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Thomas Throws Curve on Taxes

Taking aim at foreign companies that have blocked his previous tax bills, Ways and Means Chairman Bill Thomas (R-Calif.) tucked a provision into his $550 billion tax-cut plan that would exclude foreign companies from the billions of dollars in dividend and capital gains tax cuts included in the bill.

Before unveiling the measure late Monday, Thomas quietly inserted a single word into the 32-page bill that limited the tax relief to shareholders in “domestic” companies.

The distinction between U.S. and foreign-owned companies means that millions of U.S. shareholders in overseas companies such as British Petroleum, Dutch-owned Shell Oil and Australia’s News Corp. would see little direct benefit from the Republicans’ tax bill.

“It’s a major problem,” said one GOP Member on the Ways and Means Committee, which approved the underlying legislation Tuesday without mention of the provision.

The move also creates a rift in Corporate America over the tax plan as Congressional leaders work to move the key White House priority through the House and Senate in the next two weeks.

House Republican leaders, White House officials and most tax lobbyists were caught off guard by the provision.

“I didn’t know it was going to be structured that way,” said Rep. Jim McCrery (R-La.), one of Thomas’ closest allies on the tax-writing panel.

At a closed-door meeting of Republicans moments before a daylong markup Tuesday, three Republican lawmakers — Reps. Sam Johnson (Texas), Paul Ryan (Wis.) and Dave Camp (Mich.) — asked Thomas to strip the provision from the bill. But they were quickly quieted.

A few hours later, committee members approved the bill — and the provision — on a 24-15 party-line vote.

The provision is not included in the Senate bill being drafted by Finance Chairman Chuck Grassley (R-Iowa).

Thomas said he excluded foreign stock and dividends from the tax package in order to trim between $10 billion and $50 billion from the bill.

“It is an attempt on our part to get as much as possible in the bill,” said Rep. Rob Portman (R-Ohio), a key member of the panel. “All this is about fitting a $726 billion bill into a $550 billion package.”

But other Republicans on the committee said Thomas had another reason for making the change: to target many of the same foreign-owned companies that have irked the powerful committee chairman by standing in the way of a string of international tax measures.

For two years, lobbyists for foreign companies have stifled Thomas’ efforts to move legislation to change the way the U.S. subsidiaries of the multinational companies are taxed. They also have blocked a bill that seeks to penalize American companies who incorporate overseas to avoid U.S. taxes.

Thomas said his tax bill is good policy and that those who say he is being vindictive are “simply trying to foment controversy where there isn’t one.”

Creating different tax schemes for domestic and overseas companies has precedent. Before the landmark tax reform bill of 1986, the dividends of domestic companies enjoyed preferential treatment in the tax code.

On Wednesday, a group of foreign companies and House Republicans began lobbying Thomas and the House leadership to remove the provision.

Johnson, a leader of that effort, said the change is a “slap in the face of American citizens because it discriminates between stocks owners who buy domestic corporations and those who invest in foreign companies.”

Johnson, who represents portions of Dallas’ high-tech suburbs, said thousands of employees of Finnish-owned Nokia in his district would face higher tax rates for their company stock than employees of Illinois-based Motorola — even though Americans own a majority of the stock in both cellphone manufacturers.

Meanwhile, blue-collar workers in the industrial belt would see more of their retirement investments if they worked for General Motors rather than Chrysler, which is owned by Germany’s Daimler Corp.

As is stand now, individuals who receive dividends from U.S. corporations would see their tax rates cut by more than half to 15 percent under the Thomas bill, from as high as 38.5 percent in current law.

Capital gains taxes would fall from a high of 20 percent to 15 percent as well.

But individuals who own stock in Nokia, DaimlerChrysler or other foreign companies would see no tax relief.

“We’re trying to work to change that,” Johnson said. “But I don’t know that we are going to be able to.”

Aiding Johnson is a coalition of the U.S. subsidiaries of foreign companies who are circulating fliers to House offices asserting that the legislation would hurt U.S. markets.

U.S. investors owned more than $1.5 trillion worth of foreign equities in 2001, according to information distributed by the Organization for International Investment.

“They are penalizing Americans who have chosen to internationally diversify their portfolios,” said Nancy McLernon, the group’s deputy director.

Republicans on the Ways and Means Committee discussed the issue briefly during a weekly luncheon for committee members on Wednesday, but no decisions were made.

Departing the meeting, Thomas said he considered the controversy “a wrinkle” that will be simply ironed out “if we are going to wear this dress shirt.”

But it is far from certain that the provision will be removed either on the House floor Friday or in a conference committee with Senate tax writers.

Most U.S. businesses have little incentive to try to make controversial changes to the legislation as it is working its way through Congress.

“This process has to move forward. The Thomas markup moves it forward,” said Johanna Schneider, a spokeswoman for the Business Roundtable, a coalition of large U.S. corporations backing the tax package. “These bills are always a work in progress.”

Meanwhile, House Republican leaders are reluctant to upset the famously prickly Thomas by making significant changes to his legislation.

“Thomas will be Thomas,” noted one Republican leadership aide.

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