WASHINGTON – Congress is on the verge of turning a small tax bill, designed to undo a single corporate subsidy, into a sprawling package of special tax breaks that is leaving reformers and tax fairness advocates appalled.

The House and Senate have approved differing versions of the legislation, but both share a long list of special-interest tax provisions pushed by Washington’s powerful corporate lobbyists.

There are tax breaks for, among others, bow-and-arrow makers, Oldsmobile dealers, NASCAR racetrack owners and producers of fishing-tackle boxes and sonar fish-finders – not to mention a $12 billion buyout for tobacco farmers.

Land developers, ranchers, small-airplane manufacturers, commodity traders and distillers also would benefit from various tax provisions, as would makers of ceiling fans.

“This is probably the most outrageous tax legislation I have ever seen,” said Barry Bosworth, a veteran economist at the Brookings Institution and a Carter administration official. “Nobody wants to say “No’, because both parties want donations.”

Although many companies will lose money with the closing of the export subsidy, the favorable tax treatment in the legislation will enable many of them to come out ahead overall.

General Electric Co., for example, lobbied and won House approval of a complex provision enabling it and other multinational firms to avoid paying $2 billion a year in U.S. taxes on foreign earnings.

Some economists say this tax break could cause more firms to shift operations offshore – the opposite of what members of Congress said they intended.

All this began when the World Trade Organization two years ago ruled illegal a $5 billion U.S. export subsidy for American companies, granted through the creation of so-called foreign sales corporations. In retaliation, Europeans began imposing tariffs on U.S. goods earlier this year.

While the Bush administration supports a repeal of the subsidy in order to comply with WTO rules, it held its fire as Congress went on a spree of approving corporate tax breaks that would in most cases offset the subsidies that U.S. firms would lose.

The ease with which many of the provisions went through both houses not only proved discouraging to tax reformers but also illustrated what they called a lack of fiscal discipline in Washington and a willingness to shred the tax system with new corporate preferences. The Senate approved the bill by a voice vote, so no one will know how senators lined up on final passage.

Among the beneficiaries are whaling captains recognized by the Alaska Eskimo Whaling Commission, who would be able to claim a charitable income tax deduction of up to $10,500 for expenses supporting Native Alaskan subsistence whaling.

The Senate bill would exclude from U.S. taxation the winnings of foreigners who bet on dog and horse races in the U.S. The House bill would ensure that those who exercise stock options would not have to pay withholding taxes.

To many tax reformers, the bills represent a classic “Christmas tree” of tax breaks that shows who has the real clout in Washington – lobbyists. The tax code has been riddled with new loopholes since it was last reformed in 1986, when Ronald Reagan was in the White House. And now there likely will be many more.

The multinational-company tax break, with GE as the biggest beneficiary, would reverse provisions in the 1986 tax reform that limited how much large companies could offset U.S. taxes with taxes paid to foreign governments on their overseas earnings.

The business tax breaks in the House bill total more than $90 billion and in the Senate version they amount to almost $170 billion, though much of this would be offset by tightening up on some tax shelters and using a portion of federal gasoline tax revenues.

Both measures would reduce the corporate income tax by 10 percent for manufacturing companies. But the definition of manufacturing would be broadened to include movie production, farming and software production. Small businesses that make less than $20 million a year in profits would also see a cut in corporate taxes.

Daniel Mitchell, a tax expert at the conservative Heritage Foundation, was so outraged by the special interest tax breaks that he wrote in a report that Congress should junk them all and “instead reduce the corporate tax rate.”

There seems little chance of that.

Some tax-reform advocates hold out hope that this bill could be the catalyst for another major round of loophole-closing as occurred in 1986.

“If you are an optimist, the worse it gets, the better it gets,” said former Internal Revenue Commissioner Donald Alexander, now a tax lawyer. “We could be approaching that last straw.”

The reforms from 1986 have been virtually wiped out, Bosworth, of the Brookings Institution, said, adding that if the measure passes, it will “screw up” the corporate tax system.

Former Congressional Budget Director Rudy Penner, now an Urban Institute scholar, called the bill a fiasco. He pointed to one ironic provision in the Senate bill that would authorize a “blue ribbon commission on comprehensive tax reform” to make a report in 18 months on whether to overhaul the tax system or adopt a new one for the U.S.

Because Congress must pass the bill to avoid European tariffs, it has attracted particular attention from lobbyists who know that anything they attach to it will become law.

Alexander said the legislation was “the last train leaving the station” in an election-year Congress, and every special interest used its clout to get its pet tax break in the legislation.

Now the question is which of these tax breaks will survive as Senate and House negotiators meet to hammer out a final version.

Rep. Bill Thomas, R-Calif., chairman of the House Ways and Means Committee, told the National Association of Manufacturers last week that many of the special business provisions might be dropped in the House-Senate conference committee.

Claude Barfield, trade analyst for the American Enterprise Institute, said Republican leaders had hoped to use the European tariffs as a legislative hammer to obtain broader corporate tax relief.

“It’s backfired and blown up in their faces,” he said.

During the debate on the House bill, Rep. Don Manzullo, R-Ill., chairman of the Small Business Committee, fought Thomas in seeking to obtain more tax relief for many small businesses that he said would have been harmed by repeal of the foreign sales corporation law.

Manzullo had formed a coalition of Republicans and Democrats who blocked the bill until more small business relief was granted. But the congressman said he did not succeed completely.

He said in an interview the coalition evaporated when the House leadership backed a buyout of tobacco farmers and agreed to restore a tax deduction for state and local sales taxes for two years-provisions that are very attractive to certain states and lured congressmen away from his coalition.

As for the special tax provisions, Manzullo said he wasn’t concerned. Many are designed to protect domestic industry harmed by unfair foreign competition, he said.

“In the end, the more we cut taxes, the more competitive we become,” he said.

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