Once Congress returns later this month, both chambers will likely commence floor consideration of corporate tax legislation introduced in response to a WTO ruling and the specter of a trade war with the European Union. On September 18, Senate Finance Committee Chairman Charles Grassley (R-Iowa) introduced the "Jumpstart Our Business Strength (JOBS) Act" (S. 1637), which would repeal U.S. Foreign Sales Corporations – also known as Extraterritorial Income. In the House, Ways and Means Committee Chairman Bill Thomas (R-California) introduced similar legislation in July (H.R. 2896).

Legislation to repeal subsidies for U.S. manufacturing exporters became necessary after the European Union threatened $4 billion in trade sanctions pursuant to a WTO ruling in February 2000. The EU has exhorted U.S. lawmakers that such export subsidies must be abolished by March 1 to avoid the imposition of sanctions. The export subsidy was originally implemented to marginalize the advantage held by European exporters that do not pay the EU value added taxes on their exports. To mollify the economic impact of eliminating the subsidy, both pieces of legislation would gradually phase out the tax subsidy over three years. Additionally, the export subsidy will be supplanted by a reduction of the top corporate tax rate for domestic manufacturing and production income from 35% to 34% in 2004 through 2006 and 32% starting in 2007.

The repeal of the export subsidy will raise approximately $46 billion in revenue over 10 years. However, the new slew of corporate tax cuts contained in the Senate bill will cost $101 billion over 10 years. The cost of the tax cuts in the House bill is slightly more at $140 billion, though the legislation contains $80 billion in revenue raising offsets. Both pieces of legislation include offset provisions which would raise revenue through crack downs on corporate tax shelters and the elimination of questionable corporate tax deductions.

The Senate bill also contains a contentious provision that would prohibit state and local governments and other tax exempt entities from engaging in sale-leaseback transactions of infrastructure.

For over 25 years, U.S. transit agencies have used leasing as a financing tool to purchase transportation infrastructure. Leasing has enabled transit agencies to meet important capital and operating needs in a constraining budgetary environment. Leasing frees up scarce funds to supplement conventional transit budgets. Since 1996, leasing has enabled transit agencies to generate aggregate savings of between $1.5 and $2 billion. Senator Grassley has expressed concern over manufacturers receiving tax deductions from the leasing of infrastructure to transit agencies. With leasing transactions, transit agencies take possession, but not ownership of an asset. Leased assets are still owned by manufacturers, which allow such companies to receive a tax deduction from the depreciation of the asset. At a hearing on his bill in October, Senator Grassley lambasted companies that received deductions from leasing transactions with tax exempt entities. "Even our bridges, subways and water systems are all ripe for the picking. It's hard to believe that city assets are helping tax shelters. Roads and bridges built with tax dollars are leased out to shelter promoters so major corporations can get a phony tax deduction. . . . We need to shut down this type of tax shelter and all others in the process."

Supporters of sales-leaseback transactions argue that tax deductions earned by companies selling assets to transit agencies does not result in permanent tax avoidance. When the lease ends, any deductions received during the lease term will be more than offset by taxes imposed on the eventual sale of the asset. Additionally, transit agencies contend that Senator Grassley has distorted the true nature of sales-leaseback transactions involving local governments. Such agreements must comply with existing law, be filed with the IRS and submitted to the FTA for their consent. Tax-exempt entities like local governments are even subject to Pickle depreciation rules, which dilute depreciation write-offs for leasing property to a local government as opposed to a corporation.

Equity investors tend to be very concerned about the credit worthiness of tax-exempt organizations such as local governments or transit agencies that depend on tax dollars to finance infrastructure purchases. To allay weary corporations and prevent moral hazard, the business community is concerned that without tax deductions taken on leasing transactions, there will be no economic incentive to sell assets to tax-exempt entities. The Grassley bill would disallow manufacturers from receiving a tax deduction from sales-leaseback transactions. Affected corporations would pay more taxes and pass the cost onto transit agencies. Senator Grassley has proposed that these tax increases would be retroactive going back to November 18, 2003. Many corporations are now factoring in the anticipated tax increases into leasing agreements with transit agencies.

In the House, Chairman Bill Thomas elected not to insert the Grassley sales-leaseback provision into his corporate tax bill. Thomas has indicated that he does not support the provision in the Grassley bill. However, Thomas currently lacks the votes to pass his bill in current form.

Due to WTO mandates and potential EU trade sanctions, a corporate tax bill will have to be passed before March 1. House Speaker Dennis Hastert (R-Illinois) has stated that he will not move the bill until it becomes clear that Thomas has the requisite votes. There still remains a possibility that both corporate tax bills may be considered during the budget process, when such legislation would be protected from Senate filibusters under budget reconciliation procedures. However, a budget reconciliation package will likely not be passed before March 1; the deadline the EU set for repealing export subsidies. If the EU remains inflexible on the deadline date, expect corporate tax legislation to receive floor consideration by mid-February. With such urgency, Thomas may have to capitulate on the sales-transaction provision so more Republicans come on board.

The U.S. Chamber of Commerce has been consistent in their opposition to the revenue offsets in both bills. The pro-business group is arguing that some offsets may outweigh the benefit derived from the reducing the corporate income tax. The chamber has been working relentlessly behind-the-scenes to strip offsets from the bill. Transit representatives in Washington are urging transit stakeholders to work with the chamber, affected corporations, financial services institutions, and trade associations to strip the provision from the Grassley bill. However, Thomas and Speaker Hastert may be willing to keep the Grassley provision to assuage moderate Republicans worried about the total cost of the bill and the growing federal deficit.

Congress is slated to return to the Capitol on January 20. If the House and Senate leaders' plans hold together, this election year session will be a short one, with votes scheduled for only about 90 days in the entire session. The current plan appears to be to have the major substantive business of the session wrapped-up by the convening of the Democratic National Convention in late July. This would reserve September -- slated to be the final month of the session -- to complete work on the annual appropriations bills.

Given the shortness of the time available, leaders want to begin early with substantive action. Among the items on which they will seek action in the early part of the year are:

Energy Legislation

One more attempt will be made to round-up votes in the Senate for the conference report on the energy package which came up short in 2003.

TEA-21 Reauthorization

Neither the House nor the Senate knows yet how to pay for the proposals pending in their respective bodies, but leaders continue to press for floor consideration in February/March.

TANF Reauthorization

The issue of the number of required hours of work-related activity continues to be a sticking point to gaining sufficient votes in the Senate for extending TANF. Further extensions are possible.

Job Training

Senate leaders continue to look for ways to advance the concept of consolidating certain job training programs. Democrats are resisting.

Reconciliation

The tax vehicle for the year is expected to be a reconciliation measure designed to helpd reach budget targets on the revenue side. Reconciliation bills do not need 60 votes to pass in the Senate, so look for this to be a major piling-on opportunity for a number of tax-related issues. For example, the internet tax issue may well be resolved on this legislation.

This is a modest agenda in keeping with the modest amount of time available. As the session goes on, items on this list will be dropped for lack of support and others will certainly arise. More minor issues will float to the surface as time allows. Keep watching this space for frequent updates.

A month before the release of President Bush's fiscal 2005 budget, some outlines of the proposal are beginning to emerge through leaks reported in the media. On the spending side, it appears the president will seek cuts in housing, job training and veterans' health benefits, will seek to slow the growth in health research and will propose significant increases for education programs for the disabled and low income. The budget is also expected to include new tax cut proposals to encourage individual saving and to assist those without health insurance to purchase it.

Faced wih the prospect of an election-year budget with record deficit levels, the Bush Administration does not appear to be moving towards significant reduction in the deficit. Domestic discretionary spending (i.e. excluding defense, homeland security and entitlements) would increase by 3% above the fiscal 2004 levels, according to reports. This is about the same level of increase in fiscal 2004 as compared with 2003. While details on other parts of the budget have yet to emerge, it is safe to assume the upward spending trends in defense, homeland security and entitlement spending will continue. On the revenue side, the end of the three-year slide in Federal revenues (the first such dip since the 1920's) is almost certain to end. Whether revenue increases will be enough to offset the spending increases contemplated in this budget remains to be seen. The Congressional Budget Office, predicting an increase in the deficit to a record $ 450 Billion before new policies are considered, apparently doesn't think so.

The two big winners in the budget plan appear to be the IDEA program ("special ed") and the Title I education program targeted at low income students. Each program would receive a boost of about $ 1 billion, which works out to a 15% increase for IDEA and an 8% bump for Title I.

The proposal in the housing area is focused on holding the line on spending by more closely reviewing the income levels of applicants for vouchers and by limiting the number of vouchers that can be issued. On job training, it appears that cutting spending while consolidating programs will be the approach.

More details on the Bush budget plan will emerge in the weeks ahead. We will continue reporting on them and will, of course, supply a detailed report of the budget plan when it emerges officials on February 2.