Curbing Deductions for Exec Pay Considered to Pay for Tax Bill

Congressional Republicans are eyeing the possibility of limiting corporate executive pay deductions to help pay for their comprehensive tax bill which seeks to make the expiring 2017 tax cuts permanent.

Why it matters: Democrats have historically targeted executive compensation to pay for policy priorities. Although the specific proposals are unclear, Republicans, seeking to mitigate the impact of the tax bill, are now considering ways to change executive pay deductions.

Go deeper: Section 162(m) of the Internal Revenue code limits the deductible compensation for certain current and former senior executives of publicly held companies to $1 million annually.

Limiting the deductions for highly paid employees by increasing the number of employees covered, lowering the salary threshold, and changing how pay is calculated, has been successfully used to raise funds for priorities of both parties. For example:

• The ACA under Obama eliminated health insurance companies’ ability to deduct executive compensation exceeding $500,000.

• The 2017 Trump tax cuts rescinded provisions that allowed publicly traded companies to exclude performance-based pay from calculations when someone made more than $1 million, projected, at the time to raise $9 billion.

• Biden’s COVID relief package expanded the number of employees subject to the deduction limits, which was said to bring in $8 billion.

The bottom line: Congress is desperate to find a way to pay for making the 2017 tax cuts permanent. Elimination of tax breaks is much more palatable, and likely, than raising taxes on the general population in a Republican-led Congress.