Tax breaks for businesses are on Congress' agenda - and in one case, the issue is surfacing earlier than expected.
As part of the effort to boost the minimum wage from $5.15 to $7.25, Congress is trying to restrict the annual amount of deferred executive compensation to no more than $1 million. And, in an unrelated action, it wants to eliminate tax deductions and change depreciation rules for drilling, worth $7.6 billion over 10 years, that were extended to the oil and gas industry in 2004 and recapture an estimated $10 billion in lost revenues of leases given to the oil industry in the late 1990s as an incentive to drill in deep Gulf Coast.
``These provisions will do nothing to address our nation's energy supply needs and will result in higher energy costs for consumers, both industrial and residential,'' said Jay Timmons, senior vice president for policy and government relations with the National Association of Manufacturers in Washington. ``The proposals would discourage much-needed investment in domestic energy infrastructure and supply,'' by eliminating the Section 199 deduction for exploration and forcing changes to existing drilling contracts signed in 1998-99, Timmons said.
Manufacturers use nearly one-third of the nation's energy, both as a fuel and a feedstock, with the plastics industry in particular heavily dependant on natural gas.
``I am very disappointed in the effort to take away any incentives for oil and gas drilling,'' said Thomas Donohue, president and chief executive officer of the U.S. Chamber of Commerce in Washington. ``It is a populist agenda.''
The executive compensation issue combines the minimum-wage hike passed by the House with a 10-year, $8.3 billion small-business tax-break package passed Jan. 17 by the Senate Finance Committee that also includes 14 provisions aimed at raising taxes by a similar amount. The proposed change in executive compensation rules is projected to raise $806 million over 10 years.
That revenue-balancing by Congress is part of the pay-as-you-go policy both the House and Senate have adopted this year for any tax breaks. Republican senators have said they will oppose a minimum-wage increase unless there are tax breaks for small businesses.
The minimum wage has not increased in 10 years and has fallen in inflation-adjusted dollars to its lowest level in 50 years. It is a priority of Democrats, as 28 states have higher minimum wages than federal law mandates.
The attack on executive compensation at this time came as a surprise to business groups since it was not expected to emerge until later in the year.
The provision that came out of the Senate Finance Committee would limit the amount of compensation an executive could put into a nonqualified deferred compensation plan to $1 million or the executive's average annualized salary over the last five years - whichever is less.
``The minimum-wage proposal, with its $8 billion in revenue-raisers, will place significant limits on deferred compensation,'' said Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers in Washington. ``That is a significant change and limits the ability of employers to use deferred compensation as a retention tool. There is no policy reason for this. It is a solution when there is no problem to correct.''
In a Jan. 23 letter to Sen. Harry Reid, D-Nev., 11 business associations, including NAM and the U.S. Chamber, strongly urged the Senate majority leader to remove from the minimum-wage tax bill provisions related to nonqualified executive compensation and changes that have been proposed in how employers deduct compensation.
``The proposals will force employers to significantly reduce or abandon retirement and savings programs that benefit middle management employees in favor of current cash compensation,'' said the letter. ``This flawed tax policy would result in a cash drain for many employers, less flexibility at a time when both public and private companies need to be more competitive, and added complexity in the administration of compensation arrangements.
``Ostensibly, these changes are aimed at perceived abuses by corporations that pay their CEOs and other top executives what is deemed to be excessive compensation,'' continued the letter. ``If CEOs and other top executives are the real target, these proposals miss the mark.''
Dennis Gros, president of Gros Plastics Recruiters, an executive search firm in Brentwood, Tenn., has a different viewpoint. He said the proposed change would impact executives more than employers and only those executives that work for big public companies.
``If no one has the tool, then it is still a level playing field,'' said Gros. ``But the ability to defer compensation is a very vital financial planning tool for executives as their moment in the sun and glory days are short - somewhat like a professional athlete.''