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Order Code RL32444
CRS Report for Congress
Received through the CRS Web
Comparison of the House and Senate
ETI/Business Investment Bills
(H.R. 4520 and S. 1637, 108th Congress)
Updated November 8, 2004
David L. Brumbaugh
Specialist in Public Finance
Government and Finance Division
Congressional Research Service ~ The Library of Congress
Comparison of the House and Senate
ETI/Business Investment Bills
(H.R. 4520 and S. 1637, 108th Congress)
Summary
In fall 2004, Congress is considering legislation that addresses both domestic
and international business investment and the long-simmering controversy between
the United States and the European Union (EU) over the U.S. tax code's
extraterritorial income (ETI) tax benefit for exporting. Both the House and the Senate
have passed bills that would repeal ETI and implement a range of tax benefits for
business investment, in some cases restricted to domestic investment and in other
cases applying to overseas investment. The bills are similar in this general thrust of
repealing ETI while implementing a mix of domestic and overseas business tax cuts.
The House and Senate bills are contained in separate versions of H.R. 4520. The
Senate-passed version of H.R. 4520 contains the language of S. 1637, first passed by
the Senate in May 2004, but with the addition of tobacco buyout provisions. On
October 6, a conference committee approved a bill reconciling the House and Senate
bills. The President signed the measure, and it became P.L. 108-357.
There were several prominent differences between the House and Senate bills.
The House bill proposed a tax benefit limited to domestic production that would be
in the form of a tax rate reduction; the Senate bill provided a domestic production tax
cut similar in size but in the form of a tax deduction. The conference agreement
provided a deduction. The House bill contained several tax cuts not in the Senate
bill, including a rate reduction for lower levels of corporate income, an extension of
the "expensing" benefit for equipment investment, liberalized depreciation for
leaseholds, and an option for individual taxpayers to deduct state and local sales taxes
rather than income taxes. Of these, the October conference agreement did not
provide the rate-reduction, but included the other three of these items. In addition to
taxes, the House bill proposed payments to tobacco farmers in compensation for the
removal of the federal quota program. In passing its bill as an amended version of
H.R. 4520, the Senate added its own tobacco buyout provisions, and the conference
agreement likewise contains a buyout provision. The Senate bill contained a number
of investment tax cuts not in the House bill, including tax incentives related to energy
and an extension of the allowable carryback period for tax losses (net operating
losses, or NOLs). These two items were not in the conference bill.
In addition to their tax cuts, the House and Senate bills contained various
revenue-raising provisions that reduced the bills' net revenue loss. In terms of
revenue impact, the House bill was projected to reduce revenue while the Senate bill
was estimated to reduce revenue in its first years but increase revenue very slightly
over the long run. Joint Tax Committee revenue estimates for the conference
committee chairman's mark show a revenue loss of $8.8 billion over five years and
a gain of $238 million (approximate revenue neutrality) over 10 years..
This report will not be updated.
Contents
The Conference Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Impact on Tax Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Extraterritorial Income (ETI) Benefit for Exports . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tax Benefits Restricted to Domestic Production . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Tax Reductions for Foreign-Source Income: Foreign Tax Credit . . . . . . . . . . . . 3
Tax Reductions for Foreign-Source Income: Deferral and Subpart F ........4
Other Tax Cuts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Revenue-Raising Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Comparison of the House and Senate
ETI/Business Investment Bills
(H.R. 4520 and S. 1637, 108th Congress)
A major focus of congressional tax policy deliberations in the first half of 2004
has been legislation that addresses the controversy between the European Union (EU)
and the United States over the U.S. tax code's extraterritorial income (ETI) tax
benefit for exporting. In recent years, the EU has complained that the U.S. ETI
provisions contravene the World Trade Organization's (WTO) prohibition of export
subsidies; in a series of panel rulings, the WTO has supported the EU's complaint
and authorized the EU's imposition of retaliatory tariffs on U.S. goods. The EU
began a phased-in imposition of the tariffs in March.
Both the House and the Senate passed versions of legislation addressing the ETI
controversy, the Senate on May 11 (S. 1637), and the House on June 17 (H.R. 4520).
On July 15, the Senate prepared the bill for conference by approving its own version
of H.R. 4520 that contained the language of the bill it had approved in May, but with
the addition of buyout provisions for tobacco quotas. (The House bill contains its
own tobacco buyout provisions.) Both the House and Senate bills proposed to phase
out ETI, but contain a wide range of additional tax cuts that, in contrast to ETI's
repeal, would cut business taxes rather than increase them. In general, the tax cuts
in both bills contained a mix of tax incentives primarily for domestic production and
tax cuts for overseas investment. Both bills also contained a variety of revenue-
raising items.
The Conference Agreement
While the bills overlapped in several areas, there were prominent differences
among both the tax cuts and the revenue-raising items, and among both the bills'
domestic and international provisions. On October 6, House and Senate conferees
approved a version of H.R. 4520 reconciling the bills' differences; the House
approved the agreement on October 7 and the Senate on October 11. The President
signed the bill on October 22. It became Public Law, P.L. 108-357. According to
Joint Tax Committee estimates, the bill agreement would reduce tax revenue by $8.7
billion over five years and would be virtually revenue-neutral over 10 years,
increasing revenue by $1 million over fiscal years 2005-2014.
Like the House and Senate bills, the conference agreement is quite broad in
scope and focuses on business taxes; it contains a broad range of both tax cuts and
tax increases. And like the House and Senate bills, the centerpiece of the conference
agreement is repeal of the ETI export tax benefit on the one hand, and provision a tax
benefit for domestic production on the other, along with a number of tax cuts for
CRS-2
firms with overseas production. The conference agreement follows the Senate's
version of a domestic production benefit, providing a deduction rather than a tax-rate
cut for domestic production. (After a phase-in, the deduction would be 9% of taxable
income.) As with both the House and Senate bills, the largest tax reduction for
multinational firms is an alteration of the rules for allocating interest expense in
connection with the foreign tax credit limitation.
Other prominent differences between the House and Senate bills included a
number of items included in the House bill, but not the Senate legislation. These
included a number of tax cuts, including a rate reduction for lower levels of corporate
income, an extension of the "expensing" benefit for equipment investment,
liberalized depreciation for leaseholds, and an option for individual taxpayers to
deduct state and local sales taxes rather than income taxes. Of these, the October
conference agreement did not provide the rate-reduction, but included the other three
of these items. Likewise, the Senate bill contained a number of investment tax cuts
not in the House bill, including tax incentives related to energy and an extension of
the allowable carryback period for tax losses (net operating losses, or NOLs). These
two items were not in the conference bill.
For a more detailed list of the conference agreement's provisions, see: CRS
Report RL32652, The 2004 Corporate Tax and FSC/ETI Bill: The American Jobs
Creation Act of 2004.
Impact on Tax Revenues
According to estimates by the Joint Committee on Taxation (JCT), the House
bill would reduce tax revenue by $32.4 billion over a period generally spanning its
first five years (FY2005-FY2009) and by $35.7 billion over its first 10 years
(FY2005-FY2014). The Senate bill would reduce revenue by $10.2 billion over its
first five years and increase revenue by $847 million over its first 10 years.1 These
are net amounts, comprised of the impact of revenue losing items minus revenue
raising items; the scope of the changes that would be implemented by the bills is thus
not fully reflected by the net estimates. The difference in the expected direction of
the bills' impact over the longer estimating period -- that is, the House bill's
projected revenue loss and the Senate measure's expected small revenue gain -- is
chiefly due to larger revenue-raising provisions in the Senate bill, particularly in the
areas of tax shelters, expatriation, and energy. The bills' revenue-losing provisions
would reduce revenue by roughly comparable amounts.
JCT revenue estimates for the conference committee chairman's mark indicate
the conference agreement would reduce revenue by $8.766 billion over five years
(FY2005-FY2009) and would increase revenue by $238 million over ten years
1
U.S. Congress, Joint Committee on Taxation, Comparison of the Estimated Budget Effects
of H.R. 4520, the "American Jobs Creation Act of 2004," as Passed by the House of
Representatives, and H.R. 4520, the "Jumpstart our Business Strength (JOBS) Act," as
Amended by the Senate, JCX-53-04, July 23, 2004.
CRS-3
(FY2005-FY2014). Estimates for the final version of the conference agreement may
differ slightly from these totals.
A side-by-side comparison of the House and Senate bills follows.
Extraterritorial Income (ETI) Benefit for Exports
Both bills address the ETI controversy by phasing out the provision. The bills
differ, however in the particulars of the phaseout.
Senate House
Phases out the ETI benefit over 2004- Phases out the ETI benefit over 2005 and
2006, with full repeal applicable in 2007. 2006, with full repeal applicable in 2007.
During the phase-out period, During During 2005-2006, a firm's ETI benefit
2004-2006, a firm's ETI benefit would would equal a specified percentage of the
equal a specified percentage of their full ETI benefit that would otherwise
average benefit in 2000-2001. apply for that year.
Tax Benefits Restricted to Domestic Production
By definition, exports are produced in the domestic economy rather than abroad;
a tax benefit for exports such as ETI therefore necessarily poses a tax incentive that
favors domestic over overseas investment. Both bills contain new tax incentives that
are explicitly limited to domestic rather than foreign investment, although -- in view
of WTO rulings against export subsidies such as ETI -- the new benefits apply to
domestic production in general and are not restricted to the export sector.
Senate House
Phases in a 9% tax deduction for Phases in a reduction in the top corporate
domestic production that initially would tax rate to 32% from current law's 35%.
decline in proportion to the extent of a The deduction would not be diminished
firm's foreign operations. The deduction by foreign operations or subject to a wage
would be limited to 50% of wages paid. cap.
For a firm receiving the full deduction
and subject to the top corporate tax rate,
the benefit would have an effect similar
to reducing the tax rate to 31.85%.
Tax Reductions for Foreign-Source Income:
Foreign Tax Credit
U.S. citizens and firms are generally permitted to credit foreign taxes they pay
against U.S. tax they would otherwise owe on foreign-source income. In general, the
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bills each provide more generous rules relating to the foreign tax credit and
associated calculations. The tax code provides that foreign taxes can offset only the
portion of a firm's U.S. tax liability that applies to foreign (and not domestic)
income. Many of the changes in the two bills apply to the rules firms must follow
in calculating this limitation. While there are some differences between the two bills,
there is substantial overlap. The bills' provisions for allocating interest expense --
probably the most prominent foreign tax credit in either bill -- are essentially the
same.
Senate House
Revises rules for allocating interest Revises rules for allocating interest
expense when calculating foreign tax expense when calculating foreign tax
credit limitation. credit limitation.
Provides more generous treatment of Provides more generous treatment of
domestic losses in calculating foreign tax domestic losses in calculating foreign tax
credit limitation. credit limitation.
Repeals limit on use of foreign tax credits Repeals limit on use of foreign tax credits
to offset alternative minimum tax (AMT). to offset alternative minimum tax (AMT).
Shortens the "carryback" period for No carryback or carryforward provisions.
foreign tax credits to one year from
current law's two years; lengthens the
carryforward period to 20 years from
current law's five years.
Does not provide for the consolidation of Reduces the number of income categories
foreign tax credit limitations. for which a separate foreign tax credit
limitation must be calculated, providing
for two separate limits ("baskets")
compared to current law's nine.
Tax Reductions for Foreign-Source Income:
Deferral and Subpart F
Under current law, U.S. firms can indefinitely postpone (defer) U.S. tax on
foreign income as long as the income is earned through a foreign subsidiary
corporation chartered abroad and the income is reinvested overseas rather than
repatriated to the U.S. parent as dividends or other income. This deferral benefit,
however, is restricted in some cases by the tax code's Subpart F. Subpart F provides
that certain types of income -- principally income from passive investment, such as
interest, rents, royalties, and dividends -- are subject to U.S. tax even if earned
through a foreign subsidiary and not repatriated. In general, the bills would expand
the scope of the deferral benefit incrementally by relaxing certain Subpart F rules and
making other changes. As with the bills' foreign tax credit provisions, the bills
deferral and subpart F provisions contain considerable overlap but some difference.
For example, the bills contain a similar (but not identical) tax cut for earnings
repatriated from foreign subsidiaries.
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Senate House
Provides a temporary (one year) reduced Provides a temporary (six month) 85%
tax rate for dividends repatriated to U.S. tax deduction for certain dividends
corporations from their foreign repatriated to U.S. corporations from
subsidiaries. The reduced tax rate would foreign subsidiaries. For a firm paying
be 5.25%. the top corporate tax rate of 35%, the
deduction has an effect similar to a
reduction in the tax rate to 5.25%.
Provides less restrictive "look through" Provides less restrictive "look through"
rules under Subpart F for payments rules under Subpart F for payments
among related foreign subsidiaries. among related foreign subsidiaries.
Provides more generous treatment of Provides more generous treatment of
transportation income under Subpart F. transportation income under Subpart F,
but with differences from the Senate bill.
Provides a less restrictive de minimis rule Does not alter Subpart F's de minimis
under Subpart F. rule.
Other Tax Cuts
In addition to the tax cuts aimed explicitly at domestic production and those that
apply to international or foreign-source income, both bills contain a wide variety of
additional tax cuts. The list of these assorted provisions is substantially different
between the bills. Prominent provisions that are in the House, but not the Senate bill
are: a reduction of the tax rates that apply to lower levels of corporate income, and
a provision allowing individual taxpayers the alternative of deducting state and local
sales taxes rather than income taxes. The House bill also contains a non-tax
provision providing compensation to tobacco farmers for the cessation of tobacco
quotas. The Senate, in agreeing to a conference on the bill, in mid-July added
tobacco provisions that differ somewhat from those in the House. In addition, the
Senate bill contains a number of energy-related tax benefits that are not in the House
bill as well as more generous treatment of tax losses. The bills are similiar, however,
in extending a set of temporary targeted tax benefits (the "extenders"), although the
particulars of the bills' extensions differ.
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Senate House
Extends or makes permanent various Extends or makes permanent various
temporary targeted tax benefits and tax- temporary targeted tax benefits and tax-
reducing provisions (the "extenders"). reducing provisions (the "extenders").
The extensions are for various periods, The extensions are for various periods,
but are generally one or two years. A but are generally for two years. A partial
partial list of extenders in the bill list of extenders in the bill includes the
includes the research and research and experimentation tax credit,
experimentation tax credit, the welfare to the welfare to work and work
work and work opportunities tax credits, opportunities tax credits, and expanded
and expanded treatment of non- treatment of non-refundable personal tax
refundable personal tax credits under the credits under the minimum tax.
minimum tax.
Temporarily extends the carryback back No NOL provisions.
period for tax losses (net operating
losses, or NOLs) to three years from
current law's two; the extension would
apply to losses arising in 2003. Suspends
the limitation on the use of NOLs against
the minimum tax for the same period.
Provides or extends various tax benefits Contains limited energy provisions.
generally designed to promote energy
production or conservation.
Provides a tax credit to employers of No provision.
National Guard personnel on active duty
and for small business or self-employed
employers of replacement employees for
National Guard employees.
No general reduction in corporate tax Provides a phased-in reduction in the
rates (excepting the domestic production statutory tax rates applicable to lower
deduction described above). ranges of corporate income.
Extends a scaled-back version of the Extends a temporary increase in the
temporarily increased "expensing" expensing benefit for small business
benefit for small business equipment investment (not scaled-back, as in the
investment. Senate bill).
No depreciation provisions for leasehold Provides more generous depreciation
improvement. rules for leasehold improvements.
No state and local tax provisions. Provides individual taxpayers the
alternative of deducting state and local
sales taxes rather than income taxes.
No tobacco quota provision. Provides tobacco farmers compensation
for terminated tobacco quotas.
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Revenue-Raising Provisions
Both bills contain a variety of revenue raising provisions, although the total
amount of revenue projected to be raised by the Senate bill is larger than that of the
House bill. The broad areas to which the revenue-raisers apply overlap to some
extent, though in some areas where they do -- for example, tax shelters, leasing,
and corporate expatriation -- the Senate provisions tend to be more stringent.
Senate House
Applies more stringent tax treatment to Applies more stringent tax treatment to
corporations that shift their country of corporations that shift their country of
incorporation abroad (corporate incorporation abroad (corporate
"inversions" or "expatriation"). Under "inversions" or "expatriation"); unlike
certain circumstances, restrictions include the Senate bill, H.R. 4520 would not tax
taxing an inverted corporation as a inverted corporations like U.S.
domestic corporation (thus nullifying the corporations. Does place other
tax advantages from inversion). Other restrictions on inverted firms and their
restrictions include more stringent tax owners, including more stringent
treatment of assets transferred to inverted treatment of assets transferred to inverted
corporations and an excise tax that would firms and application of an excise tax to
in some cases apply to stock options of the stock options of inverted firms'
inverted firms' officers. officers.
Places limits on corporate use of tax Provides new tax shelter provisions
shelters, including "clarification and related to reporting and penalties; does
enhancement" the judicial doctrine that not contain provisions related to the
limits the use of tax benefits associated economic substance doctrine.
with transactions that lack economic
substance. Provides new provisions
related to reporting and penalties.
Places new limits on tax savings available Places new limits on tax savings available
from leasing arrangements between from leasing arrangements between
taxpayers and tax-exempt (or tax taxpayers and tax-exempt (or tax
"indifferent") entities. "indifferent") entities. The limits are in
some respects less stringent than those of
the Senate bill.
Contains provisions designed to limit Contains provisions designed to limit
evasion of excise tax on fuels. evasion of excise tax on fuels.
Extends certain customs user-fees that are Extends certain customs user-fees that are
scheduled to expire under current law. scheduled to expire under current law.
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For other versions of this document, see http://wikileaks.org/wiki/CRS-RL32444