The House this week approved a new version of a billion dollar trade subsidy for American companies.
The new legislation will revamp a tax law that allows major U.S. exporters, such as Boeing and General Electric, to exempt billions of dollars in foreign sales income from taxation in the U.S.
The legislation would rework the Foreign Sales Corporation (FSC) law in an attempt to meet international trade guidelines, but preserve in a new form tax breaks used by U.S. exporters.
Through FSCs, businesses export domestically manufactured goods and shelter between 15%-30% of that income from U.S. taxes. During the 1990s, this program cost U.S. taxpayers more than $10 billion, with most of that going to the largest U.S. corporations. New cost estimates show that FSCs will result in $42 billion in lost revenue from the U.S. Treasury in the next decade.
Like so many corporate welfare programs, this one isn't available to all companies. It goes only to those that export. A select few reap the benefits of FSCs. Less than 1% of U.S. corporations have an FSC. Of those that do, fewer than 50 large exporters enjoy most of the tax benefits. One of the biggest users of the tax credit, Boeing Co., saved $130 million in U.S. taxes in 1998, 12% of its earnings that year.
Last year, the World Trade Organization (WTO) responded to an European Union (EU) protest that the U.S. tax loophole was in violation of international trade laws prohibiting export subsidies, and gave the U.S. until October 1 to comply. Otherwise, under trade law Europe would be allowed to slap 100% tariffs on billions of dollars of U.S. exports, potentially the largest court-ordered trade retaliation in history.
The new FSC legislation is not likely to comply with the WTO. The EU has already stated that the changes are insufficient, and that it intends to seek authority to retaliate.
Besides the need to survive a WTO court ruling, there are other reasons to dump the FSC system. It's both a waste of taxpayer money and is very inefficient. Although the FSC was intended to help reduce the U.S. trade deficit, its long-term impact on the trade balance has been negligible.
The 6,000 companies that have used the FSC break are already robust exporters and don't need much encouragement to ship overseas. They would export with or without the tax break.
By aiding exporters at the expense of U.S. companies that do not export, the FSC subsidy makes the federal government pick and choose the winners and losers in the global economy. Congress should get out of that business and eliminate this wasteful corporate welfare.
