The World Trade Organization (WTO) has decided again that U.S.
tax law covering export income earned by U.S. companies violates
international trade agreements. Under the ruling, the United States
has until November 1 to enact replacement legislation or face up
to $4 billion in trade sanctions on U.S. exports to the European
The WTO ruling is only the most recent blow to the U.S. export
regime. The tax law enacted last year, P.L. 106-519, replaced the
Foreign Sales Corporation program, which was also found to violate
Under international agreements, the United States is not required
to alter its current tax law. However, if this nation keeps the
current regime, it must accept trade sanctions approved by the WTO.
Members of U.S. industry, including the defense and aerospace industries,
have expressed their preference to reform the current tax code in
an effort to avoid trade sanctions.
During the markup of the National Defense Authorization Act for
fiscal year 2002, the House Armed Services Committee adopted an
amendment that would effectively delay—if not block altogether—the
Defense Department’s efforts to contract for services.
The amendment, known as the Department of Defense Services Contracting
Reform Act of 2001, was offered by Rep. Neil Abercrombie, D-Hawaii.
It would require that all of the department’s future service
contracts, including re-competes, extensions and modifications,
be subject to public-private competition.
The Abercrombie amendment also would require that all direct and
indirect contractor costs be reported on a quarterly basis—at
a minimum. The reporting requirements are similar to those proposed
by the Army earlier this year. The Department of Defense rescinded
those requirements on procedural grounds.
The legislation is needed to ensure that the federal government
achieves continued cost savings through competition between public
and private sectors of the economy, according to the American Federation
of Government Employees (AFGE). Once work is turned over to the
private sector, AFGE officials said, there are often no mechanisms
to ensure that savings are maintained. By requiring public vs. private
studies, the federal government ensures that the most cost-effective
organization will provide the service, union officials argued.
NDIA disagreed. Once a contract is won by the private sector, the
association said, competition is actually greater than when public-private
competition is required. Public vs. private studies can take more
than two years to complete and are very costly to both private and
public sectors, NDIA said. Currently, the association said, only
2 percent of all defense contracts are competed through such studies.
Requiring them on all service contracts would result in gaps in
service, when military personnel or civilian defense employees would
be required to perform the work regardless of the cost, NDIA said.
Maintaining Aging Equipment
The Congressional Budget Office in August released a report finding
“no evidence” to support the armed services’ contention
that the cost of operating and maintaining aging equipment is responsible
for increasing spending in their operation and maintenance accounts.
The study, prepared in response to a request from the Senate Budget
Committee, centered on two main questions: First, does aging equipment
and associated operating and maintenance costs explain trends in
O&M spending? And, second, what lessons can be learned from
previous studies on the relationship between aged equipment and
its operation and maintenance costs?
The report found that approximately 20 percent of O&M spending
is devoted to equipment and that O&M spending for the majority
of equipment types has not risen between 1990 and 2000. Although
certain equipment—such as the KC-135 tanker aircraft—may
have experienced marked increases in maintenance costs, these spikes
in spending are not enough to explain dramatic increases in O&M
expenditures, the study found.
Other O&M spending, such as environmental remediation, health
care and base support, has grown, even as the size of the armed
forces has decreased since 1990.
The numbers cited by the services to explain recent spending increases
are selective and incomplete, the study suggested.
In the case of the Air Force, for instance, the report found that,
by using data from 1995 to 2000, instead of 1999 to 2000, costs
per-flying-hour increased 10 percent over five years, rather than
almost 50 percent over four years.
The Army estimated a cost growth of 30 percent for spare parts
for five of its weapon systems in the past three years. The CBO
found, however, total Army-wide spending on spare parts per operating
hour increased by only 12 percent in the past six years.
The Office of Management and Budget (OMB) in late August projected
a fiscal year 2002 budget surplus of $173 billion, down from an
estimated $231 billion in April. Long-term estimates also declined.
OMB’s latest projection called for a 10-year budget surplus
of roughly $3.1 trillion, a reduction of $130 billion from April.
Of this surplus, $2.5 trillion is in the politically sensitive Social
The shrinking surplus has intensified the debate on increased funding
for defense. The administration has asked for an additional $18.4
billion in defense spending, but is facing sharp criticism, particularly
from Senate Budget Committee Chairman Kent Conrad, D-N.D. Based
on the latest OMB estimates, Conrad told reporters that he could
no longer approve the defense increase. The money, he said, just
If Conrad’s committee does oppose increased defense spending
in its budget resolution, 60 votes on the Senate floor could override
Even if the increase for 2002 is approved, appropriators in the
Senate and House are worried about the 2003 budget. The administration
purposely held off funding for many modernization and re-capitalization
programs in the 2002 budget in an effort to wait for the so-called
Rumsfeld reviews, which were folded into the Quadrennial Defense
Review. Shrinking surplus estimates are sure to raise new questions
about these programs.