Tax Reform Hold Up

In an election year, congressional tax bills tend to be padded with lawmakers' pet interests, otherwise known as pork. This year is no different — except that this year, the sheer extent and diversity of the larding may actually sink the legislation to which it is attached.

In May and June, the House and the Senate passed bills intended to repeal a tax break for exporters — called the Extraterritorial Income Exclusion Act (ETI) — that has been declared illegal by the European Union, and replace it with an acceptable incentive. Two proposed alternatives would provide tax breaks to compensate for the repeal of the ETI, such as reducing the tax rate for manufacturers from 35 percent to 32 percent by 2008 and allowing companies to repatriate foreign earnings at a tax rate of 5.25 percent. "There are good things in both bills," says Robert Willens, a tax analyst at Lehman Brothers. "I like what they're doing."

Unfortunately, the bills also contain a hodgepodge of other tax breaks aimed at such narrow interests as cruise-ship operators, tackle-box makers, bow-and-arrow manufacturers, and NASCAR-track owners. "There are too many interests being served," says George Plesko, an assistant professor of management at the Massachusetts Institute of Technology's Sloan School of Management.

And too many discrepancies between the House and Senate versions of the legislation. The House bill, for example, contains a $9.6 billion buyout of a federal quota program for tobacco farmers. A number of senators oppose the buyout. The Senate bill contains provisions that would curb tax shelters and corporate tax loopholes — moves that are unpopular in the House.

Bickering about the different versions could delay passage of a compromise bill before Congress adjourns on October 1. "Everyone is pessimistic about the odds that this gets passed anytime soon," says Gary McGill, professor of accounting at the University of Florida. That could have consequences for U.S. businesses, as companies continue to face tariffs from EU members over the ETI.

Worse, instead of reforming corporate taxation, the new legislation could make it more complex. "The most troubling aspect of these bills is the numerous provisions that could complicate tax compliance and impose additional burdens on corporate tax departments," says Timothy McCormally, executive director of the Tax Executives Institute in Washington, D.C. —Joe McCafferty

Get Over It

To all the executives who have been griping about the negative effects of the Sarbanes-Oxley Act, its sponsors have two words: quit whining.

In separate interviews with the Financial Times in June, both lawmakers lashed out at executives who have been critical of the legislation. Rep. Michael Oxley (R­Ohio) said: "They're whining two years too late." Sen. Paul Sarbanes (D­Md.) told managers to just deal with it. "I think people should get with the program," he warned. "We have to clean up the situation."

That might not sit well with executives who have criticized the law. Borland Software Corp. CFO Kenneth Hahn has said that the act is nothing more than "an efficiency tax." And in an interview with CFO last year, Graham Perkins, CFO of LCC International Inc., said the legislation's authors didn't understand all of its adverse consequences.

While most finance executives concede that the law has had some benefits, plenty of them think the positives don't outweigh the high cost of compliance. Oxley disputes the claim: "It's pretty hard to argue that the cost is prohibitive, given the [importance of] restoring investor confidence." —J.McC.

Safety Net or Deal Breaker?

With exorbitant severance packages coming under fire, the golden parachute has become more lightning rod than safety net. Twice in recent months, the acquisition-triggered severance-pay packages for top managers have come close to breaking deals.

First, AXA Financial Inc.'s $1.5 billion acquisition of New York insurer MONY Group barely passed, with just 53 percent of shareholders approving the deal in May. Large institutional investors protested both the proposed price and the reported $90 million in severance MONY executives stood to make if they were terminated after the deal closed. (The company ultimately reduced the packages by $7.4 million.) Also in May, the California Public Employees' Retirement System urged opposition to Anthem Inc.'s $16.5 billion takeover of WellPoint Health Networks Inc., in part because of an estimated $600 million­plus payout to WellPoint executives upon completion of the deal. (Shareholders approved the merger in June, however, and the companies are awaiting regulatory approval.)

"There is a concern that the packages are so lucrative that they might in fact be inspiring the deals," says Carol Bowie, director of governance research at the Investor Responsibility Research Center (IRRC). That possibility is leading shareholders to oppose excessive golden parachutes in greater numbers: the IRRC is tracking 36 different shareholder proposals that seek to set limits on the compensation technique this year. Most of them ask companies to obtain shareholder approval when awarding severance packages that equal more than 2.99 times the total of the executive's base pay and bonus. The average level of shareholder support for proposals to limit golden parachutes was 57 percent of voted shares in 2003, up from 35 percent in 2002, according to the IRRC.

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