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Senate Panel Limits Pay Deferrals for Executives
Measure Is Part of Broad Tax-Break Package to Help Small Businesses Offset Cost of Minimum Wage Rise
By Lori Montgomery and Jeffrey H. Birnbaum, Staff Writers
Washington Post
Thursday, January 18, 2007

The Senate Finance Committee approved legislation yesterday to limit one element of the big pay packages awarded to corporate executives, a move that business lobbyists saw as the harbinger of an assault on corporations and the wealthy now that Democrats control Congress.

On a voice vote, the committee agreed to change rules permitting some executives to amass millions of dollars in tax-deferred accounts.  Limiting that perquisite would raise $806 million over 10 years, by congressional estimates.  The money would be used to help cover tax breaks for small businesses hurt by a proposed increase in the minimum wage, a top Democratic priority.

Highly paid executives are not the only target of the new Democratic majority.  In an indication of the shifting priorities on Capitol Hill, oil and gas companies could lose tax breaks for drilling to raise money for renewable-energy initiatives.  Drug companies are battling a House-passed plan to require the government to negotiate lower prices for Medicare recipients.  And a variety of businesses, from insurance companies to wholesalers, are trying to block proposals that would increase their taxes to generate cash for Democratic proposals.

"In an environment like the one we face today, every business is at risk," said Dirk Van Dongen, president of the National Association of Wholesaler Distributors, which is fighting some measures.

"I don't think most people have grasped what they may be facing yet," tax lobbyist Kenneth Kies said.  "Every industry should worry."

Stan Collender, who follows congressional budget-making at the public relations firm Qorvis Communications, said that though the business community is rightly nervous, "the Democrats at least are trying to find ways to pay for additional spending by going where the money is:  corporate tax breaks and subsidies."

The proposal to limit an executive perk known as deferred compensation is linked, in a complex way, to a proposal to raise the minimum wage to $7.25 an hour from $5.15.

The measure symbolizes an effort on Capitol Hill to find a new political center in a Congress that Democrats control by a narrow margin.  The Democrats have placed a high priority on increasing the minimum wage, which has fallen, in inflation-adjusted dollars, to its lowest level in more than 50 years.  Senate Republicans, who might have the votes to block the measure, will go along only if there are tax breaks for small businesses that would have to pay higher wages.

But Democrats criticized the federal budget deficit during the campaign, and have pledged not to increase it.  To pay for the small-business tax breaks, they came up with a plan to revoke tax provisions that they regard as corporate loopholes and tax shelters.

The result is a grab-bag bill that contains 13 tax breaks worth $8.3 billion over 10 years -- and 14 provisions aimed at raising taxes by a similar amount on corporations, their chief executives and other highly paid workers.  The tax package is to be merged on the Senate floor with a minimum-wage bill that has already passed the House.  The Senate is expected to take up the issue as soon as next week.

While business lobbyists said they were concerned about several of the tax-raising measures, provisions aimed at executive compensation are causing the most controversy.

The measure would place new restrictions on one of the most popular executive benefits in corporate America.  About 95 percent of Fortune 1000 companies offer deferred-compensation packages in some form, said Jeff Varblow, senior vice president of the Cochlan Group, a Chicago firm that specializes in designing and administering the plans.

The plans typically function as high-end retirement accounts for corporate executives.  In principle, they work a lot like Individual Retirement Accounts or 401(k) retirement plans, but involve far larger sums.

The plans allow the executives to put part of their income, sometimes several million dollars a year, into a special account without immediately paying taxes.  The money earns interest, which isn't taxed right away, either.  After retirement, the executive withdraws the money and pays taxes on it, but the earlier tax deferrals mean an account may have grown millions of dollars larger than an ordinary savings account would have.

The practice allows executives to "retire in the same type of lifestyle they were used to living," Varblow said.

The measure approved yesterday would limit the amount an executive could put in such a plan to $1 million a year or the amount of the executive's annual salary, whichever is less.  Anyone who exceeded the allowable amount would be forced to pay taxes on all income deferred since Dec. 31, 2006, plus a 20-percent penalty.

Finance Committee Chairman Max Baucus (D-Mont.) said limiting the accounts is a declaration that "more Americans should be treated equally."

"For the vast, vast majority of families, there's a limit on deferred compensation that's not taxed of about $15,000" a year, Baucus said, referring to the sum ordinary people can put in a 401(k) plan.  "I just think the general rule should apply to all Americans, even the very highly compensated executives."  Limiting their annual deferral to $1 million "is not an unfair burden," he said.

The measure faces trouble in the House, where many Democrats oppose more tax breaks for business.  House Majority Leader Steny H. Hoyer (D-Md.) yesterday said he was "disappointed" by the Finance Committee's action.

"The choice to tie a bill raising the minimum wage to tax breaks for businesses will cost taxpayers $8 billion and complicate and delay the passage of an increase," Hoyer said in a statement.  "Eighty-nine percent of the American people support an increase in the federal minimum wage, and they should not have to spend $8 billion in order for Congress to do the right thing."

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/17/AR2007011701071_pf.html