Skirmish Over Tax Breaks Is Waged in the Shadows

THE time was nearing 3 a.m. on Thursday, June 24, as the United States Senate prepared to wrap up a grueling debate on President Clinton's economic package. Just one minute before the end of the debate, Sens. John McCain (R) of Arizona and Daniel Inouye (D) of Hawaii proposed an amendment that would create a tax break for companies that invest on Indian reservations where the unemployment rate is particularly high.

The Senate quickly passed the amendment on a voice vote before voting on the rest of the economic plan. Yet what many of the senators may not have realized was how the $212 million tax break for Indian reservations would be financed: through a corresponding reduction in section 936 of the Internal Revenue Code.

What, you ask, is section 936? That's the part of the tax code that gives a large tax deduction to companies that invest in Puerto Rico.

The House had already drastically scaled back section 936, but the Senate had kept more of the tax deduction in place after an intensive lobbying campaign by Motorola Inc., General Electric Company, PepsiCo Inc., and other large corporations that benefit from the tax break.

Their cause was championed by Sens. Bill Bradley (D) of New Jersey and Daniel Patrick Moynihan (D) of New York, whose states are the homes of many of these corporate giants and many voters of Puerto Rican ancestry.

So why did Senator Bradley and other supporters of section 936 allow a last-minute amendment to effectively reduce the size of the Puerto Rico tax break? One Senate staff member says that supporters of section 936 were afraid of a recorded vote.

"Nobody wanted to cast a vote that would deny help to [American Indians] at the expense of the most profitable corporations who happen to be based in Puerto Rico," this staffer says.

Now that the House-Senate conference committee has opened business, however, Senator Moynihan and his counterpart at the House tax-writing committee, Rep. Dan Rostenkowski (D) of Illinois, will be free to change the Indian tax-break provision as they like. And they won't have to go on the record to do it, since the conference committee makes its decisions behind a veil of secrecy.

Scott Celley, a spokesman for Senator McCain, stresses that the amendment was not designed as an attack on the Puerto Rican tax breaks. He says that the conferees should try to keep the Indian investment tax credit in the reconciliation act by finding some other way of financing it. The act is designed to achieve $500 billion in deficit-reduction over five years through a variety of spending and tax changes. If the conferees drop the Indian tax measure altogether, Mr. Celley vows, McCain and Senator Inou ye "will come back again and again" with the provision.

The measure passed the House and Senate last year but was part of a tax bill that was vetoed by then-President Bush. McCain and Inouye introduced the tax breaks as a free-standing bill earlier this year.

Designed to bring nongambling businesses to Indian reservations, the legislation would provide a 10 percent tax credit to those hiring American Indian workers and a 15 percent credit to those building on Indian lands. But the full benefits would only be available on Indian reservations where the unemployment rate is 300 times the national average.

"A particularly strong set of tax incentives are necessary in order to succeed in attracting businesses to Indian reservations," McCain wrote in a statement.