June 2004
  Incentives Deal of the Month
   from Site Selection's exclusive New Plant database
Senate Answers EU Sanctions with $170B in Incentives for U.S. Firms
U.S. Capital
The Senate approved the JOBS Act by a 92-5 vote. But EU sanctions continue as the House deliberates.

by JACK LYNE, Site Selection Executive Editor
of Interactive Publishing

WASHINGTON, D.C. – U.S. firms, particularly manufacturers, are looking at a whopping US$170 billion in incentives. That's the case, at least, if a Senate-approved bill secures passage from the House of Representatives.
        The Senate passed that big bundle of subsidies in mid-May, ostensibly in response to trade sanctions that the European Union (EU at http://europa.eu.int) initially imposed on March 1. But the Senate's legislative remedy - the Jumpstart Our Business Strength (JOBS) Act - actually went well beyond the EU's duties on U.S. imports.
Grassley (left) and McCain
Differing views: Iowa Sen. Charles Grassley (left) said that the JOBS bill "gives a real shot in the arm to U.S. factories and farmers at home and abroad." But Arizona Sen. John McCain (right) called the legislation "a $170-billion Christmas tree of goodies for every conceivable special interest."

        And that's just what corporate America needs, maintained Iowa Sen. Charles Grassley (R), chairman of the Senate Committee on Finance.
        The JOBS bill, said Grassley, "is not only the first step toward ending the Euro tax on America's exports, but it also gives a real shot in the arm to U.S. factories and farmers at home and abroad. I hope the House will soon follow suit with similar legislation. We need to give permanent relief to the nation's job creators and lift the sanctions burden from our exports."
        But despite the lopsided 92-5 vote, a few senators weren't at all happy with the final JOBS bill.
        Arizona Sen. John McCain (R), for example, called the legislation "a $170-billion Christmas tree of goodies for every conceivable special interest. It's as bad as anything I have ever seen."

WTO Ruling on U.S. Laws
Triggered EU Import Duties
The JOBS Act's initial impetus traces back to the EU's duties on U.S. imports. Those levies were triggered by an August 2002 ruling by the World Trade Organization (WTO at www.wto.org), the agency that oversees world trade rules among 147 nations. The WTO found that two U.S. tax breaks for American companies were illegal.
WTO headquarters in Geneva
With its headquarters (pictured) in Geneva, the WTO ruled that two U.S. tax laws constituted unfair subsidies and authorized the EU's $4 billion in import duties.

        Those breaks stemmed from two U.S. tax regulations, the Foreign Sales Corporation law and the Extra Territorial Income Act (FSC/ETI). Those laws, the WTO ruled, were allowing thousands of U.S. companies to use subsidiaries in offshore tax havens to secure lower export taxes that have been estimated at $5 billion a year.
        Those reduced taxes amounted to export subsidies, violating global trade rules, the WTO found. Consequently, the Geneva-based body in November of 2003 authorized the EU to take "appropriate countermeasures" by imposing $4 billion in U.S. import duties.
        U.S. Trade Representative Robert B. Zoellick reassuringly responded that the federal government would "seek to cooperate with the EU in order to manage and resolve this dispute. . . . I believe that today's findings will ultimately be rendered moot by U.S. compliance."
        That compliance never came, though, even after the EU's delay in imposing duties to allow Congress time to act. "There's no way now we can avoid these sanctions, which hopefully will concentrate a few minds on the urgency of this legislation," EU Trade Commissioner Pascal Lamy said in February in announcing the penalties' activation.
        Now, with the JOBS Act, the Senate at least has given its concentrated OK to end the FSC/ETI tax breaks.

Bill Closes Host of Loopholes
The Senate bill largely offsets the costs of its new tax breaks through a series of reforms. "This is the biggest loophole-closing bill in my memory," said Montana Sen. Max Baucus (D).
        The JOBS Act's reforms include a crackdown on the type of shadowy tax shelters employed by companies like Enron. The Senate bill fixes the penalty for such practices at 100 percent of tax-shelter income. Another reform would increase penalties for U.S. firms that (technically, at least) "relocate" their bases to offshore tax sanctuaries.
        "Since we're giving tax relief to companies and small businesses, it's only fair that we tighten the law for those avoiding their fair share," said Grassley.
        The JOBS bill also eliminates the estimated $39 billion in tax deductions that U.S. companies were claiming for leasing and writing off the depreciated value of domestic and foreign public works. Many such transactions have included purchasing public works and then leasing them back to public authorities. Grassley characterized such practices as "abusive leasing tax shelters that allow corporations to claim tax deductions for sewers, bridges and subways that are owned by foreign countries or paid for with U.S. taxpayer dollars."
        In the past, however, the Federal Transit Administration (FTA) actually promoted such practices. But the FTA late last year ceased authorizing such transactions, acting on the advice of the U.S. Treasury, which was reviewing such deductions.

New Breaks for Manufacturers
But the JOBS Act's broadly focused tax breaks will likely have the greatest impact. "This legislation is going to help grow American jobs," Minnesota Sen. Norm Coleman (R) asserted in describing the subsidies.
        A sizable number of those jobs will be in manufacturing - at least if the sector incentives now in the Senate bill secure House approval. Those new subsidies are welcome news for the nation's hard-hit manufacturing sector, which has cut some 1.7 million jobs since November 2001.
        The JOBS Act's major manufacturing incentives include:
        • an effective income tax rate cut for U.S. manufacturers to 32 percent from 35 percent by 2007, with the lower rate coming through deductions for U.S.-based manufacturing operations.
        • an 18-month extension of the R&D tax credit, a benefit popular not only with a wide range of manufacturers, but with technology-focused firms as well.
        In addition, in a real estate-related provision, the Senate bill extends the income tax rate reduction to architectural and engineering services firms.
"Failure to get final legislation promptly to the president's desk would . . . hinder the very job creation and economic growth all members of Congress insist they want to help bring about," warned NAM Executive Vice President Michael Baroody (pictured).

        The National Association of Manufacturers (NAM at www.nam.org) hailed the Senate bill's passage. "Senate leadership on both sides of the aisle is to be commended for ending the partisan delays that have served only to punish innocent U.S. manufacturers whose products are subject to the EU tariffs," said NAM Executive Vice President Michael Baroody.
        Domestic spending could also get a major boost from the Senate provision reducing taxes on repatriated foreign earnings.
        Currently, U.S.-based firms' foreign earnings are taxed at 35 percent when those revenues are brought into America. The JOBS Act would provide a one-year grace period in which companies could repatriate foreign earnings at a 5.25-percent rate. To be eligible for the reduced rates, companies would have to use repatriated funds for "job-creating investments" such as hiring, training and R&D.
        That incentive "will create hundreds of thousands of new jobs and get our economy moving again. It is exactly what we need to get people back to work," said Oregon Sen. Gordon Smith (R), who introduced the provision.

Subsidies for Cruise Ships,
NASCAR and Trial Lawyers
The Senate bill's approval in the House, though, is hardly a slam-dunk. The JOBS Act is sure to draw heavy fire for its large number of single-industry tax cuts.
        President George W. Bush (R) had urged lawmakers "take up and pass FSC/ETI legislation that reforms the tax code, removes the underlying reason for the tariffs that have been imposed today on American exports, and further advances the competitiveness of American manufacturers and job creators." It's doubtful, though, that the president envisioned the final bill's dizzying array of special interests.
        U.S. energy companies are one beneficiary. The bill includes $14 billion in tax cuts for those companies to promote renewable energy and energy production. McCain strongly opposed that provision, characterizing the subsidies as wasteful spending that won't promote conservation or production.
        Then there's the plethora of other industries favored in the bill. Seeking to broaden support, the Senate approved a number of tax cuts for specific sectors, including auto dealers that formerly sold the now-defunct Oldsmobile, cruise ship operators, movie studios, NASCAR, railroads, ranchers, shipbuilders and trial attorneys. The final days of debate on the bill saw senators adding on even more provisions, including a 50-percent tax credit to offset expenditures in creating movie closed captions, a tax credit for new ethanol production pollution-control equipment and a capital-gains tax cut on gold, palladium, platinum and silver.
        Predictably, a number of watchdog groups have pilloried the bill's broad range of beneficiaries. Keith Ashdown, vice president of Taxpayers for Common Sense (www.taxpayer.net), blasted the final bill as "a $170-billion corporate cash cow stuffed to the brim with more than 150 unrelated giveaways and payoffs to almost every special interest with Gucci-clad hired guns."
        The Senate bill's runaway vote, though, may pressure the House to move rapidly. "It is imperative that the House of Representatives act quickly," said South Dakota Sen. Tom Daschle (D), Senate minority leader. "The American people can't wait any longer for legislation that encourages companies to keep their jobs in the U.S."

EU Sanction Escalating
House leaders, however, say that debate on the bill won't begin until the end of May at the earliest.
        And that means that the EU sanctions will continue. At their present rate, the duties will cost U.S. firms an estimated $300 million this year. Current penalties, however, are far less severe than they could be - and eventually will be.
Pascal Lamy
"The EU will immediately repeal the countermeasures the moment WTO-compliant legislation becomes law," said EU Trade Commissioner Pascal Lamy (pictured).

        The EU has a potential mountain to tax. Trade between the U.S. and the EU nations averages about $1.3 billion a day. The European body, however, decided to phase in penalties, beginning at 5 percent of the WTO's $4-billion tariff limit. The phase-in, Lamy explained, is designed to limit damage to EU importers. The sanctions will increase, though, by 1 percent every month, reaching a maximum of 17 percent. If sanctions continue, U.S. firms next year will pay EU duties estimated at $666 million.
        The Europeans have also initially limited the range of U.S. products subject to sanctions. The duty now applies only to gems, toys and wood. The EU has excluded from tariffs any U.S. product providing more than 20 percent of its nations' supply.
        Even so, targeted sectors are feeling the sanctions' pinch.
        "More than a hundred U.S. forest products have been priced out of the European market, hurting U.S. exports and costing thousands of Americans their jobs," said W. Henson Moore, president and CEO of the American Forest & Paper Association (www.afandpa.org).
        The EU's Lamy called the Senate bill's passage "a very important step. . . . It goes without saying that the moment WTO-compliant legislation becomes law, the EU will immediately repeal the countermeasures. I very much hope that the House will soon follow so that a repeal bill is rapidly adopted and signed into law by President Bush."
        But nothing is certain, even in the unlikely event that the House passes a carbon-copy bill. The WTO, after all, first ruled in March of 2000 that the FSC law constituted a subsidy. On Nov. 15, the U.S. responded by passing the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
        But that didn't do the trick. Two days later, the EU filed another dispute, saying U.S. action hadn't eliminated subsidies. And the WTO, we know, eventually agreed.

Editor's note: Check out the July 2004 issue of Site Selection for further coverage
of the EU sanctions and their effects on U.S. manufacturers.



ti0406bti0406b ©2004 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.