusion of the tobacco buyout, said only that the bill would be wrapped up before the end of the year.

"It's a big bill with all kinds of complicated issues to resolve," he said.

Senators opposed to paying tobacco growers to give up the federal quotas propping up their prices, as well as the effort to give the Food and Drug Administration new powers to regulate tobacco products, were most pessimistic.

"If you allow enough barnacles to be attached to the hull of a ship, it will sink, and this one is in real jeopardy of sinking," said Sen. Trent Lott, R-Miss.

The House added a tobacco buyout to its tax bill in June to garner enough votes to pass it. Unlike the Senate buyout, financed by cigarette manufacturers, the House would ask taxpayers to cover the costs.

The core of the tax bill eliminates the exporters' tax break and replaces it with new tax cuts for manufacturers. The House and Senate also used the bills to streamline some international tax rules.

In addition to the tobacco buyout and cigarette regulations, dozens of other items had already been attached to the corporate tax bill, one of the few things that lawmakers expect to be completed during this election year.

Billions in tax breaks for energy producers, a short tax holiday for companies amassing profits overseas, a new federal deduction for state sales taxes, and dozens of changes designed to close tax loopholes are among those additions.

"It may be too much of a load for that bill to pass conference," said Sen. Don Nickles, R-Okla. "I can see all kinds of ways that this could bog down the conference and we end up having no bill, and who wins out of that?"

While lawmakers work, some producers said they have started to feel the pinch of escalating tariffs.

Paul Freedenberg, vice president for government relations at the Association for Manufacturing Technology and a former Commerce Department official, said the machine makers he represents cannot absorb the cost of tariffs much longer and will have to soon pass the costs on to their European customers.

"Obviously, as it ratchets up, it becomes increasingly impossible. We've hit that point by this summer," Freedenberg said.

Many of his association's members supply automobile and aerospace producers. "We're concentrated in the Midwest, basically the swing states that are needed for the election," he said.