Surprise Strike On Stealth Wealth

Sam Pizzigati
February 16, 2007

Sam Pizzigati, an associate fellow at the Institute for Policy Studies in Washington, edits Too Much, an online weekly on excess and inequality.

Last month, in the official Democratic party retort to the president’s State of the Union, freshman Sen. Jim Webb from Virginia thrilled millions of average working Americans with a powerful, plain-language poke at out-of-control corporate executive greed. Today, the typical American worker, Webb related, has to work “more than a year to make the money that his or her boss makes in one day.”

This week, House Democrats did some more thrilling, but the thrilled just happen to be the corporate greedy.

On Monday, in a unanimous vote, the House Ways and Means Committee killed a tax reform—already passed by the Senate—that would have ended the single most popular perk in executive-suite land—the loophole that, year after year, lets CEOs avoid paying taxes on multi-millions of their paycheck dollars.

The committee’s handiwork, the Small Business Tax Relief Act, now goes before the full House, where observers are predicting easy passage. The U.S. Chamber of Commerce couldn’t be more pleased. The Chamber’s top lobbyist, Bruce Josten, even penned a “thank you” to Rep. Charles Rangel, the New York Democrat who chairs Ways and Means, and Rep. Jim McCrery of Louisiana, the committee’s ranking Republican.

“The business community,” Josten noted in his valentine, “appreciates the restraint you exercised.”

How did this happen? How could House Democrats, handed the best legislative opportunity in years to rein in CEO pay excess, end up letting corporate pooh-bahs off the hook? The answer tells us a good bit, almost all of it discouraging, about just how much clout corporate America continues to hold in the new Democratic-majority Congress.

Our story starts last month, in the Senate Finance Committee.

The House had just passed, as part of the First 100 Hours blitz, a minimum wage increase. Senate supporters of that increase realized they had no chance at winning the 60 votes they needed to get a straight minimum wage bill passed, so they fashioned a compromise package that included $8.3 billion in tax breaks for mostly small businesses.

Sen. Max Baucus, R-Mont., the Finance Committee chairman, did something else as well. He offset the cost of the business tax breaks by adding $8.3 billion worth of revenue-generating provisions into the package. These changes included a first-ever cap on the annual pay top corporate executives can park away, tax-free, in deferred-compensation accounts.

Now most Americans, thanks to 401(k) plans, know a little about how “deferred compensation” works. If you have a 401(k), you can have a chunk of your paycheck parked in a special account where that chunk can grow, untaxed, until you retire.

Most Americans with 401(k)s also know that these deferred pay plans come with limits. A 401(k) can only shield so much of your pay—$15,500 this year—from taxes.

Here’s what most Americans don’t know about deferred compensation: Top corporate executives have been routinely deferring tens of millions of dollars a year into tax-free pots via personalized pay plans open only to top corporate brass.

“There isn’t a company out there of any size that doesn’t have an extensive deferred-compensation arrangement,” Robert Willens, a tax analyst at Lehman Brothers, told Bloomberg News last month.

Executive pay deferral plans can operate, legally, without annual limits because these plans, unlike the 401(k), carry no special privilege. In a bankruptcy, creditors cannot seize 401(k) assets. Executive deferral plans enjoy no such protection. In theory, the dollars in these plans sit at risk. If a company goes belly up, or gets gobbled up, an executive could lose every deferred dollar.

But corporate boards have moved to eliminate this risk. Boards simply reimburse executives for the cost of insuring their deferred pay stashes. One example: CSX, the transportation company, gave CEO John Snow $421,000 to offset the cost of insurance that Snow, who later became George W. Bush’s second secretary of the treasury, bought to guarantee his deferred pay, should CSX be taken over.

The Senate Finance Committee vote to cap executive pay deferrals doesn’t exactly even the tax-free compensation playing field. Under the Senate cap, executives would still be able to defer from taxes as much as $1 million a year in pay. As Webb might point out, that’s 66 times more than the $15,500 an average corporate employee can shield from taxes with a 401(k).

But corporate America, caught totally off-guard by the Senate Finance Committee cap vote, went ballistic anyway, with the Wall Street Journal denouncing the cap as pure “tax folly.” But the business backlash started too late to stop the “folly” on the Senate floor. Corporate lobbyists then shifted their sights to the House Ways and Means Committee, where the top Republican, Louisiana’s Jim McCrery, had “serious concerns” about the Senate’s pay-deferral limit.

Rangel would quickly make those concerns his own. Last Friday, in the spirit of “bipartisanship,” Rangel and McCrery announced their own minimum wage compromise. McCrery gave up $7 billion in small business tax breaks that the Senate had passed. Rangel gave up the Senate tax code changes that had big business squawking, most notably the cap on pay deferrals.

Three days later, the full Ways and Means panel rubber-stamped the Rangel-McCrery exercise. A satisfied Rangel hailed that speedy action as “a symbol of what can happen when Democrats and Republicans work together.”

But work together for whom?

The full House will vote on these measures shortly—as soon as the troublesome topic of Iraq is dealt with. And then, a conference committee has to iron out the differences between the House and Senate minimum wage packages. Low-income Americans will surely get a long-overdue—but modest—increase in the minimum wage from whatever legislation emerges out of the conference committee. Will corporate CEOs get years more of special tax treatment?

For the new Democratic majority on Capitol Hill, this figures to be an interesting test.