By Berta Gomez
Washington File Staff Writer

Washington -- The House of Representatives June 17 approved legislation that would make major changes to U.S. tax law and repeal export tax breaks that have been ruled illegal by the World Trade Organization (WTO).

Voting 251-178, legislators approved a measure that cuts taxes for manufacturers and overhauls U.S. rules dealing with international taxation.

The Senate passed its own tax measure on May 11. Now negotiators from both chambers will be appointed to reconcile differences between the two bills. A final version must be approved by both the House and Senate and signed by President Bush in order to become law.

Despite considerable differences between the two bills, they each include billions of dollars in corporate tax breaks and share the same core aim: resolution of a long-standing dispute with the European Union (EU) over U.S. tax breaks to exporters under the Foreign Sales Corporation (FSC) law, and its successor regime, the Extraterritorial Income Act (ETI).

The WTO has repeatedly found FSC/ETI provisions to be impermissible under international trade rules and has authorized the EU to impose up to $4 billion in retaliatory tariffs on U.S. exports. The EU began in March to impose tariffs of 5 percent on a wide range of U.S. products, and said the rate would increase by 1 percentage point a month up to 17 percent. As of June 1, the tariff rate was 8 percent.

The Bush administration repeatedly has called on Congress to repeal the FSC/ETI tax breaks and bring the United States into compliance with its WTO obligations.

The White House's Office of Management and Budget (OMB) issued a statement supporting passage of the House bill, but also suggested that House and Senate negotiatiors should work to reduce the measure's $34 billion cost.

"The administration looks forward to working with the conferees on this legislation to move it toward budget neutrality," OMB said.

One significant difference between the House and Senate measures is that the House bill's $155 billion in tax cuts are offset by $121 billion in tax increases and other revenue-raising provisions, leaving a $34 billion difference. The Senate measure is revenue neutral.

One of the more controversial sections of the House bill would give $9.6 billion to tobacco farmers in exchange for ending government price supports.

During debate on the House floor, opponents of the bill strongly criticized the tobacco provision, along with what they described as numerous tax breaks for special interest groups, including manufacturers of pharmaceuticals, sonar devices for fishing, bows and arrows, and tackle boxes.

Congressman Steny Hoyer, the second-ranking Democrat in the House, declared: "This is the worst tax bill I have seen on the floor of this House."

House Ways and Means Committee Chairman Bill Thomas, chief sponsor of the bill, said the provisions were necessary to provide a competitive playing field for small producers, as well as to win support for the overall measure.

Both the House and Senate measures would reduce the income tax rate for manufacturers from 35 percent to 32 percent by 2008, and include a special one-year 5.25 percent income tax rate for companies that repatriate foreign earnings.

It is unclear if House-Senate negotiators will be able to resolve their differences during the current congressional session.