Saying American companies "ought to pay taxes and be good

citizens," President Bush acknowledged on Wednesday there is a

growing problem with U.S. companies relocating to offshore tax

havens - an issue Democrats are exploiting with an eye on the fall elections.

In what's known as a "corporate inversion," a company sets up a

shell headquarters in a tax haven such as Bermuda while keeping most operations and jobs in the United States, potentially saving

millions of dollars in U.S. taxes on income from foreign sources.

The practice is legal, but Democrats have been hammering away at

the issue for months as yet another example of corporate

irresponsibility. Republicans have been scrambling for a response

beyond their standard claim that the relocations are triggered by

complicated, burdensome U.S. tax laws.

Speaking with reporters Wednesday at the White House, Bush stopped short of endorsing proposals that inversions be outlawed -but he did urge greater scrutiny of the issue.

"I think we ought to look at people who are trying to avoid U.S.

taxes as a problem," the president said. "I think American

companies ought to pay taxes and be good citizens."

A few hours after he spoke, the Senate approved on voice vote a

measure by Sen. Paul Wellstone, D-Minn., to prohibit these

corporate expatriates from getting Defense Department contracts if they moved to offshore tax havens after Dec. 31, 2001. The measure was added to the annual defence spending bill.

"We're just putting everybody on notice: You're not going to be

able to do that," Wellstone said. "This is an egregious practice."

Several Republicans grumbled that the issue was far more

complicated than portrayed by Democrats.

"We are in an environment where slapping business around is good

politics," said Sen. Phil Gramm, R-Texas. "It may be popular, but I do not think it is good public policy."

In 2001, 26 companies now located in Bermuda or another tax haven had more than $1 billion in federal contracts, according to

Democratic research. More than two-thirds had projects related to

defense or homeland security.

The White House also responded Wednesday to a report in The Daily News in New York raising questions about a subsidiary set up in the Cayman Islands - another tax haven country - by Harken Energy Corp. in 1989, while Bush was on the company's board of directors. Bush said he opposed the venture.

Also, Halliburton Co., a Dallas-based energy services company,

registered at least 20 subsidiaries in the Cayman Islands when

Vice President Dick Cheney was chief executive from 1995 to 2000, The Washington Post reported, citing Securities and Exchange Commission records.

Several tax lawyers said the Harken arrangement, which involved

oil exploration in Bahrain, differed from the other corporate moves

because it did not involve setting up a new parent company that

would pay no U.S. taxes on its foreign-earned income. White House

spokesman Ari Fleischer said the subsidiary would have paid US taxes on income from any U.S. oil sales, but the venture didn't make any money.

"If they had produced any oil in Bahrain and sold it in the United

States, it would of course have been taxable in the United

States," Fleischer said.

Dozens of U.S. corporations have relocated their headquarters to

Bermuda or other tax havens in recent years or are in the process

of doing it. The Stanley Works tool company, Tyco International,

Ingersoll-Rand, Accenture, Cooper Industries and Fruit of the Loom

are among the companies that have or want to set up shop in

Bermuda, according to the House Ways and Means Committee.

The heightened interest follows a surprising vote last week on an effort to bar these firms from getting contracts with the

yet-to-be-created Homeland Security Department. More than 100

Republican House members switched their votes at the last minute

when Majority Whip Tom DeLay, in a rare move, released them to

vote for it.

A few months ago, most Republican leaders, backed by the Bush

administration, said tackling this issue would require a long-term

overhaul of corporate tax laws. They suggested that corporations

were being driven offshore for competitive reasons by an

unreasonably high U.S. tax burden.

Now, the issue has gained such steam that House Speaker Dennis Hastert, R-Ill., has promised a vote addressing it this year, a

spokesman said. Democrats have obtained 187 of the 218 signatures needed to force consideration of a bill to eliminate inversions.

The Senate Finance Committee recently approved a bipartisan bill

that would treat such companies as U.S. firms for tax purposes if

they do no substantial business in their new host country.