House approves $155 billion in corporate tax breaks

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WASHINGTON (CBS.MW) -- The House passed a $155 billion bill Thursday that would provide new tax breaks to U.S. corporations and pay tobacco farmers nearly $10 billion to give up a federal subsidy program.

The controversial legislation repeals a corporate tax break that has prompted retaliatory trade sanctions by the European Union, and replaces it with a number of new tax cuts.

The bill, which passed on a 251 to 178 vote, repeals a portion of the tax code known as the "foreign sales corporation," or FSC, which amounts to a $5 billion annual tax break for U.S. exporters -- including Boeing (BA: news), Caterpillar (CAT: news) and Microsoft (MSFT: news).

The FSC portion of the tax code was replaced with a cut in the corporate income tax rate paid by manufacturers from 35 percent to 32 percent by 2008. It would also give U.S.-based multinationals a brief window to repatriate foreign-earned profits at a tax rate of 5.25 percent -- a measure opposed by the Bush administration.

Forty-eight Democrats joined 203 Republicans in voting for the bill. Twenty-three Republicans went against the bill.

The legislation provides a total of about $155 billion in tax breaks and spending over the next decade. That's partly offset by the FSC repeal and the closure of some corporate tax loopholes, bringing the net cost to $34 billion. A Senate bill passed last month contains many similar provisions, but offsets all tax breaks.

"I look forward to quickly resolving differences between the House and Senate versions and sending a bill to the president's desk for his signature, so American businesses can continue to do what they do best: create jobs," said House Ways and Means Committee Chairman Bill Thomas, R-Calif., the sponsor of the bill.

The bill also includes a number of changes in the tax code that benefit a range of businesses, including corporate jet manufacturers, tackle box and sonar equipment makers, and bow-and-arrow manufacturers.

One of the most contentious parts of legislation provides nearly $10 billion to pay tobacco farmers to give up a government quota program.

A Christmas tree bill

Most Democrats and a handful of Republicans opposed the effort, saying it went far beyond its intended goal of offsetting sanctions to provide tax breaks and other largesse to a wide range of special interests, while driving up the deficit.

"The Republican leaders sent the word out that every lobbyist in Washington has one day to get his favorite thing in this bill. It is just unfortunate that the American people didn't get their one day to get jobs in the bill," said Rep. Charles Rangel of New York, the senior Democrat on the tax-writing Ways and Means panel.

Thomas countered that such accusations were off base, and that the measures targeted to tackle box makers and other manufacturers were meant to address long-standing inequities in the tax code.

"I believe everybody deserves one day every 20 years to take a look at the problems they face in the tax code. Why? Because small businesses in some industries are faced with a discriminatory tax code that puts U.S. small businesses at a disadvantage to foreign businesses," he said.

The World Trade Organization last year declared the FSC an illegal subsidy and authorized the European Union to impose retaliatory sanctions. The E.U. began implementing tariffs in March against some U.S. goods, ratcheting them up on a monthly basis. They currently stand at 8 percent on products ranging from jewelry and timber to leather goods.

Shortly after passage, European trade commissioner Pascal Lamy issued a statement praising the vote and urged the House and Senate to move quickly to finalize the legislation.

"It goes without saying that the moment WTO-compliant legislation becomes law, the E.U. will immediately repeal the countermeasures," Lamy said.

In addition to the FSC repeal, the cut in the corporate tax rate and the tobacco buyout, the House bill also includes a $3.6 billion provision that would let residents of states with no income tax to deduct state and local sales taxes from their federal income tax.

The House bill contains many of the same provisions as the Senate's package. Senators are expected to insist any final package be budget-neutral.

The White House issued a statement earlier Thursday urging House passage of the Thomas bill, but said it looks forward to working with House and Senate negotiators to move final legislation "toward budget neutrality."