Jan. 17 (Bloomberg) -- The Senate Finance Committee voted to add $8.3 billion in tax breaks for small businesses to legislation that would increase the minimum wage. The panel also agreed to cap the amount of tax-deferred pay employees can receive each year.

The committee voted unanimously to approve the tax measures, including a an extension until 2012 of the Work Opportunity Tax Credit, which benefits companies such as Wal-Mart Stores Inc. and Olive Garden restaurant owner Darden Restaurants Inc. that hire workers on welfare. The legislation offsets the cost of the tax breaks with about a dozen revenue-raising proposals, including a $1 million limit on executive compensation that qualifies for tax-deferred status.

The tax cuts will become part of Senate legislation that would raise the minimum wage by $2.10, to $7.25, over two years, the first such increase in a decade. Committee Chairman Max Baucus, a Montana Democrat, said the tax incentives were necessary to help the minimum-wage increase pass in the narrowly divided Senate and avoid a veto by President George W. Bush.

``By acting today, we can help to create a sounder minimum- wage bill,'' Baucus said. ``We can help to create a minimum-wage bill that can get more than 60 votes and pass the Senate. And we can help to create a minimum-wage bill that the president will sign.''

House Measure

Still, the Senate measure may spark a clash with the House, which voted Jan. 10 to approve a minimum-wage increase that didn't include tax incentives. House Majority Leader Steny Hoyer of Maryland said today that inclusion of the tax measures would ``complicate and delay'' passage of final legislation.

``Minimum-wage earners have already waited nine years and four months for a raise,'' he said. ``Congress should not make them wait any longer.''

Other tax cuts in the Senate measure include an increase to $112,000 the amount of equipment businesses can expense on their tax returns in a single year rather than depreciate over time. The measure also would allow restaurants and retailers to deduct improvements to buildings over 15 years, rather than the 39-year schedule under current law.

Home Depot

Experts said Congress is ratcheting up proposals to restrict executive pay after a public outcry last year over compensation arrangements at companies such as Pfizer Inc. and Exxon Mobil Corp. The Senate proposal comes two weeks after investors protested the compensation of ousted Home Dept Inc. Chief Executive Officer Robert Nardelli, which included the acceleration of $77 million in deferred stock awards.

``We are seeing the legislative response to the extraordinary payouts given to top executives that have been hidden from investors for years through deferred-compensation schemes,'' said Richard Ferlauto, director of pension investment policy at the American Federation of State, County and Municipal Employees in Washington, whose union represents members with $1 trillion invested in public pension funds.

The limits on deferred pay, if enacted by the full Senate and the House, may have wide repercussions on the compensation agreements that are common at many U.S. companies, said Robert Willens, a tax accounting analyst at New York-based Lehman Brothers Holdings Inc. ``There isn't a company out there of any size that doesn't have an extensive deferred-compensation arrangement,'' he said.

The compensation arrangements typically allow employees, usually the top executives, to defer part of their pay package, including salary, bonuses and stock incentives. By deferring, executives are often guaranteed a higher return from the company later and may pay lower taxes when they have left their job. Under federal law, companies can only deduct $1 million in base salary annually, though they generally can deduct excess compensation that takes other forms.

Effect on Deficit

Baucus said the tax cuts in the legislation are designed to compensate the small businesses that would bear the brunt of a higher minimum wage. The tax-raising measures would limit the effect of the tax breaks on the budget deficit, he said.

Andrew Liazos, a partner at the law firm McDermott Will & Emery LLP in Boston who specializes in deferred-compensation arrangements, said the proposal has a good chance of becoming law if it passes the Senate because it would be attached to the popular minimum-wage measure.

``If this is attached to a bill that otherwise would be enacted it's going to be very hard to lobby against,'' he said.

Taxed at 35% Rate

The Senate proposal would allow employees to defer the lesser of $1 million a year or the average of their taxable compensation over the previous five years, according to a draft of the legislation posted on the panel's Web site. Any deferred compensation above those amounts would be immediately subject to taxes as high as 35 percent, the document said. Those who violate the proposed rule would be subject to an unspecified penalty, according to the draft.

The provision would raise taxes on wealthy individuals by a net $810 million over a 10-year period, according to preliminary committee estimates. Individuals would pay taxes they had been deferring and companies would be required to immediately claim compensation deductions.

Some activist investors said they opposed the Senate proposal. Companies, they said, should be free to pay executives however they like, so long as they first get approval from shareholders.

``A limitation on the deduction of deferred compensation for executives would only be advisable if shareholders were not provided an advisory vote on executive compensation,'' said Lynn Turner, the head of research at Glass, Lewis & Co. Inc., in Broomfield, Colorado.

At least one lawmaker agreed. As the panel began deliberations of the measure today, Senator Jim Bunning, a Kentucky Republican, said the deferred-compensation provision ``seems to be a little Draconian.''

Tax-Avoidance Tool

Patrick McGurn, executive vice president at Institutional Shareholder Services, a Rockville, Maryland firm that advises clients on proxy issues, said the deferred-compensation legislation would force companies to restructure the way executives are paid. Pay deferral is primarily used by companies as a tax-avoidance tool, he said.

The measure ``has the potential to definitely have a very significant impact on compensation programs,'' McGurn said. ``Deferral for tax purposes has become one of the linchpins of executive-compensation packages in the U.S.''

`Tying Pay to Performance'

Nell Minow, a prominent activist shareholder who is editor of the Corporate Library, said the effort by lawmakers to put a lid on executive pay is ill-conceived. ``The U.S. Congress should not be in the business of deciding how much executives make,'' she said. ``They should be in the business of making sure that boards can do an effective job of tying pay to performance.''

The proposal is the latest in a series of laws passed by Congress in response to scandals at Enron Corp. and WorldCom Inc., where executives at bankrupt companies received nearly all their compensation while workers were left with nothing.

The description of the legislation said the deferred- compensation provision would be effective Dec. 31, 2006.

Other tax-raising proposals in the document would target companies such as Charlotte, North Carolina-based Wachovia Corp. that used a controversial tax shelter earlier in the decade. The shelter allowed the companies to claim tax benefits from leasing publicly financed infrastructure such as subways without actually operating the facilities.

The legislation also would impose penalties on companies that incorporated in Bermuda for tax-avoidance reasons between March 2002 and March 2003; it would also penalize Americans who renounce their citizenship for tax reasons.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net;

Last Updated: January 17, 2007 17:16 EST