A proposal to cap the amount of pay that executives can defer tax-free each year has been dropped from legislation that would raise the minimum wage, but the idea may resurface in future tax bills.

House Ways & Means Committee Chairman Charles Rangel, D-New York, and Senate Finance Committee Chairman Max Baucus, D-Montana, reached an agreement late Friday, April 20, on $4.8 billion in tax breaks for small businesses to help offset the costs of raising the minimum wage to $7.25 from $5.15 over two years.

The pact was a compromise between the $8.3 billion tax package the Senate included in its minimum wage bill and the $1.3 billion approved by the House in its version. The measure has been added to a bill that would provide emergency funding for the war in Iraq.

The Iraq bill is at the heart of a showdown between congressional Democrats and the Bush administration over troop withdrawal timelines linked to the war funding. If Democrats and the White House reach an impasse, it is possible that the minimum wage piece of the Iraq measure would be voted on separately.

Regardless of its form, the minimum wage bill will not include the executive compensation proposal, which would have limited the amount of pay that could be deferred tax-free each year to $1 million or the five-year average of an individual’s salary before the deferral, whichever is less.

“We have reached the final resolution—and I mean final—on a package of small-business tax credits that will enable us to pass the first increase in the federal minimum wage in nearly a decade,” Rangel said in a statement.

Another provision that Rangel and Baucus scotched was one that would have expanded the definition of a company’s five highest-compensated employees. Instead of just including corporate officers, it would have encompassed anyone in the firm making one of its top five salaries. A company would be limited to an annual $1 million cap on tax deductions it could take on the pay of professionals in the top pay category.

The proposals bit the dust in part because they were only in the Senate bill. The final compromise revolved around tax increases that both the House and Senate included in their packages.

But there was also worry that the popularity of deferred compensation meant that a cap would reach far lower into a corporation than the C-suite.

“The provision was not included in the final package because there were concerns about the language it contained and its potentially broad impact on rank-and-file workers,” says Matthew Beck, a spokesman for Rangel.

The proposal, however, may be part of a tax package later this year.

"The deferral provision or one like it may be seen in subsequent legislation,” says a Baucus aide.

When the idea percolates again, business lobbyists will be ready to defend the practice of paying later for work done now. Advocates argue that deferred compensation increasingly is a vehicle for workers to save for retirement.

They also say that deferral ensures an executive will work in a company’s long-term interests because that person won’t get paid if the firm falters in the future.

Proponents of limiting deferred compensation “have yet to show some abuse they’re trying to address with this provision,” says Bob Shepler, senior director of government relations at the National Association of Manufacturers.

The proposal was prompted in part by congressional concern about soaring executive compensation that seems to be out of step with company performance. Democrats have argued that exorbitant executive salaries are incongruous with real wages for most workers that only keep pace with inflation.

But Shepler asserts that putting off pay is helping a cross section of the labor force.

“Folks are beginning to see that non-qualified deferred compensation is good for employee savings,” he says.

An influential senator, however, is not enamored of the minimum wage tax agreement.

“This package is stripped of a lot of meaningful tax relief,” said Sen. Charles Grassley, R-Iowa and ranking member of the Senate Finance Committee, in a statement. “And missing are many of the tax abuse crackdowns from the Senate bill. Apparently the lobbyists’ crocodile tears over those crackdowns were effective.”

—Mark Schoeff Jr.