[Congressional Record Volume 143, Number 31 (Wednesday, March 12, 1997)]
[Extensions of Remarks]
[Pages E443-E445]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            THE DEFENSE JOBS AND TRADE PROMOTION ACT OF 1997

                                 ______
                                 

                           HON. WALLY HERGER

                             of california

                    in the house of representatives

                       Wednesday, March 12, 1997

  Mr. HERGER. Mr. Speaker, today Mr. Jefferson, Mr. Crane, Ms. Dunn, 
Mr. Sam Johnson of Texas, Mr. Hulshof, Mr. Hayworth,

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Mr. English, Mr. Cardin, Mr. Packard, Mr. Dreier, Mr. King, and Mr. 
McCollum join me in introducing legislation that eliminates a provision 
of tax law which discriminates against U.S. exporters of defense 
products. The Defense Jobs and Trade Promotion Act of 1977 will help 
defense contractors improve their competitiveness, will protect our 
defense industrial base, and will help insure that American defense 
workers--who have already had to adjust to sharply declining defense 
budgets--do not see their jobs lost to overseas competitors because of 
a harmful quirk in our own tax law.
  The Internal Revenue Code allows U.S. companies to establish Foreign 
Sales Corporations [FSC's], under which they can exempt from U.S. 
taxation a portion of their earnings from foreign sales. This provision 
is designed to help U.S. firms compete against companies in other 
countries which rely more on value-added taxes [VAT's] than on 
corporate income taxes. When products are exported from such countries, 
the VAT is rebated, effectively lowering their prices. U.S. companies, 
in contrast, must charge relatively higher prices in order to obtain a 
reasonable net profit after taxes have been paid. By permitting a share 
of the profits derived from exports to be excluded from corporate 
income taxes, the FSC in effect allows companies to charge lower prices 
and partially compensates for the differences between the U.S. tax 
system and that of most of our competitors.
  In 1976, Mr. Speaker, the tax law was amended to reduce the tax 
benefits for defense products to 50 percent, while retaining the full 
benefits for all other products. The rationale for this discriminatory 
treatment--that U.S. defense exporters faced little competition--no 
longer exists. Whatever the veracity of that premise 20 years ago, 
today's military exports are subject to fierce international 
competition in every area. Twenty years ago, roughly one-half of all 
the nations purchasing defense products benefited from U.S. military 
assistance. Today, U.S. military assistance has been sharply curtailed 
and is essentially limited to two countries. Moreover, with the sharp 
decline in the defense budget over the past decade, exports of defense 
products have become even more critical to maintaining a viable U.S. 
defense industrial base. The aerospace industry alone provides over 
800,000 jobs for U.S. workers. Roughly one-third of these jobs are tied 
directly to export sales. In 1996, for example, total industry sales 
were $112 billion, $37 billion of which was for exports. Of the three 
fighter aircraft under production in this country, two are dependent on 
foreign customers.
  No valid economic or policy reason exists for continuing a tax policy 
that discriminates against a particular class of manufactured products. 
Furthermore, repealing this section will not impact the foreign policy 
of the United States. Military sales will continue to be subject to the 
license requirements of the Arms Export Control Act.
  Mr. Speaker, improvement of the U.S. trade imbalance is fundamental 
to the health of our economy. The benefits provided by the FSC 
provisions contribute significantly to the ability of U.S. exporters 
to compete effectively in foreign markets. The FSC limitation on the 
exemption for defense exports hampers the ability of U.S. companies, 
many of whom already have access to large foreign markets, to compete 
effectively abroad with many of their products. Section 923(a)(5) 
should be repealed immediately to remove this impediment to 
international competitiveness and to improve the health of our defense 
industry.

  Let me briefly describe the historical context in which the FSC 
provisions were enacted, as it helps to explain why this section of the 
law should now be repealed.
  The genesis of the FSC was the Domestic International Sales 
Corporation or DISC. Congress had enacted the DISC provisions in 1971 
to stimulate exports and grant a Federal income tax deferral 
opportunity to U.S. firms engaged in exporting through domestic 
corporations. A DISC was not subject to Federal income tax on its 
earnings. Rather, the DISC's parent company was taxed each year on part 
of the DISC's earnings as if the parent company had received a dividend 
from the DISC. The DISC's remaining earnings were not taxed until 
actually distributed to the parent company. Until 1976, up to 50 
percent of the DISC's annual export profits could be deferred in this 
manner, including profits from the sale of military products.
  From the outset, Mr. Speaker, the DISC program was the subject of a 
dispute between the United States and other signatories of the General 
Agreement on Tariffs and Trade [GATT]. Some countries contended that 
the DISC provisions essentially created an illegal export subsidy that 
violated the GATT.
  Partly in response to these criticisms, Congress reduced DISC 
benefits in the Tax Reform Act of 1976. First, Congress changed the tax 
rules in such a way that less than 25 percent, rather than 50 percent, 
of a corporation's earnings from exports could be deferred from U.S. 
taxation. Second, DISC benefits for the sale of military products were 
cut back. The House originally proposed to terminate all DISC benefits 
for military sales, except if the products were to be used solely for 
nonmilitary purposes. The Senate recommended that all DISC benefits be 
terminated for military sales unless it was determined that the 
property was competitive with foreign-manufactured property.
  The compromise reached was that the DISC benefits would be terminated 
for 50 percent of military sales--whether or not competitive--made 
after October 2, 1975. For this purpose, military property was defined 
to include any article that is inherently military in character without 
regard to its intended use, such as communications satellites and their 
components, launch vehicles, and many aircraft and their components.
  DISC remained a serious irritant in U.S. trade relations with other 
countries, particularly the European Economic Community, and in October 
1982, the United States informed the GATT Council that it would propose 
to Congress legislation addressing the concerns of its trading partners 
over DISC.
  In March 1983, the administration announced the general elements of 
an alternative to the DISC program. Legislation on the proposed 
alternative was introduced on August 4, 1983, to replace DISC's with 
Foreign Sales Corporations [FSCs]. The FSC provisions were signed into 
law on July 18, 1984, as part of the Deficit Reduction Act of 1984.
  The FSC provisions are similar to the DISC provisions in that they 
were designed to encourage exports by allowing exporters to exempt a 
percentage of export income from taxation. FSC benefits are provided 
for property manufactured or produced in the United States. The 
exemption on the sale of military goods, again, is half the amount 
otherwise allowed for other types of property. The legislative history 
shows that this special rule for military property was simply a 
carryover from the DISC provisions which were based on the premise that 
military products were not sold in a competitive environment.
  Mr. Speaker, with the sharp decline in our defense budget over the 
past decade, exports of defense products have become even more critical 
to maintain or increase employment in the United States and to preserve 
the skills and facilities necessary to maintain a viable U.S. defense 
industrial base. But today, our defense companies face intense 
competition from companies in Europe and around the world. Indeed, 
global competition is even further intensified because Russia and other 
former Communist countries are now considered acceptable suppliers by 
countries that would not have purchased from them during the cold war. 
This increased global competition has contributed heavily to declining 
American sales abroad. Indeed, over the 10-year period between 1984 and 
1994, U.S. defense exports declined an astounding 37 percent when 
measured in constant dollars.
  The U.S. public and U.S. industry have made a tremendous investment 
in our defense industrial base. Decisions on whether or not to allow a 
defense export should continue to be made on foreign policy grounds. 
However, once a decision has been made that an export is consistent 
with those interests, surely our Government should encourage such sales 
to go to U.S. companies and workers, not our competitors. 
Discriminating against these sales in the Tax Code puts our defense 
industry at great disadvantage and makes no sense in today's 
environment.
  The repeal of section 923(a)(5) would put defense companies on a more 
level playing field with other competitors with respect not only to 
military products but also to commercial products. This is true because 
companies that have developed skills and expertise producing goods for 
military use are most likely to apply those in commercial markets by 
developing new uses for military products or close derivatives from 
those products. Since the FSC provisions rely on a definition of 
military products that focuses on the source of the product's 
development and its potential use rather than on its actual intended 
use, almost all products currently produced by the aerospace industry 
are subject to the 50-percent FSC limitation under current law. This is 
the case even if these products or close derivatives are exported for 
strictly commercial purposes.
  Mr. Speaker, let me close by stressing that no valid economic or 
policy reason exists for continuing a tax policy that discriminates 
against one class of manufactured products. To the contrary, thousands 
of good U.S. jobs, the maintenance of a healthy defense industrial 
base, and the improvement of our balance of trade argue for abolishing 
this unfair policy.
  We must repeal this part of the Tax Code in order to provide fair and 
equal treatment to our defense industry and its workers, and to enable 
our defense companies to compete more successfully in the increasingly 
challenging international market. I would urge my colleagues to join 
me--and the bipartisan group

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of original cosponsors--in supporting the Defense Jobs and Trade 
Promotion Act of 1997.

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