By Bruce Odessey
Washington File Staff Writer

Washington -- Negotiators from the Senate and House of Representatives are drafting a compromise bill that would repeal U.S. export tax breaks ruled illegal by the World Trade Organization (WTO), but plenty of obstacles remain to final passage.

After months of inaction, a House-Senate conference committee went back to work on the bill September 29. Representative Bill Thomas, Republican chairman of the conference, released the latest draft late October 4, just days ahead of Congress' scheduled recess October 8 until some time after the November elections.

Conferees were expected to continue working out issues at least October 5 and 6.

The underlying goal of the legislation is resolution of a longstanding 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 ruled that FSC/ETI provisions violate international trade rules and has authorized the EU to impose up to $4 billion a year 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 October 1, the tariff rate was 12 percent.

Even though no serious opposition to FSC/ETI repeal has emerged, controversy abounds over some of the scores of tax breaks for individual industries in the 633-page draft.

Probably most controversial is the tobacco provision. In order to secure passage in the House of an earlier version of the bill, Thomas included $10 billion to buy out quotas held by tobacco-growing farmers for decades but no longer profitable.

The Senate-passed version of a tobacco buyout provision would also require Food and Drug Administration (FDA) regulation of tobacco products for the first time.

Thomas' latest draft includes the Senate-passed buyout provision, which would require the tobacco industry to pay the cost of the buyout, but does not include the FDA regulation provision.

FDA regulation is known to be anathema to Representative Tom DeLay, the Republican House majority leader, and other House Republicans, but senators of both political parties have threatened to prevent final passage in the Senate of the entire bill without it.

To become law, a bill must be passed by both the Senate and the House of Representatives and be signed by the president. As the conference continues its work, however, Treasury Secretary John Snow wrote October 4 letters to Thomas and Senator Chuck Grassley, the senior Senate Republican negotiator, raising serious objections to numerous special interest tax breaks passed in the earlier House and Senate versions.

"Legislation taking up more than 1,000 pages of statutory language (or even 400 pages) goes far beyond the bill's core objective of replacing the FSC/ETI tax provisions with broad-based tax relief that is WTO-compliant," the letters say. "The administration will work with the conferees to eliminate these narrowly crafted provisions."

Snow's letters contain no veto threat over any bill that contains special-interest tax breaks. They add more doubt, however, about whether Congress would give the bill final passage before the election.

The Thomas draft would reduce taxes over 10 years to corporations as well as sole proprietors, partnerships and other small businesses. Offsetting the cost would be scores of provisions for raising revenue by closing tax loopholes, including those related to foreign tax shelters.

Snow's letters commend provisions closing loopholes and tax avoidance schemes. They generally approve a tobacco buyout provision but say nothing about FDA regulation.

Thomas' draft appears to have dropped provisions of earlier bills that are opposed by the Bush administration. One would have offered international corporations temporary slashed tax rates for repatriating foreign income now held abroad. Another would have repealed a new Labor Department regulation on overtime pay.