Foreign-owned companies are the targets as House Democrats try to plug a financial hole in the new farm bill.

A tax proposal by Lloyd Doggett, D-Texas, will likely be added to the farm bill (HR 2419) before that measure reaches the House floor on Thursday, according to a leadership aide. That would help cover $4 billion in additional funding for nutrition programs and put the farm bill in compliance with pay-as-you-go rules requiring offsets for new spending.

Doggett, a member of the Ways and Means Committee, aims to close what he calls a loophole that allows foreign-owned companies to minimize U.S. taxes through a practice known as “earnings stripping,” which shifts income to a country with lower tax rates.

“This bill requires international tax dodgers to pay their fair share,” Doggett said in a statement. “America needs the tax dollars, and American firms who play by the rules deserve a level field.”

The proposal is drawing intense opposition from corporate groups that say it would discourage foreign investment and harm the economy.

This is “doing something that’s going to discourage these businesses from operating in the United States,” said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers. “I think any business is going to rethink their plans, if they’re going to be saddled with additional taxes.”

Here is how earnings stripping works: A foreign-owned company doing business in the United States sets up a subsidiary in a third country. The subsidiary takes possession of an important asset, such as a trademark, a patent or intellectual property.

Then, the U.S. arm of the company makes interest or royalty payments to the other subsidiary. Under U.S. law, those payments are deductible, reducing or eliminating the company’s U.S. tax liability, shifting it to the third country. The maneuver essentially allows the company to pay taxes at rates lower than those in the United States or in its home country.

Companies would be required to pay the withholding rate in their home country or in the other foreign country, whichever is higher.

Todd Malan, president of the Organization for International Investment, said the proposal would discriminate against companies investing in the United States and creating jobs.

Doggett’s proposal would raise a projected $7.5 billion over 10 years, although the Joint Committee on Taxation has not released an official estimate. The price tag for the nutrition section of the farm bill is about $4 billion more than the baseline budget over five years.

Some House Democrats argued against tax-based offsets for the cost of the farm bill. On Tuesday, Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee, joined them, saying lawmakers should find savings in farm programs.

“We’ll probably need all of our offsets for expiring tax relief provisions that need to be addressed this year,” Grassley said in a statement.

First posted July 24, 2007 9:05 p.m.