Tax Legislative Outlook for the Last Days of the 106th Congress

September 6, 2000

Dorothy Coleman, Vice President Tax Policy
National Association of Manufacturers

Monica McGuire, Senior Policy Director, Taxation
National Association of Manufacturers

Kimberly Pinter, Director, Corporate Finance and Tax
National Association of Manufacturers

P R O C E E D I N G S

MS. COLEMAN: Hi, I'm Dorothy Coleman. I'm Vice President of Tax Policy here at the National Association of Manufacturers. There are 18 million people who make things in America; the NAM is the nation's largest and oldest multi-industry trade association. We're delighted to have you here today. I know it's going to be a busy fall for all of us, especially for Congress.

There's about 20 legislative days left, and there's lots to do. My colleagues, Monica McGuire, our Senior Policy Director, Taxation, and Kimberly Pinter, Director of Corporate Finance and Tax, are joining me today to talk to you about what we think is going to happen in the tax legislative area.

We are hopeful and fairly confident that there will be a tax bill signed into law this year, probably not as large as we want it to be, but hopefully including some of our tax priorities. What I'd like to do today is just talk very briefly about some of the issues that I'm working on, some of the tax issues, and then turn the podium over, first to Kimberly, who will talk about some international tax issues that are important to the NAM, most notably Foreign Sales Corporations. Monica will follow Kimberly and talk about some other issues of importance to NAM, and also give you a general wrap-up of where we think things are going. After everyone's finished, then we'll open the podium up to questions.

The first issue I'd like to talk about is pension reform. We were delighted that the House this summer passed by a wide bipartisan majority a pension reform bill. Many of the things in there are things that we have been working on for several years. The increased contribution levels to 401K and IRAs are important to us and to our members.

The portability provisions that make it easier for an employee to take his plan from one employer to another. The provision that allows a -- that allows a dividends deduction, a dividends received deduction for ESOP dividends that are reinvested in the ESOP. That's something that is important to our members. We are pleased that it was in there.

Another -- just the general simplification and reduction of the administrative burden that was part of that bill again is something that we have worked for, and that our member companies are very pleased with. I think the bill in total strengthens the American private pension system and makes it easier for employers to provide pension benefits for their employees and easier for employees to participate in pension plans.

As you know, the Finance Committee is going to mark up a similar bill tomorrow. It's an expanded version of what the House passed. We're very pleased with it and support Senator Roth's efforts in that area. This is being marked up as the second budget reconciliation bill on the Senate side.

On both the House and Senate sides, pension reform is moving as a freestanding bill, at least at the moment. I'm not sure that that's always going to be the case. I think there generally is a lot of bipartisan support. This is something Congress can get done and can get signed into law this year. We're hopeful, whether it's a freestanding bill or part of a large bill, that it will happen.

Now I'd like to turn to two issues that are important to our small manufacturers, small and mid-size manufacturers. We have 14,000 member companies at the NAM, and 10,000 of them are small and mid-size manufacturers. For the 10,000 small and mid-size companies, death tax repeal is their top tax priority.

We are very pleased with the movement that that issue has made during the 106th Congress. Congress has voted twice to repeal the death tax, which is pretty amazing, and I think the result of a lot of hard work by the small business community.

Certainly, the most recent votes in the House and Senate, those bipartisan votes, we were extremely pleased. Our members played a very active role in contacting their Senators and Representatives to talk with them about the importance of the issue and really urge them to vote in support of H.R. 8, and I think those efforts really paid off in the final votes, again, in both the House and Senate.

We were disappointed, but certainly the President's veto of the bill was not unexpected. A number of our members did call the President before the veto and expressed their hope that he would reconsider. Obviously he did not, but I think our focus right now is on the override vote in the House tomorrow.

Certainly it's going to be a tight vote. Our emphasis right now, we are working with our members. They are contacting their members of Congress, particularly the Democrats, the 65 Democrats who voted with us in June, contacting them, trying to shore up their vote and continue their support for H.R. 8.

I will admit it's an uphill battle, but we are firmly behind repeal. I can't emphasize enough the importance of it to our smaller members, and we're just going to keep pushing. One step at a time is sort of our philosophy at the moment.

Finally, the other issue that I'm working on, and really hopeful of some action this year, is repeal -- excuse me, reinstatement -- of the installment sales rule. Last year a tax bill that was signed into law late in 1999 re-repealed the installment sales rule for accrual method taxpayers.

It sounds like a lot of bureaucratic or arcane tax law. What it basically does is prevent our small and mid-size company business owners from selling their companies and taking back seller financing. This not only for manufacturers but for many small business owners is the best way for them to sell their businesses.

A lot of the people that they're selling their companies to are key employees, they don't -- it's difficult for them to obtain commercial financing. Taking back a note from the current business owner is both -- for both sides of the equation, and the change, it was a small change, I think. Depending on who you talk to, it was an unintended -- excuse me, unintended effect on small businesses.

We are very pleased. We've been lobbying hard since last December to get this reversed, and many staff and members of Congress actually, including Chairman Archer, have told us and the small business community in general that this is must do legislation this year.

So I think that is one thing. Right now the installment sales reinstatement is in the minimum wage bill. I'm not sure where that's going at the moment. That currently is very much up in the air, but again, I am hopeful that this will be wrapped up in some type of tax bill before the end of the year.

So those, briefly, are just the issues that I'm working on, or some of the issues that I'm working on, that we expect some action on. I'd like to turn the podium over to Kimberly right now, to talk about her issues, and then again at the end I'll be happy to take questions. Thanks.

MS. PINTER: Thank you, Dorothy. Good morning, everyone. As Dorothy mentioned, I'm Kimberly Pinter. I'm the Director of Corporate Finance and Tax for the National Association of Manufacturers, and I handle our international tax policy.

Lately I've been working primarily on two international tax legislative issues, and those are foreign sales corporations and confidentiality of taxpayer information. I'm going to start off with foreign sales corporations, or FSCs, as many of you have come to know them. They've been in the news quite a bit lately.

Let me just start with a brief background, and then sort of give you the outlook of where I think we're going on this. Foreign sales corporations, or FSCs, are foreign entities that are created by parent companies to market the parent's products and services abroad.

Under current U.S. tax law, part of the income from U.S. exports sold through an FSC, part of that income is exempt from U.S. taxation. Both U.S. companies and domestic affiliates of foreign companies are eligible to use foreign sales corporations.

The vast majority of these companies who do use FSCs are manufacturers. In 1996 89 percent of FSCs exported manufactured products. There were 430 -- excuse me, 4,363 FSCs in that same year, and the total gross receipts were approximately 285.9 billion, generating about 32.8 billion in total income. These provisions have been the law for approximately 15 years now.

In November of '97, as I'm sure you know, the European Union filed a complaint with the WTO, alleging that foreign sales corporations were an illegal export subsidy. The WTO panel ruled in October of 1999 that the EU was right, that they had a case, that we had to address the situation.

Of course the United States appealed, and so did the EU. The appellate body confirmed the underlying opinion of the panel in February of this year. We have until October 1, 2000 -- in other words, less than a month away -- to comply with the WTO's decision. Failure to meet this deadline could result in retaliation by the EU.

The administration and the Congress have both been very, very concerned about this decision and have worked together very, very well, in a glowing example of bipartisanship, to come up with a WTO-consistent alternative to provide similar benefits to those provided by foreign sales corporations.

The new regime will be implemented by H.R. 4986, which is the FSC Repeal and Extraterritorial Income Exclusion Act of 2000. It's sponsored by Ways and Means Committee chairman Bill Archer. This bill was introduced and passed by committee on July 27, 2000, by a vote of 34 to 1. Needless to say, it has broad bipartisan support.

We are expecting the House floor and Senate committee action next week, probably early next week. As I'm sure you've all seen, the European Commission has already objected to our proposed solution, but that's not particularly surprising. They've objected to everything we've tried to do so far, yet they've also not negotiated with us and aren't giving us any suggestions as to what they think we should do.

I'll leave that for questions at the end, and turn to confidentiality of taxpayer information now. We call this sort of competent authority for short, because that's the issue that started this whole thing in the first place. It seems to be a reprise pretty much of the advanced pricing agreement, what's the word I'm looking for, issue that arose last year, if you're familiar with that one.

Basically, the competent authority process is one that's used to resolve complex tax issues arising between the United States and other taxing jurisdictions. Especially difficult questions concerning double taxation, income by more than one jurisdiction, or tax treaties containing confidentiality clauses, that ensure that this information will be kept confidential.

Our member companies, our trading partners, and the U.S. competent authority all rely on this confidentiality promise that's in our treaties, and they're very, very concerned by a recent Freedom of Information Act request that was made I think earlier this year to try and get the contents of competent authority agreements.

On July 27th, Representative Amory Houghton from New York introduced H.R. 5044, which would remove the confidentiality concerns and allow the competent authority program to operate as intended. This is supported on a bipartisan basis. It is supported by Congress and is supported by the administration, and needless to say, there's no revenue cost associated with it, so it has a very good shot of being included in the tax bill this year.

In the interest of keeping things fairly brief and simple, I'll just mention that both closing agreements and pre-filing agreements are addressed by the legislation as well. If there are any questions on that or on the competent authority agreements I'll be more than happy to take questions on all of that at the end. Now I'll turn the podium over to Monica.

MS. McGUIRE: Thank you, Kimberly. I'm Monica McGuire, Senior Policy Director, Taxation, NAM. Thanks for joining us this morning. I appreciate it. I will quickly go over three issues that I am responsible for here at the NAM, and then go to -- get the bottom line, as our companies would say, which is, will we have a tax bill enacted into law this year.

Briefly, the three tax issues. One is the phone excise tax repeal. I call that the motherhood and apple pie issue of the 106th Congress. I say that because it passed by a wide margin, over 400 votes, in the House. There's broad bipartisan support in the Senate, and it's just a silly tax -- there's no other way to characterize it -- because it was used to pay for the Spanish-American War.

Both businesses and individuals do use that, and so NAM is very supportive, has been very supportive of the current excise tax repeal, but I see that as definitely passing. If I were a betting person I'd definitely put money on the phone excise tax repeal passing this year.

Second issue, R&D tax credit permanency. NAM has been a longtime supporter and advocate, a very visible advocate, of a permanent R&D tax credit. Interestingly enough, it's the single business issue supported by both of the leading presidential candidates, Gore and Bush. To the best of my knowledge, it's the only business issue that the two leading presidential candidates support, is a permanent R&D tax credit.

The bottom line on the R&D tax credit permanency is that permanency will enhance the incentive value of the credit. In other words, companies will be able to come to rely on it, and be able to plan accordingly. On average, it takes five to seven years from the time you get -- do your initial R&D, and it translates into a product. For manufacturers, of which 60 percent -- nearly 60 percent of all R&D is performed by manufacturers -- it's a key issue and also it's the fuel for not only the overall economy, but the manufacturing sector. Two-thirds of the growth in manufacturing is attributable to technological advances which come primarily from R&D.

Third issue, AMT, the corporate alternative minimum tax. This year, particularly given that it's a presidential election year, individual AMT is probably more -- you're more familiar with than corporate AMT, but suffice it to say, whether it's the corporate or whether it's the individual, the IRS in its national taxpayer advocate annual report has cited the AMT, both individual and corporate AMT, as just being -- it's not the word they use, but I would characterize it as a silly tax as well. It's a burdensome tax, and it is an administrative nightmare.

So NAM, which is the leader of the AMT coalition, has had introduction -- has had bills introduced to this Congress, with bipartisan support in both bodies, and that's an ongoing issue there.

That's a summary of the three tax issues that I have been primarily working on.

I'm going to turn to the bottom line now, and that is, looking into a crystal ball, what are we forecasting for the next 30 days? What does the NAM think might be enacted into law? I will say that, my comments here, I couldn't make without the collective efforts of the NAM tax team. We pool our sources, and what we hear, here and yonder, and this is how I'm able to come up and make the remarks that I'm about to make on the bottom line.

First, I think that the driver of tax legislation this year will be the FSC issue that Kimberly addressed. It replaces the extenders. In years past, it's been expiring tax provisions that fueled a tax bill. Well, this year -- or have been the driver of tax bills. Well, this year, the driver I believe is the FSC remedy. I want to underscore the point that the FSC is not just a big company issue. It's small, medium, and large, and Kimberly I think addressed that. NAM did a survey of our small companies, and the impact of FSC on them. So I see FSC as the driver.

Second issue would be pension reform that Dorothy mentioned. There's bi -- broad bipartisan support. Pension reforms, they're relatively non-controversial, and I think that there will be pension reforms in a bill.

Third, phone excise tax repeal. I led off with that, but definitely a motherhood and apple pie issue. I see that being enacted into law.

Fourth, installment sales. That's an issue of clear interest to Chairman Archer. Since Chairman Archer's retiring at the end of this year, he has said even this past spring that that was a key issue. I see installment sales remedy in the final tax bill.

Competent authority is another issue. There's no revenue loss associated with it. It's just good tax policy, and there seems to be not too much strong objection. We see that moving through and enacted into law. The Community Renewal New Markets Act is -- I see that being passed. Broad agreement was reached on that, in fact this spring, between Speaker Hastert and the Clinton administration. Most of the bugs in that have been worked out. One component in there is the New Millennium Classroom Act. I think it stands a good chance of being enacted.

That's it. Let me turn now -- I've listed what I think will pass, but what will it pass, and what will it be part of? If I were a betting person, I think it would be part of either, one, a second reconciliation bill. Right now Lott, majority leader Lott, has said that the second reconciliation bill and Roth, as Chairman Roth said, the second reconciliation bill in the Senate will be pensions only, and maybe some debt reduction.

But on the House side, it's unclear what they might do. Of course, there's that looming September 13th deadline for a second reconciliation bill. That deadline was in the budget agreement that was adopted earlier this year. So that's kind of a magical date, September 13th, to see what happens with reconciliation.

There's talk that the House might roll in some of the individual tax bills as passed this year into a second reconciliation bill. They could do that and there could be some kind of agreement between the House and the Senate to make it -- to advance a second reconciliation bill.

So that's one avenue, is a second reconciliation bill, or the other avenue I see is a possible omnibus spending bill. You know, there are 11 appropriations bills that haven't passed yet, and historically we've had a lot of omnibus spending bills. I know there's a lot of rhetoric flying in both directions on Pennsylvania Avenue about whether we're going to have an omnibus spending bill or pass individual appropriations bills, but bottom line, I think Congress is going to get out by the October 6th deadline. We've heard rumors that they will. I mean, that is their scheduled adjournment date. I don't think that they'll supersede it, because clearly the Senate Republicans lost the Senate in 1986 as a result of being kept in three weeks longer than their scheduled adjournment date.

So I see them getting out in early October, which then puts pressure I think on an omnibus spending bill if they don't get the 11 remaining appropriations bills done.

That's it in summary. We'll turn it over for questions.

QUESTION: Can I just ask, what was the tax bill when you said, just before new markets. The second to last provision.

MS. McGUIRE: Competent authority.

MS. COLEMAN: Thank you, Monica. I'd now like to open the forum up to questions.

QUESTION: Dorothy, do you think -- sorry. Do you think that if either the second reconciliation package gets larger and includes some of these items, or if there's an omnibus bill there including a lot of the tax items or both, conceivably, that there could be some smaller mix from perhaps estate tax and maybe marriage penalty, which I realize is not as much of a concern of businesses. Some of those issues, you know, that they had pushed really hard. Or do you think that people will just continue to say we came really far on these issues this year, let's give it another try to get what we want for the next Congress?

MS. COLEMAN: I think it's hard to say at this point. Certainly, there has been talk about maybe a smaller estate tax piece, but again, Lori, I think that people have moved, the small business community has really pushed for repeal.

I know here at the NAM repeal is our goal. A lot of the fixes that they talk about really are not acceptable to us because they don't help the problem at all. They might play well, business carve-outs, things like that, but then when you take a look at them, no one uses -- they have very little revenue cost, because no one can use them.

So I think right now, we're sticking with repeal, and we'll see where it goes.

QUESTION: My question is about FSC. You said this was going and Eisenstadt has said this as well, that the Europeans aren't offering any suggestions, but a lot -- I've been hearing a lot of people say, Americans as well, that the bill remains export- contingent. As the House Ways and Means go into a meeting on Thursday, do you expect a lot of changes in this bill?

MS. PINTER: Well, I do expect a lot of changes, but not necessarily with regard to what you're talking about, because the bill that is out there right now is not technically export-contingent. What it does is that it includes products that are manufactured in the United States. It also includes products that are manufactured abroad.

There was a little bit of a problem, I think, with some of the domestic content language that was in the original bill, that might have given that impression that de facto it could have been done export-contingent. I do fully expect that that will be changed to make sure the class is expanded in a meaningful way.

As far as other changes, I would expect that there will be some additional transition rules, that kind of thing. Needless to say, the goal was to try to get something out there, to make sure it was workable for the companies who care about FSC, and to try to get something passed as quickly as possible. So all the technical things were not necessarily ironed out the first time, and I think that that's what they're trying to do now, primarily.

QUESTION: And do you think they will make those changes in the Rules Committee then, if the bill is to come to the House floor next week, or have you heard -- I guess we'll probably know more on Thursday about what they would do, but is that sort of your assumption, that they wouldn't go back to the committee?

MS. PINTER: Yes.

QUESTION: Could you give us a little bit of a longer term view on that? I mean, my understanding -- I'm not a tax expert, particularly as a reporter, but -- is that the Europeans are going to reject this bill, whatever modifications were made, or that could be made within the remaining time, and then you're going to be left with a trade fight.

What's the best solution long term? Is this bill going to have to be revisited, or could we possibly do just like the Europeans do with bananas and beef, what they seem to be, the policy they seem to be pursuing is just to absorb the losses and go on from there. Maybe FSC is so important that we could do that.

MS. PINTER: Well, this is certainly an extremely important issue, but it's also very much our intent to comply with the WTO's ruling. That is the intent of both the administration and the Congress, and this bill is crafted in such a way that both the administration and the Congress are confident in their understanding of the WTO rules that it will comply.

The EU, yes, has objected to the proposal. They've objected to everything we put on the table thus far, so it's not particularly surprising. However, when it comes right down to it, it's not up to the EU. It would be up to the WTO, I assume the original panel, to determine whether we have in fact met the -- we have complied with the ruling and met their objections.

If once we pass this bill, the EU is still unhappy with it, they are able to go back to the WTO and say, we don't think that this did it. Then it's up to the WTO to make a decision whether we did it or we didn't.

QUESTION: If they decide against us, where does that leave us? That sanctions -- that there's no second opportunity to pass a bill at that point, or where does that lead in?

MS. PINTER: Yes, that probably would lead us in the position of sanctions.

QUESTION: So are you disappointed with this bill? I mean, is this sufficient, what they've done, or -- my understanding is that the betting is the WTO's going to rule against this bill, but you think it still was a good idea in the conception?

MS. PINTER: Yes, we're very supportive of the bill. We do feel that it addresses all the concerns that were raised by the WTO in their opinion on the panel in the appellate body rulings. We do feel that it complies, and we are behind it 100 percent.

QUESTION: Does NAM have anything to say about the IRS funding of the Treasury appropriations bill? Obviously you've got the small business and the large or mid-size business that are two new divisions of the IRS. They have to function properly in order for the tax rules to be applied. There is no mention in your statements on anything about IRS funding. Do you have any position on them?

MS. COLEMAN: We haven't commented directly on that. Certainly we were pleased with the reorganization of the IRS, and we were part of many discussions that the Commissioner had with the business community, as to the best way for it to work, and certainly support all efforts to have it work properly and provide the best service to the taxpayers, but we haven't gotten directly involved in that issue.

QUESTION: Do you have a comment on Hastert's proposal on the minimum wage? He put a tax package in with that, and wants to raise it over two years. What's your position on that?

MS. COLEMAN: Well, we do not support increases in the minimum wage. Our members do not pay minimum wage, pay much higher, but traditionally in support of the larger business community, and for both economic and social policy rules -- excuse me, reasons -- we don't support increases in the minimum wage.

I should say that earlier this year, when there was a vote on the floor, there was a bifurcated vote on a separate minimum wage piece and a much larger tax piece. We did key vote the tax portion of that, and one of the reasons that at that time the tax package included pension reform, state tax relief, and also reinstatement of the installment sales rule. So, this is a whole different ball game and a whole different package that Hastert is talking about now.

QUESTION: So you oppose the tax increase?

MS. COLEMAN: Pardon me?

QUESTION: Do you oppose the package?

MS. COLEMAN: I think we'll just remain silent at the moment.

MS. McGUIRE: I might just add, I think that that letter certainly gives credence to my earlier suggestion of what -- that we'll probably have a final tax bill enacted. As Dorothy said, we'll have to wait and see the final package, but it certainly -- do you understand the point I'm making?

That letter clearly shows to me that there's movement between the administration and Congress to getting some kind of final tax bill enacted. I'm not commenting on whether we'd support it or not at this point. We'd have to wait and see.

QUESTION: So there's sort of a class act fund, for all aspects of the --

MS. McGUIRE: Yeah, that's the power of positive thinking.

QUESTION: I was just sort of going to ask, do you think that it's possible that the minimum wage and that small package, that they all get thrown together, too, at the end?

MS. McGUIRE: If I were a betting person, that's where I'd put my money.

QUESTION: Also, you didn't include the permanent R&D in your bets to pass this year.

MS. McGUIRE: Are you -- excuse me, were you asking --

QUESTION: What's the explanation again?

MS. McGUIRE: I did not include that. NAM, along with R&D Credit Coalition, is actively here pursuing, trying to get a permanent R&D credit enacted this year. However, if it isn't included -- it's certainly a challenge. It would be a challenge to get it included this year. I think the prospects look good regardless of who's elected President, since both leading candidates support permanent R&D.

QUESTION: Just a last thing from me. What you outlined and what you think is likely on passage, doesn't look like a very extensive tax bill this year, does it?

MS. McGUIRE: No. I think it will be a smaller tax bill, because I think -- this is a best guess. I mean, gosh, anything could happen here in the next 30 days before Congress adjourns, but traditionally -- I mean historically -- there have been tax bills enacted in presidential election years, and in order to get a bill enacted, there's got to be compromise, and I think that that's what you're seeing, is a smaller tax bill will be the compromise.

Now remember, in the budget resolution that Congress passed earlier this year, they had a 150 billion tax cut number, with a 25 billion dollar surplus, I believe. That takes you up to 175. We've seen 76 billion be entered about, I think, by Speaker Hastert this week. So I'm thinking the range is somewhere between 100 and 150.

QUESTION: That's what you're thinking?

MS. McGUIRE: Mm-hmm, over five years.

QUESTION: Okay, and you're not -- are you including in your -- what you said might likely pass, you're not making judgements on things like the marriage tax and so forth that don't directly affect business, or are you?

MS. McGUIRE: I -- you know, I did not address -- the marriage penalty is not something that NAM has a position on or gets involved in. I think that's a difficult issue. It's a good question. I'm just thinking about how to best answer this on the marriage penalty.

I think that it would be hard to get a compromise on marriage penalty relief, because that's actually a complicated issue when you look at it. Just the nature of the issue, because you're picking winners and losers, and the income tax brackets, et cetera. I'm not so certain that there will be marriage penalty relief this year.

I don't see it -- I don't think that they'll be able to compromise enough to be able to get something in the tax bill, but I might be surprised. I'd hold that out as a wild card.

MS. COLEMAN: Can I just add, I think the bottom line here at the NAM, we expect there to be a tax bill. It will be smaller than we want. When you have a huge surplus we certainly think there's a lot of room for more pro-growth tax cuts, but I think in reality we can expect some -- we're hopeful that some of the things that we outlined today are in -- the FSCs, installment sales, telephone excise repeal, things like that.

Certainly time constraints alone, and other -- the presidential elections, the appropriations bills, are going to prevent -- is working against us.

Any more questions?

I'd like to thank you all for coming today, and please, I think the pamphlets that you received have all of our cards in. Call us if you have any questions. There's also some surveys. I don't know, I did not mention. We did an estate tax survey of our members, earlier this year, on the burden of estate tax planning, which showed that they pay $52,000 a year on estate tax planning. That's one of the reasons that every day they feel the burden of the estate tax, and one of the reasons we keep pushing for repeal. Well, thank you all for coming.