New federal tax bill does way too much

A proposed new federal tax bill does two things of great value for Washington, and way too much besides.

The “American Jobs Creation Act of 2004,” more humbly known as H.R. 4520, helps exporters, and would reimplement a federal income tax deduction for state sales tax payments. Unfortunately, it also includes $9.6 billion for tobacco growers, $428 million in deductions and credits for the liquor industry, and myriad other goodies for just about every business with a lobbyist able to draw breath.

The net cost to the U.S. Treasury is an estimated $34 billion over 10 years after allowing for the effect of other new revenues and loophole closures. That also assumes the bill’s temporary tax-relief provisions are allowed to expire. Total tax breaks over the next decade add up to $143 billion.

A companion Senate bill, S.S.1637, covers an even more exhaustive 930 pages, but has the offsetting benefit — maybe — of revenue neutrality. Total tax breaks: $167 billion, and it does not include the sales tax deduction.

Washington is one of only a few states with a sales tax but no income tax. Federal law allows taxpayers to deduct state income tax payments on their tax return. A similar allowance for sales tax payments was eliminated in 1986.

The deduction would cost the Treasury about $3.6 billion.

According to estimates done by Congressional Research Service, restoring the sales tax exemption will save Washington taxpayers as much as $541 million annually, or an average $519 to $575 per family that itemizes on its return. About 40 percent of the state’s 2.2 million taxpayers itemize.

That’s a lot of new money circulating through the state. You can almost see car dealers smiling already.

Also, Washington trails only California, New York and Texas in the value of its exports, and is the most trade-dependent of all states. But it was alleged subsidies to Boeing, Microsoft and other U.S. companies that ignited the out-of-control legislating in the House and Senate.

It started with a 2002 finding by the World Trade Organization that tax laws intended to shelter the overseas income of U.S, companies violate international trade law. Since that decision, the European Union has prepared a list of tariffs that will cost U.S. companies about $5 billion annually. They were to kick in March 1, but the Europeans have held off while awaiting final congressional action and a signature from President Bush. They are imposing additional penalties of $1 million per month in the meantime.

The House passed its bill last Thursday. The Senate acted in May. But the bills are so different the conference committee that will have to reconcile the two may not be able to come up with an acceptable compromise. With the Democratic and Republican national conventions rapidly approaching, and fall campaigning to follow, there may be no action until after the election.

But some bill must pass, and that imperative launched the gold rush by lobbyists, and a classic example of coalition building, and train wrecks. The buyout of tobacco farmers, for example. Its inclusion helped get the votes of 48 House Democrats. A $35 million break for the makers of tackle boxes hooked an Illinois Republican. Even Oldsmobile dealers, former Oldsmobile dealers, that is, got a little something. How big could that constituency be?

An economist with the conservative Heritage Foundation was quoted in the Washington Post saying “There’s always a certain amount of grease that’s part of getting any tax policy changes through the process, but with this bill, the actual policy seems secondary to the grease.”

At the nonpartisan Taxpayers for Common Sense, Vice President Keith Ashland says Congress, if it was serious about a sales tax deduction, would not give it just two years. “It’s generally good policy in a bad bill,” he says.

The administration, which sat out the horse-trading, has announced the president will sign whatever compromise comes out of the conference committee, despite reservations expressed by former White House advisers.

Remember, the original problem was a $5 billion tax break of overseas income, which the House and Senate bills replace with a 10 percent tax reduction on overseas profits from U.S.-made goods. From this tiny squeak has a mighty greaseball grown.