[Congressional Record Volume 145, Number 28 (Tuesday, February 23, 1999)]
[Extensions of Remarks]
[Pages E247-E248]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




            THE DEFENSE JOBS AND TRADE PROMOTION ACT OF 1999

                                 ______
                                 

                            HON. SAM JOHNSON

                                of texas

                    in the house of representatives

                       Tuesday, February 23, 1999

  Mr. SAM JOHNSON of Texas. Mr. Speaker, today I have introduced 
legislation, H.R.--, that will eliminate a provision of the tax code, 
which severely discriminates against United States exporters of defense 
products. My bill, entitled ``The Defense Jobs and Trade Promotion Act 
of 1999'' will help our nation's defense contractors improve their 
international competitiveness, protect our defense industrial base, and 
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 (FSCs), 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 that rely on value-added taxes (VATs) rather than on 
corporate income taxes. When products are exported from such countries, 
the VAT is rebated to these foreign companies, 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 incomes taxes, the FSC allows 
U.S. companies to compete with our international competitors who pay no 
taxes.
  In 1976, Congress added section 923(a)(5) to the tax code. This 
provision reduced the FSC tax benefits for defense products to 50 
percent, while retaining the full benefits for all other products. The 
questionable rationale for this discriminatory treatment, that U.S. 
defense exports faced little competition, clearly no longer exists. 
Whatever the veracity of that premise 25 years ago, today military 
exports are subject to fierce international competition in every area. 
Twenty-five 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 ever more critical to maintaining a viable U.S defense 
industrial base. For example, of the three fighter aircraft under 
production in this country, two are dependent on foreign customers; the 
same is true for 1MA1 tank, which must compete with several foreign 
tank manufacturers.
  The Department of Defense supports repeal of this provision. In an 
August 26, 1998 letter, Deputy Secretary of Defense, John Hamre wrote 
Treasury Secretary Rubin about the FSC. Hamre wrote ``The Department of 
Defense (DoD) supports extending the full benefits of the FSC exemption 
to defense exporters. . . .  I believe, however, that putting defense 
and non-defense companies on the same footing would encourage defense 
exports that would promote standardization and interoperability of 
equipment among our allies. It also could result in a decrease in the 
cost of defense products to the Department of Defense.'' My legislation 
supports the DoD recommendation and calls for the repeal of this 
counterproductive tax provision.

  The recent decision to transfer jurisdiction of commercial satellites 
from the Commerce Department to the State Department highlights the 
capriciousness of section 923(a)(5). When the Commerce Department 
regulated the export of commercial satellites, the satellite 
manufacturers received the full FSC benefit. When the Congress 
transferred export control jurisdiction to the State Department, the 
same satellites, built in the same factory, by the same hard working 
men and women, no longer received the same tax benefit. Because these 
satellites are now classified as munitions, they receive 50 percent 
less of a FSC benefit than before. This absurd result demonstrates that 
the tax code is not that correct place to implement our foreign policy. 
The administration has agreed that Congress should take action to 
correct this inequity as it applies to satellites. My legislation would 
not only correct the satellite problem, but it would also ensure that 
all U.S. exports are treated in the same manner under the FSC.
  The Department of Defense is not the only entity that has commented 
publicly about this provision. A December 1998 joint project of the 
Lexington Institute and The Institute for Policy Innovation entitled 
``Out of Control: Ten Case Studies in Regulatory Abuse'' included an 
article by Loren B. Thompson about the FSC. The article is aptly titled 
``26 U.S.C. 923(a)(5): Bad for Trade, Bad for Security, and 
Fundamentally Unfair'' highlights the many problems of this unfair tax 
provision. I call your attention to one issue the article addresses 
that I have not yet raised--the real reason the Congress enacted this 
provision in 1976. The author, Loren B. Thompson, argues that Congress' 
decision to limit the FSC benefit for military exports was not based on 
sound analysis of tax law, but on the general antimilitary climate that 
pervaded this country in the mid 1970's. As Mr. Thompson writes, 
Congress enacted section 923(a)(5), ``to punish weapons makers . . . . 
Section 923(a)(5) was simply one of many manifestations of 
Congressional antimilitarism during that period.''
  Times have changed since this provision was enacted. This provision 
makes little sense from a tax policy perspective. No valid economic or 
policy reason exists for continuing a tax policy that discriminates 
against a particular class of manufactured products. The legislation I 
am introducing today is a small step this Congress can take to improve 
our military and strengthen our defense industrial base.
  I urge my colleagues to join me in repealing 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.

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