Legislation to stifle the flow of US corporations reincorporating offshore to lower their tax bills has been tied to a long-stalled charity tax break proposed by US president George W. Bush.

US Democrats hope that combining the corporate and shelter measures with a charitable tax break would provide enough critical mass to get their package through Congress.

A leading Senate Democrat, Finance Committee Chairman Max Baucus, said last week that his panel would take up a bill in June, coupling the charity deduction with two measures that would raise money to offset the lost revenue.

One would impose tougher penalties on promoters and users of tax shelters; the other would remove the tax advantages for corporations that relocate to jurisdictions such as Bermuda.

In a report released last Wednesday, the General Accounting Office (GAO) estimated that abusive tax schemes such as shelters used by 737,000 taxpayers cost the American government almost $50 billion in 2000 alone.

President Bush wants taxpayers who do not itemise deductions on their tax returns to be able to claim a deduction for charitable contributions that would rise from $100 in 2002 to $1,000 by 2012. The deduction is part of a broader proposal by the president to foster greater involvement by religious groups in meeting social needs.

Facing growing budget deficits, lawmakers have balked at the estimated cost of almost $30 billion over 10 years. The House last July passed a slimmed-down $13 billion version.

Mr. Baucus provided no details of his plan aside from the cost issue.

Some Republicans were sceptical, contending that the shelter and corporate provisions could be too controversial. Republican Senator Rick Santorum said Democrats should keep a commitment to act on Bush's faith-based proposals without weighing them down.

"That's again taking something that is a consensus matter and turning it into a partisan escapade," Santorum said.

Lawmakers of both parties, as well as Bush's Treasury Department, are increasingly concerned about the proliferation of tax shelters and the wave of companies relocating to Bermuda in a bid to cut their US tax payments. No estimates were available on how much revenue the shelter and corporate measures might raise, but there was some sign of the scope in the GAO's new report.

Citing Internal Revenue Service estimates, the GAO - Congress' investigative arm - reported that 505,000 taxpayers in 2000 used a variety of offshore schemes to avoid paying up to $40 billion in taxes.

Another $10 billion in taxes were associated with 232,000 taxpayers who filed frivolous returns, claimed frivolous refunds, such as a phony slavery reparations credit, or set up abusive domestic trusts.

IRS Commissioner Charles Rossotti told the GAO in a letter that rooting out tax shelters is "among the highest compliance priorities" at the agency.

The GAO agreed that the IRS had stepped up activity in combatting shelters but that more needed to be done.