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
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
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
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 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."