ACTION ALERT! ACTION ALERT! ACTION ALERT! ACTION ALERT! ACTION ALERT!

Background  |  Action Request

THE US SENATE IS SET TO APPROVE A $300 MILLION/YR INCREASE IN TAX SUBSIDIES FOR ARMS EXPORTS AS PART OF A $4 TO $6 BILLION CORPORATE WELFARE GIVEAWAY.

The Foreign Sales Corporations Repeal and Extraterritorial Income Exclusion Act of 2000 (H.R. 4986) which passed the Senate Finance Committee Tuesday, September 19, is an example of the worst kind of corporate welfare, and a substantial threat to public health and safety.

H.R. 4986 is a flawed response to a WTO ruling that our current FSC scheme is an unfair trade practice. Although the EU, the complainant in the original suit, has already stated that it will not accept this new legislation, proponents of the bill are using a putative WTO Oct 1 deadline to pressure Congress into passing the bill without any amendments. In fact, the US and EU are now engaged in negotiations that have thus far resulted in the EU effectively rescinding the Oct 1 deadline.

A growing coalition of peace and justice, health, children's, labor, environmental, and fair tax advocate groups are rising in opposition to this alarming threat to public welfare, but we need your help.

At this time it appears that Senate leadership will try to place H.R. 4986 on some non-amendable vehicle. This could happen as early as the week of Oct. 9. The leadership could choose to bundle H.R. 4986 together with other pending tax bills. This could happen in one of two ways: 

a) The likely scenario is that the House and Senate will go to a conference with a handful of modest tax measures the Senate has passed. In this case, the major provisions from tax legislation the Senate has not voted upon, such as FSC, could be added in conference without a prior Senate floor vote. Under this scenario, the House and Senate would have to vote on Conference Reports. A Conference Report is a vehicle which is not amendable. 

b) A Reconciliation bill, which has some limitations on amendments based on germaneness considerations, could also be a vehicle for the leadership to use. Also, remember, the Senate leadership could still decide to place H.R. 4986 in an Omnibus Appropriations bill, and thereby prevent amendments. The potential problem with this option, however, is that it is as yet unclear when the negotiations between Congress and the White House will be finished to resolve outstanding appropriations disputes. Thus, the option of the Omnibus Appropriations bill appears to be diminishing in its attractiveness to Senate leaders. Finally, in light of the timeline of the upcoming elections, the need for Senators to leave for home to campaign, and the supposed November 1, 2000 deadline that the Europeans have agreed to as the date by which Congress has to have passed a new law concerning export subsidies, so that the legality of the new law can be addressed by the WTO, it appears at this time that Senate leadership could take route of a Conference Report, as noted above, to prevent amendments to the FSC bill.

H.R. 4986:

*Doubles the available tax benefit for arms exporters- amounting to a $300 million dollar increase in subsidies. Though the US already corners the market on arms sales, this bill would encourage greater sales of weapons abroad, strengthening military dictatorships and threatening global stability.

*Provides an indefensible $100 million subsidy for tobacco companies so that they might more easily export their deadly product abroad. Big Tobacco has been forced to stop its marketing to kids in America, and now the American taxpayers are going to be forced to finance Tobacco's search for new generations of smokers overseas.

*Contains no real domestic content requirement so that US companies exporting foreign-made goods, and even foreign companies exporting through the US, now qualify for this tax break. So, although proponents claim it is essential to ensure US competitiveness, H.R. 4986 actually harms US workers and small businesses.

*Includes a subsidy for the pharmaceutical industry-- which Fortune magazine rated as the most profitable industry in 1999. This subsidy is particularly unconscionable at a time when pharmaceutical companies export drugs abroad for sale at substantially lower prices than they charge US consumers. Many major prescription drugs are sold in Canada for 1/3 the price that US consumers pay. The pharmaceutical industry is also the least taxed industry in the US. (a detailed description of these concerns appears at the end of this message)

 


 

Action Request

URGENT: It is important for Senate Republican and Democrat leadership to receive calls and telegrams as soon as possible urging them to permit amendments on H.R. 4986.

The telephone number for the office of Majority Leader Trent Lott (R-MS) is 202-224-3135. The telephone number for the office of Minority Leader Tom Daschle (D-SD) is 202-224-5556. 


CONTINUE: Grassroots calls, faxes, and telegrams to individual senators, in support of the
Wellstone amendment and the elimination of the $100 million arms subsidy in H.R. 4986, should be also continued. 

Your Senators need to hear that you OPPOSE H.R. 4986 AND ITS EGREGIOUS SUBSIDIES for the tobacco, pharmaceutical, and defense industries. Any calls or telegrams that can be generated to Senate offices in opposition to this bill and its threat to public welfare, are critical. Also, it would be helpful if your institution could send to the Hill a statement in opposition to this corporate boondoggle. TELL YOUR SENATORS TO OPPOSE ANY UNANIMOUS CONSENT AGREEMENT THAT WOULD PREVENT AMENDMENTS TO THIS BILL, AND TO SPONSOR AND SUPPORT AMENDMENTS TO REMOVE THESE OFFENSIVE CORPORATE SUBSIDIES.

Any press work that your organization can do to bring these concerns to the attention of the media would also be key to this cause. Contact Gretchen Gordon of the Citizens Trade Campaign at ggordon@essential.org or 202-614-8136 for more information.

Please forward this message on to others.

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FROM:  Segundo Mercado-Llorens

RE:    Foreign Sales Corporations Bill

DATE:  September 19, 2000

The Citizens Trade Campaign, a coalition of labor, consumer, environmental, family farm, religious and other organizations strongly urges opposition to the FSC Repeal and Extraterritorial Income Exclusion Act of 2000, (H.R. 4986, in the House) a measure which provides $4 to $6 billion of egregious corporate welfare subsidies for the tobacco, pharmaceutical, defense and other industries, while lacking any strict domestic content requirement. It is a controversial bill that was the subject of no hearings, only a 40 minute House debate, and no opportunity for amendments.

        The new Foreign Sales Corporations tax bill expands corporate welfare for the largest multi-national corporations by enlarging the existing tax exemption on export profits to include profits made from foreign sales of goods manufactured abroad.

        NO REAL DOMESTIC CONTENT REQUIREMENT

        Incredibly, U.S. officials recently admitted that multi-national corporate beneficiaries of this “fleecing of America” bill “could have `little or no U.S. content’ and still qualify for the new tax treatment.” According to Inside U.S. Trade, “U.S. officials have previously stated that a trademark on a pair of jeans would count toward this threshold, which means an eligible pair of jeans may be made of foreign components and still qualify,” (source: Inside U.S. Trade, September 8, 2000, p. 3) The reason for this is that the bill’s 50% requirement is the “fair market value,” which can be met by non-tangible factors such as brand name value, or the value to the company of an endorsement contract signed by Michael Jordan, the former great basketball player.

        Moreover, contrary to claims made by the FSC’s supporters, the Congressional Budget Office has written that: “Export subsidies do not increase the overall level of domestic investment and domestic employment…In the long run, export subsidies [actually] increase imports as much as exports.” (source: CBO, August 1996) H.R. 4986 also allows American subsidiaries of European firms to qualify for the tax subsidy.  FSC recipients include British Petroleum, Unilever, BASF, Daimler Benz, Hoescht, and Rhone-Poulence. Obviously this does nothing to help U.S. economic competitiveness.

 $100 MILLION TOBACCO SUBSIDY

        As the Washington Post reported on September 12th, the FSC “export subsidy bill…would give American tobacco companies about $100 million in tax breaks yearly for tobacco products they sell abroad.” (source: The Washington Post, September 12, 2000, page A. 20)

In a letter to the Speaker of the House, dated September 11, 2000, Representatives Waxman (D-CA) and Doggett (D-TX) noted in opposition to the FSC measure: “Smoking currently causes more than 3.5 million deaths each year throughout the world.  Within 20 years, that number is expected to rise to 10 million, with 70% of all deaths from smoking coming in the developing countries that are the newest targets of the tobacco industry.”

        Incredibly, in this election year, the American taxpayer is now being asked to join hands with the tobacco industry in ensuring the export of disease and death.

FSC IS AN INCENTIVE FOR DRUG INDUSTRY PRICE GOUGING

In a special report published in Tax Notes, the assistant director of the U.S. General Accounting Office (GAO) writes: “The top 20 percent of FSC beneficiaries…obtained 87 percent of the FSC benefits…Most of the benefits are received by a small number of large corporations….” (source:  Tax Notes, August 14th, 2000) Also, the Internal revenue Service Statistics of Income Division reports that 78% of FSC tax breaks go to companies whose assets exceed $1 billion.

        The FSC bill provides an incentive for pharmaceuticals to sell cheaper drugs to foreign citizens, while continuing to sell them at higher prices in the United States, with the U.S. consumer picking up the tab. According to the Congressional Research Service, “at least part of the tax benefit [of the FSC] is passed on to foreign consumers in the form of lower prices.

This price reduction can be viewed as a transfer of economic welfare from U.S. taxpayers in general to foreign consumers.”  (source:  CRS analysis of FSC, “The Foreign Sales Corporations (FSC) Tax Benefit for Exporting and the WTO,” published June 28, 2000)

        The FSC subsidy to the pharmaceutical industry is a tax give-away to what Fortune magazine rated as the most profitable industry in 1999, with one company alone, Merck, earning profits greater than the entire airline industry, and over twice that of the engineering-construction trade. While garnering high profits in the U.S., the pharmaceutical industry has fought the effort to make generic medicines more accessible to those in need abroad.  The industry even “threatened Israel with a WTO challenge over proposed legislation to make…less expensive pharmaceuticals available to consumers.” (source:  Whose Trade Organization?,  Lori Wallach and Michelle Sforza,1999)

FSC IS A MUCH-NEEDED SUBSIDY FOR THE DEFENSE INDUSTRY

H.R. 4986 is a bill that the Washington Times has called a benefit to “Corporate Welfare Queens.”  (source: The Washington Times, September 5, 2000)  In this regard it bears noting that the new FSC measure doubles the available tax break for weapons sales. This results in a $300 million increase in corporate subsidies overall.

Amazingly, even the Treasury Department conceded in August 1999 the absurdity of such support. It declared:  “We have seen no evidence that granting full FSC benefits would significantly affect the level of defense exports.” (Source: Dissenting Views on H,. R. 4986)

In addition, the CBO reported in 1997 that “U.S. defense industries have significant advantages over their foreign competitors and thus should not need additional subsidies to attract sales.”  Absent this unnecessary and wasteful tax break, the U.S. defense industry sold more weapons last year than all European countries combined, over a third of the world’s total. Cato Institute’s William D. Hartung, President’s Fellow at the World Policy Institute also noted in August of 1999 concerning the FSC’s subsidy to the defense industry that: “[G]ranting additional tax breaks to an industry that is being so pampered by the U.S. government makes no sense.”

           CONCLUSION

The FSC was defended in the House as necessary to counter the European practice of rebating the Value Added Taxes (VAT’s) that would otherwise apply to export sales.  Yet, according to the Congressional Research Service, “[E]conomists have long held that such `border adjustments’ do not distort trade and are in fact necessary if exported goods are to be part of the same relative price structure as other goods in the importing country. In addition, U.S. sales and excise taxes do not apply to exports, while European countries do not have a formal system for forgiving corporate income tax on exports.”  (source:  CRS Report on FSCs “The Foreign Sales Corporations (FSC) Tax Benefit for Exporting and the WTO, June 28, 2000)

Also, it should not go unnoticed that the European Union has already informed the United States that the pending measure is one it regards as an illegal subsidy under WTO rules.  At present, the European Union has decided not to adhere to the previously announced deadline of October 1st with respect to FSCs.  The reason for this is because of the apparent decision by the U.S. not to announce carousel sanctions proposed relative to the other outstanding disputes (on beef and bananas) between these trading partners.

Tax exemption:

To: All Constituents of Rep. Lloyd Doggett and THOSE OF YOU who want less perks for the Defense Industry!

We wanted to let you know about a lonely battle your congressman has been waging against the weapons industry's latest campaign to increase government subsidies for their exports. U.S. exporters in general have for years been able to shelter a portion of their profits by settting up what are called Foreign Sales Corporations (FSCs). In 1976 Congress looked at the already-oversubsidized, world-market-dominating U.S. weapons industry, and decided to set a limit on how much of their export profits could be sheltered this way.  The weapons industry has been trying to get rid of this limit ever since. They may succeed this year. The WTO disallowed the whole FSC tax scheme this spring, and Congress is now pushing through a proposed replacement for it, which eliminates the limit on this benefit for weapons exports. Cong. Doggett has been leading the opposition to this change, with precious little support from his colleagues. Clearly no poll told him this fight would win big points with his constituents. He just knows it's right.  Please give him a call or drop him a line to let him know that some of his constituents do appreciate it. Just referring to "his fight against more subsidies for arms exports" would probably do the trick.

202-225-4865 or

Cong. Lloyd Doggett (D-TX)

House of Representatives

Washington, DC 20515

Thank you.