Executive Comp Splits Minimum Wage Camps

Large companies are complaining about a revenue-raising measure that would limit the amount that highly paid executives can defer on their taxes.

Since the 110th session Congress began with the Democrats in charge, legislators’ push to raise the minimum wage has been moving quickly. But the Senate’s insistence that the $2.10 wage hike be bundled with tax credits for small businesses could slow progress toward the increase.

That’s because the two houses will have to compromise if the issue has any chance of moving forward. Last week, the Senate passed the House’s bill to raise the minimum hourly wage from $5.15 to $7.25, by a margin of 94-3. The Senate, however, tacked on a resolution to grant $8.3 billion in tax cuts to small businesses that could be hamstrung by the wage increase. The House’s original bill required only that all companies raise their minimum-wage floor in three increments over two years and two months.

Many Republican senators, as well as President Bush, have said a wage hike must be tied to tax relief for small businesses, and the Democratic senators have gone along with that compromise. The issue hinges now on the question of how much the House is willing to adjust its original plan.

As legislators work out their differences, small-business advocates are praising the Senate’s legislation, which includes several tax incentives and offsets. At the same time, other business lobbyists say those credits could come at the expense of larger companies, which would have to make up for the tax relief over the long term by forfeiting such tax deductions as those on the cost incurred from liability suits. The Senate bill’s tax sweeteners, which are mostly extensions of existing tax breaks, would be temporary while the loss to the tax deductions enjoyed by mostly large companies would be permanent, according to Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce.

The chief complaint about the Senate bill among large companies is a revenue-raising measure limiting the amount that corporations’ most highly paid executives can defer on their taxes. The proposed $1 million cap on non-qualified deferred compensation plans would create “administrative and enforcement nightmares for companies and for the IRS,” wrote David Heywood, chairman of Financial Executives International’s tax committee, in a letter to a number congressmen and senators. Under the bill, executives could not defer more than $1 million or their average taxable compensation for the previous five years, whichever is less. Failure to do so could result in a 20 percent penalty in taxes and fines.

Estimated by the Senate staff to raise $307 million over 10 years, the deferred compensation provision is one of the most expensive items in the Senate’s Small Business and Work Opportunity Act, notes Mark Prysock, FEI general counsel. This change to executive compensation is not surprising, he adds, as it has been a hot topic for some time after high-profile CEO exits from Home Depot and Pfizer led to shareholder outcry about excessive pay packages.

Still, attempts in Congress “to advance a certain social policy using the tax code as a way to do that is not appropriate,” Prysock told CFO.com. “The best way to address executive compensation issues is through the Securities and Exchange Commission.” The Senate Finance Committee wants to limit how much top executives can avoid paying in income taxes because rank-and-file employees generally cannot defer compensation, according to the committee’s markup of the bill.

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