Senate panel votes to trim tax breaks

Legislation to limit deferral of executives' pay is folded into minimum wage bill

January 18, 2007|By Marilyn Geewax | Marilyn Geewax,Cox News Service

WASHINGTON -- The Senate Finance Committee voted yesterday to rein in the tax breaks that sweeten the huge compensation packages corporations often bestow upon executives.

The crackdown was tucked into legislation to raise the federal minimum wage by $2.10 over two years to $7.25. In a unanimous voice vote, the committee approved the wage increase, along with a package of tax reductions and credits aimed at helping small businesses.

In a surprise to many lobbyists who didn't see it coming, one provision was aimed at top executives of hundreds of large companies. It says an individual can defer no more than $1 million per year in compensation, beginning this year.

Executives at most major corporations receive pay packages worth far more than $1 million annually, and typically move much of their compensation, especially bonuses and stock incentives, into deferral accounts to shield their earnings from taxes until they are retired.

By waiting to collect their full compensation, most executives ultimately reap a higher reward, said Patrick McGurn, executive vice president at Institutional Shareholder Services, a Rockville firm that advises clients on proxy issues.

"Compensation packages are built on a foundation of deferral," McGurn said. "The longer you put off paying taxes, the better off you are."

If the legislation were to get final approval, which is expected, taxes on some of the nation's best-paid executives would rise by a total of $806 million over 10 years.

Other provisions aimed at executive pay may emerge from the new Congress. Long criticized by workers and shareholder activists, the controversy exploded this month when Home Depot Inc. Chairman and Chief Executive Officer Bob Nardelli left the home-improvement company with a $210 million severance package.

This month, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, promised to introduce legislation this year to tame the "out of control" system for paying executives. He wants to write rules to give shareholders more power over compensation packages.

An opening

The minimum-wage issue gave the Senate an opening to start addressing the executive compensation issue very early in the new Democratic-controlled Congress.

Last week, the House approved a bill boosting the minimum wage. To ensure enough votes for Senate passage, Democrats have agreed to attach the incentives to help small businesses.

In all, the new tax breaks would cost government about $8.3 billion over a decade. Because Democrats have promised to balance new tax cuts with either spending reductions or tax increases in other areas, the Senate Finance Committee had to find offsets.

Committee Chairman Sen. Max Baucus, a Montana Democrat, worked out a bipartisan package of provisions to reduce corporate tax shelters and loopholes to raise $8 billion over 10 years. The limit on tax breaks for deferred compensation is part of that package.

Expected to pass

The legislation is expected to pass easily in the Senate, perhaps as early as next week.

The House then would have to vote on the tax-related provisions to match the Senate's bill before a single, unified measure could be sent to President Bush for his signature. The House is very likely to do that, and the White House has indicated it would approve the minimum-wage increase legislation as long as it contained the tax incentives for small business.

The Senate's proposed legislation would not by itself restrain executive pay. In fact, it could have the unintended effect of causing executives to demand raises to "make them whole" after they pay higher tax bills.

But corporate boards may not want to boost compensation now that the mood has turned against them in Congress. The committee's unanimous vote "shows that a populist tide exists on Capitol Hill," McGurn said. Executives should expect to see new legislation to restrain their pay, he said.

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