51 In connection with the adoption of FASB Staff Position 106-2, the Act had the effect of reducing the accumulated postretirement benefit obligation by $3.0 million. This resulted in an unrecognized net gain to the plan, which is currently being amortized. The annual reduction in the Company’s other postretirement benefits expense due to the Subsidy is expected to be approximately $0.4 million, which includes the amortization of the unrecognized net gain. The provisions of the Act do not have a material effect on the consolidated finan- cial statements. In December of 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was enacted in the U.S. The Act introduced a prescription drug benefit under Medicare as well as a federal subsidy of 28% of drug costs between $250 and $5,000, tax-free (the Subsidy), to sponsors of retiree health benefit plans that provide a benefit that meets certain criteria. The Company’s other postretirement plans covering U.S. retirees currently provide certain prescription benefits to eligible participants. The Company’s actuaries have determined that one of the Company’s prescription drug plans for retirees and their dependents retired prior to January 1, 2004 provides a bene- fit that is at least actuarially equivalent to Medicare Part D under the Act. The assumed annual rate of increase in the cost of covered health care benefits is 8.0% for 2005. It is assumed to decrease gradually to 4.5% in the year 2011 and remain at that level thereafter. Changing the assumed health care cost trend would have the following effect: The assumed discount rate was 6.0% for 2004 and 2003, respectively. Estimated future benefit payments for the next 10 years are as follows: The provision for income taxes consists of the following: 11. INCOME TAXES The components of income from consolidated continuing operations before income taxes follow: A reconciliation of the U.S. federal statutory rate with the effective tax rate follows: Deferred tax assets and liabilities are comprised of  the following: Retiree Retiree Life Fiscal Year Medical Insurance Total (millions) 2005 $ 5.4 $ .7 $ 6.1 2006 5.5 .7 6.2 2007 5.8 .8 6.6 2008 6.0 .8 6.8 2009 6.3 .9 7.2 2010 - 2014 36.7 5.0 $41.7 1-Percentage- 1-Percentage- (millions) point increase point decrease Effect on total of service and interest  cost components in 2004 $ .9 $ (.8) Effect on benefit obligation as of  November 30, 2004 9.2 (7.7) (millions) 2004 2003 2002 Income taxes Current Federal $ 67.4 $ 48.2 $ 29.3 State 7.7 4.1 1.4 International 15.6 15.5 17.6 90.7 67.8 48.3 Deferred Federal 1.5 15.3 19.6 State – 1.4 1.9 International (3.2) (1.1) (.4) (1.7) 15.6 21.1 Total income taxes $ 89.0 $ 83.4 $ 69.4 (millions) 2004 2003 2002 Pretax income United States $204.5 $175.6 $140.7 International 89.3 94.4 83.2 $293.8 $270.0 $223.9 2004 2003 2002 Federal statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of  federal benefits 1.7 1.3 1.0 Tax effect of international operations (5.8) (5.3) (4.4) Tax credits (.5) (.8) (1.2) Other, net (.1) .7 .6 Effective tax rate 30.3% 30.9% 31.0% (millions) 2004 2003 Deferred tax assets Employee benefit liabilities $ 58.0 $ 56.6 Accrued expenses and other reserves 19.8 18.1 Inventory 3.7 4.9 Net operating and capital loss  carryforwards 11.5 7.9 Other 38.5 30.7 Valuation allowance (13.3) (7.0) 118.2 111.2 Deferred tax liabilities Depreciation 54.7 49.4 Other 38.4 36.1 93.1 85.5 Net deferred tax asset $ 25.1 $ 25.7 MCCORMICK & COMPANY 2004 ANNUAL REPORT