Corporate tax bill spreads the wealth

Author: Chris Serres, Susan E. Peterson

Published: October 15, 2004

With a presidential election looming, oil prices soaring and the federal budget deficit deepening, Jack Zwickey says he thought Congress would have bigger concerns than to give arrowhead manufacturers a tax break.

But Zwickey, whose company makes archery and bow hunting arrowheads at a small factory in North St. Paul, was mistaken.

This week, the U.S. Senate passed a sweeping bill that doles out $143 billion over 10 years in tax breaks to dozens of industries -- including fishing tackle box manufacturers, cruise ship operators, horse and dog racetrack owners, Chinese ceiling-fan makers, film studios and archery equipment manufacturers.

"I never would have thought that the bow-and-arrow industry would have this much clout," Zwickey said.

President Bush is expected to sign the bill into law soon.

Congressional leaders say the legislation boosts corporate profits, compelling companies to hire more people. However, some economists say the bill complicates an already dense tax code, worsens the budget deficit and heaps billions of dollars of corporate giveaways on particular industries with no guarantee they'll create more jobs.

State economist Thomas Stinson says the legislation will increase corporate profits by less than one-half of 1 percent next year.

"If your lobbyist has a pulse, you have a tax break in this bill," Stinson said. "But all of these little breaks really don't add up to much, especially when you consider the overall size of the economy and corporate profits."

The bill got its start as an effort to appease the European Union by eliminating an export subsidy, but changed under three years of intense lobbying.

The most significant provision of the bill would reduce by three percentage points -- from 35 to 32 percent -- the top income tax rate on manufacturers who engage in "domestic production." Still, the cut will be phased in through 2010, which means the short-term impact will be minimal, some economists argue.

Ecolab Inc., the St. Paul cleaning products maker, estimates the tax reduction will add about $6 million to its combined profits through 2010. Yet the contribution represents just 2 percent of the $277 million the company earned in 2003.

"It's $6 million we didn't have, but we didn't gather in a room and celebrate," said Michael Monahan, vice president of external relations for Ecolab, which has 14 plants in the United States.

To discourage companies from sheltering profits overseas, the new law would cut to 5.25 from 35 percent the tax on profits brought home from abroad, often in tax havens. That's an impressive, 85 percent reduction. Still, the lower rate will remain in place for only a year and there is no requirement that companies use the money saved by the break to hire more people or to build more facilities in the United States.

A study by economists at J.P. Morgan Chase, which included a survey of 28 large corporations, found that much of the money coming back to the United States will not be used to create jobs. More than half of the companies said they would use the money to strengthen their balance sheets by repurchasing shares or paying down debt.

"If the goal was to create jobs for accountants and lawyers, then this bill has succeeded," said Leonard Burman, co-director of the Urban-Brookings Tax Policy Center in Washington.

"You get taxed at one rate for one activity and another for another activity. It's incredibly confusing. ... It would have been better had Congress lowered the corporate tax rate across the board instead of creating another layer of complicated rules."

Jan Meier, chief financial officer of Meier Tool & Engineering, a precision metal-stamping firm in Anoka, had a quick huddle with the company's tax accountant after the bill passed. A preliminary analysis indicates the bill will benefit manufacturers, "but it's not going to change decisions about manufacturing overseas," she said. "It's not a big enough dollar amount."

"For most companies there's probably no significant effect," said Meier, who also is president of the Minnesota Precision Manufacturers Association.

But lobbyists who represent particular industries -- such as NASCAR track owners, importers of Chinese ceiling fans and American film studios, should be pleased by the final outcome.

Randy Sampson, president and chief executive officer of Canterbury Park Holding Corp. of Shakopee, got an e-mail Monday afternoon from the National Thoroughbred Racing Association informing him that foreign gamblers no longer would be subject to a 30 percent tax on their winnings at horse tracks. Sampson was not aware that the industry had been lobbying to include the provision.

"I must say I'm surprised," said Sampson, whose company hosts wagering at its race track in Shakopee. "I never sent a letter to Washington. I never called my congressman. ... But if this succeeds in opening up U.S. racetracks [to foreign betting], then I suppose it's a good thing."

Not everyone benefiting from a special break actually wanted one.

Rich Femling, owner of Rose Creek Anglers, a fishing tackle box manufacturer based in Roseville, learned Wednesday that Congress cut the excise tax on tackle boxes to 3 percent from 10 percent. Yet the money collected from the excise tax has been used to support fish and wildlife preservation projects, and Femling is concerned those projects will be cut along with the tax.

"It's certainly not something I would have lobbied for," Femling said.