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Turning a Trade Fight into a Tax Windfall for Business

Ever since the World Trade Organization ruled three years ago that $4 billion in annual tax breaks for big U.S. exporters was illegal, Congress has been struggling to fix the problem. Now the squabble over export subsidies is turning into a fight over much broader business tax cuts. That battle is pitting company against company and the tax-slashing House against the more deficit-averse Senate. And it is even threatening to become a hot potato in the 2004 Presidential race.

The latest round was kicked off on July 25. House Ways & Means Committee Chairman Bill Thomas (R-Calif.), with the encouragement of the White House, unveiled a plan that would replace now-illegal export subsidies with a huge package of other tax breaks. Although the banned subsidies are worth up to $50 billion over 10 years, Thomas would cut business taxes by $120 billion more than that. And while many companies would enjoy a tax windfall, the exporters who benefited most from the old subsidies, such as Boeing (BA), Caterpillar (CAT) and Microsoft, would end up worse off. That has set off a huge battle within the business community.

Democratic strategists are thrilled. Presidential hopefuls, already ripping Bush for running up the deficit, are in a populist lather over the prospect of new breaks for companies that manufacture overseas. "The supporters of this bill seem more interested in budget-busting tax cuts for multinational corporations than in protecting American jobs," says Senator John Edwards (D-N.C.).

In fact, the battle over which companies get the benefit will dwarf the debate over the WTO ruling itself. Thomas wants to level the tax treatment between U.S. manufacturers and those that produce overseas. But other key Republicans, such as House Speaker J. Dennis Hastert (R-Ill.), insist on a tax system that benefits U.S. manufacturers such as Caterpillar, a major employer in his district.

And while national Democrats are on the rhetorical offensive, many congressional Dems quietly back tax cuts that help their local businesses. They prefer a bipartisan alternative offered by Representatives Philip M. Crane (R-Ill.) and Charles B. Rangel (D-N.Y.) that aids U.S. manufacturers.

In an effort to regain the political advantage, Thomas shifted gears. He still wants to reduce the tax advantages enjoyed by domestic producers. But he has added a fistful of other business breaks. Though they have little to do with trade, they are popular among many companies and their congressional representatives. Among them: lowering rates for small businesses and providing generous new benefits for the purchase of business equipment. The result is a corporate Christmas tree that has lobbyists salivating.

Despite the add-ons, Thomas still has not rounded up enough votes to get his plan out of his own committee. And the bigger his tax cuts get, the more trouble he'll have in the Senate, which is reluctant to add to the deficit. Senate Finance Committee lawmakers are pulling together a bipartisan bill aimed at giving manufacturers a tax break for goods produced in the U.S. But they will insist that other cuts for business will have to be financed by closing corporate loopholes.

Lawmakers want to sort out the export tax mess this year. And in the end, both domestic manufacturers and those U.S. companies that produce overseas are likely to get some new tax benefits. But with deficits rising and businesses anxious for new tax breaks, Congress will first have to navigate the treacherous shoals of domestic politics. And that could turn out to be even harder than satisfying the WTO. With polls showing President Bush winning the support of up to 15% of Democratic voters, his reelection campaign is gearing up a Democrats-for-Bush operation. The group will try to recruit dissident Democratic officeholders into the Bush fold and increase the President's support among blue-collar, Catholic, and suburban voters. A key player will be Brian Lunde, a Washington consultant and former Democratic National Committee executive director. If Bush is going to win over Democrats, he has some explaining to do to voters who think he stretched the truth in the runup to war against Iraq. Most Democrats consider him a serial exaggerator and don't think the invasion was worth it. Republicans believe just the opposite. But there's a growing swing bloc of voters who favor the war and don't care if Bush exaggerated. A July 22-24 Ipsos-Reid/Cook Political Report Poll says that so-what-if-he-lied hawks tend to be moderate Democrats, men, Southerners, and less educated voters. Yet when it comes to Bush's handling of the economy, 66% of them give him a thumbs down. Bush isn't the only Republican taking heat for the economy's slow snapback. A July 18-20 CNN/USA Today/Gallup Poll gave Hill Dems a double-digit edge in handling the economy, the deficit, and unemployment. In January, Republicans held a one-point advantage on economic stewardship. Now, Democrats lead, 53% to 36%.

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