Naval shipbuilders would get a break on the timing of estimated taxes, just as commercial yards do.

BY: MATT WICKENHEISER Staff Writer

President George W. Bush is expected to sign a corporate-tax bill that will defer millions of dollars of corporate-income-tax payments for naval shipbuilders like Bath Iron Works, a General Dynamics subsidiary that is one of Maine's largest employers.

A provision of the bill championed by U.S. Sen. Olympia J. Snowe, R-Maine, allows the shipbuilders to pay 40 percent of their estimated income tax during the life of the ship contract and then pay the remaining 60 percent in the year that construction is completed. That's only fair, supporters contend, because the profit or loss on a ship project is known only when it is complete.

Currently, naval shipyards estimate profits during each year of the construction of a ship and pay income taxes on those estimates.

Critics have labeled the tax bill a pork-barrel measure that benefits only a few large corporations. However, supporters of the proposal say it provides greater fairness to shipbuilders that won't be taxed on profits they haven't yet earned. Over time, they add, the change won't cost the government anything.

In the next five-year period, the accounting change will cost the U.S. Treasury roughly $500 million in taxes, according to government estimates, as shipbuilders transition to the new system. That money will be recouped in coming decades.

"It is a matter of cash flow; it doesn't reduce their taxation," said Snowe on Wednesday as she prepared to tour a commercial section of South Portland.

Snowe said the entire corporate-tax bill is revenue-neutral; any shortfalls created by provisions like the shipbuilders' tax adjustment have been offset by closing corporate loopholes, such as tax shelters.

On the surface it's a wash - the shipyards pay the same taxes, just at different stages. However, there is a benefit: The shipyards will be able to use money normally paid in taxes to invest in their business, or to make money in other ways.

"We haven't had a real hard look at it," said Kendell Pease, spokesman for General Dynamics, BIW's parent company. "It's being examined to see what real impact we'll have."

Critics of the provision took issue with the tax bill, saying that past experience suggests that the tax deferral could be abused.

"It's technically a deferral; the problem is it's a deferral that just keeps deferring," said Robert S. McIntyre, director of Citizens for Tax Justice, a left-leaning, Washington-based tax-watchdog group. "Year in and year out, they never seem to pay anything."

His concern is based on the experience of the early 1980s, when some government contractors extended projects indefinitely without paying taxes. The problem led to legislation in 1986 that required shipyards to pay estimated taxes during the duration of a contract.

Snowe said that problem won't be repeated because her provision includes a cap that didn't exist in the early 1980s code. The naval shipyards are only allowed to use the 40/60 treatment for five years, after which time they have to pay the remaining taxes owed.

McIntyre pointed out the lost-revenue estimate for the government was $500 million.

"If it costs the government money, then somebody's getting it," he said.

Snowe's office said that the $500 million was the transitional cost, a drop in tax revenues that would occur while the systems changed over. In the long run, the $500 million would be recouped.

Snowe said the change was also giving naval shipyards the same advantages already enjoyed by their commercial counterparts.

"It is not pork, it's a matter of fairness," said Snowe.