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Can Thomas Thread the Needle With FSC Bill?

The Senate’s unexpected passage of the international corporate tax bill last week has put House Ways and Means Chairman Bill Thomas (R-Calif.) in quite a pickle.

His challenge in the coming weeks will be to try to balance the interests of tax-

[IMGCAP(1)] cutters, deficit hawks and advocates for the small-businessman while producing a piece of legislation that can again survive the Senate, where it took the original bill two months, four trips to the floor and three cloture votes to pass. If ever there was a time to feel sympathy for the irascible Californian, it may be this week.

According to two industry lobbyists, Thomas was secretly hoping the Senate would fail to pass a bill so he wouldn’t be forced to actually rewrite a measure ostensibly designed to end European trade sanctions against U.S. goods by repealing an illegal export subsidy and replacing it with a broader tax break for U.S. manufacturers.

Nonetheless, Thomas is forging ahead with what he described as “mixing and matching” provisions in the House and Senate bills this week.

There is, of course, politics involved. Until an international tax bill passes the House, it will be nearly impossible for GOP leaders in both chambers to credibly blame Senate Democrats for blocking what has been lauded as a desperately needed tax break for the nation’s manufacturing sector. Democrats made up nearly half of the overwhelming 92-5 Senate vote for passage, but the jury is still out on whether they will allow the bill to go to conference.

And while “obstructionist” is the favored cudgel for Republicans to employ against Democrats, at least one House Republican is reveling in that role when it comes to the bill. House Small Business Chairman Don Manzullo (R-Ill.) and 24 GOP lawmakers loyal to him have for months threatened to withhold their crucial votes from the bill until Thomas expands the tax breaks in his bill to include small manufacturing firms, not just large multinational corporations.

But that problem is just the tip of the iceberg for Thomas as he seeks to shepherd a new bill to the House floor shortly after Memorial Day.

One House GOP Member warned that House Republicans of all stripes will be trying to leverage their votes in exchange for tax breaks for businesses in their districts.

“It’s the one last major vehicle coming out of the Ways and Means Committee this year. All kinds of people will be holding onto their votes,” the Member said.

Then there is the question of how to pay for those myriad tax cuts.

The Senate bill packs a whopping $170 billion worth of corporate tax breaks into its measure. But, thanks to Senate Finance Chairman Chuck Grassley’s (R-Iowa) penchant for going after corporate tax cheats, it is paid for by cracking down on a variety of tax shelters.

Meanwhile, many House GOP lawmakers have made it known, most notably in this year’s budget negotiations, that they don’t think tax cuts should be offset with any type of revenue raiser, even the closing of tax loopholes. And their consistency on this issue has spilled over into the debate on the international tax bill, also known as the Foreign Sales Corporations/Extraterritorial Income (FSC/ETI) bill.

“It’s hard to say that more revenue coming into the government is not a tax increase,” said Rep. Clay Shaw (R-Fla.), a Ways and Means member.

And that’s the way many House lawmakers are viewing Grassley’s proposals, especially one to end the dubious practice of corporations leasing municipal utilities as a means of taking a hefty tax break.

Another GOP House Member, who requested anonymity, said, “the pay-fors are going to be the biggest problem with the Senate bill, leasing in particular.”

But because prohibiting companies from taking the leasing tax break would bring in $39 billion in additional tax revenue — a substantial chunk of the Senate’s proposed offsets — eliminating the provision will be difficult for deficit hawks to stomach, said the GOP House Member.

FSC watchers may remember that Thomas already had trouble this year trying to crack down on corporate leasing deals in a separate bill that he hoped would be able to offset the cost of his FSC legislation.

But never fear, Rep. Jim McCrery (R-La.), a Ways and Means member, is working on a compromise that will likely be a “slimmed-down version of the Senate’s proposal,” said the GOP House Member. McCrery will likely keep provisions in the Senate bill prohibiting U.S. companies from taking a tax break on leases of foreign utilities, but American cities may still be able to count on corporate leasing arrangements for extra cash.

Manzullo and his cadre of loyalists, meanwhile, continue to demand that Thomas open up the tax breaks in his bill to small manufacturers. They also oppose tax cut provisions they say would encourage U.S. companies to move overseas, versions of which were included in both House and Senate bills.

Thomas has resisted expanding his bill to include small businesses because it would increase the cost, which, we’ve established, he’s going to have a hard time paying for already.

And it may not help Manzullo’s case that he also opposes the Senate’s desire to pay for the bill by closing the corporate leasing loophole.

“We’re going to the wall on that one,” he said in an interview last week.

However, Manzullo appears to have softened a bit on the overseas provisions.

“A lot of parts of the foreign tax package are good,” Manzullo said of the Senate bill last week.

But just because Manzullo may be showing signs of openness to compromise, it doesn’t mean other GOP Members, who have watched businesses in their districts move overseas or outsource some of their operations to foreign countries, will be like-minded.

“The general problem with the House [bill] is that the whole issue of outsourcing is still there,” said the GOP House Member. “It’s going to be a big issue with our Members.”

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