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Senators To Target Deferred Compensation
Washington Post
By Lori Montgomery and Jeffrey H. Birnbaum
Washington Post Staff Writers
Wednesday, January 17, 2007; Page D01

The Senate Finance Committee is considering a proposal to sharply limit the earnings corporate executives and other highly paid employees can place tax-free into deferred compensation plans, one of the most popular executive benefits in corporate America.

Under the proposal, expected to be discussed today by committee members, an individual taxpayer could defer no more than $1 million annually in compensation, beginning this year. The shift in tax policy would be likely to affect top executives at hundreds of corporations and would raise taxes on some of the nation's wealthiest workers by an estimated $806 million over 10 years.

The proposal tracks rhetoric that some Democrats employed during the midterm elections, when they portrayed the Republicans who controlled Congress as being too close to special interests and the wealthy. It also offers a response to controversies that have erupted over executive pay in recent months, including scandals over backdated stock options and multimillion-dollar compensation packages paid to current and former corporate chieftains.

The proposal is among more than a dozen provisions aimed at shrinking corporate tax shelters and closing tax loopholes that Chairman Max Baucus (D-Mont.) is expected to propose when the committee meets today, Finance Committee aides said. Together, they would boost federal tax revenue by more than $8 billion over a decade, according to preliminary committee estimates -- nearly enough to pay for a series of tax breaks Baucus and others want to push through Congress for businesses likely to be hit hard by a proposed increase in the minimum wage.

Last week, the House voted to raise the minimum wage to $7.25 an hour from $5.15, the first such increase in a nearly a decade, making good on one of the Democrats' campaign promises.

The minimum-wage increase faces difficulty in the Senate, however, unless it is accompanied by tax breaks for small businesses, according to a leadership aide. On Friday, Baucus and the senior Republican on the Finance Committee, Sen. Charles E. Grassley of Iowa, unveiled a package of "small-business tax incentives" that would extend credits for employers who hire former welfare recipients and change the tax code to simplify bookkeeping for certain companies, among other provisions.

It is estimated by the committee that that package will cost $8.3 billion over 10 years. Because Democrats have promised not to increase the deficit, that sum must be offset by spending cuts or tax increases.

In addition to limiting deferred compensation for executives, the committee is expected to target several controversial corporate tax shelters, as well as Americans who renounce their citizenship for tax reasons. But the deferred compensation provision appears likely to generate alarm among business leaders.

Limiting deferred compensation would be "earthshaking" to American executives, said Patrick McGurn, executive vice president of Institutional Shareholder Services in Rockville.

"A lot of executives are deferring the lion's share of their compensation these days. And the typical executive at a Fortune 100 company makes well over $1 million. So there is a huge amount of compensation that would go into deferral accounts that could not be deferred if the tax code were changed," McGurn said.

Business lobbyists reacted to the proposal with deep skepticism.

"There are lots of technical problems with this. For instance, we're not sure what the definition of deferred compensation is," said Lynn D. Dudley, a vice president of the American Benefits Council, an advocate of employer-sponsored benefit plans. "It makes sense to me to have this discussion; Congress is sensitive to this issue, and we want to work with them. But more needs to be done to vet the practical implications of this."

Other lobbyists were surprised at the measure, saying they had not even known it was under discussion.

"I didn't know it was coming," said Dan Danner, executive vice president of the National Federation of Independent Business, a small-business lobby. "It's not something that we proposed or had anything to do with."

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