Taxes: Caught in the Crossfire

Long anticipated pension reform and other pro-business legislation could fall prey to Washington infighting.
Joseph McCafferty and Joe McCaffertyNovember 6, 2000

It’s official.

Congress just set a record for staying in session the closest ever to an election day. But while lawmakers are putting in overtime on The Hill, little is getting done.

Not only has Congress failed to pass a budget that the President will agree to sign, but bickering between both parties and the President has stalled a $240 billion 10-year tax-cut bill (HR-2614) that includes a number of measures that will affect businesses. Pension reform, Medicare funding, and small- business tax cuts are in peril unless lawmakers can mount an eleventh-hour rescue mission.

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Senators began leaving last Thursday, many to join their re-election campaigns, and representatives were expected to follow suit on Friday. The exodus sets up the first lame- duck session since the early eighties, and one that will be greatly influenced by who’s in charge when the dust settles.

That could be good news for companies. In recent days, the tax-cut bill, which includes a number of pro-business measures, has taken a back seat to the spending appropriations bills, which by law must be passed to continue funding of the federal government. The extra session makes it likely that HR-2614, which Clinton has already threatened to veto, could get a fresh look.

It doesn’t guarantee that it will pass, however. In typical political maneuvering, the pension reform portion, which has bipartisan support from both chambers, was folded into the larger tax-cut bill. “Things have gotten pretty muddy in Washington,” say James Delaplane, vice president, retirement policy, at the Washington, D.C. —based Association of Private Pension and Welfare Plans. “I would be greatly distressed if [pension reform] doesn’t become law due to the veto of the larger tax bill.” Delaplane adds that business and government have been working on passing pension reform legislation for the past two years.

Included in the pension reform portion is a measure that would significantly simplify pension administration. “It would let companies operate in a more rational and cost- effective manner, and reduce the complexity and cost of administering those plans,” says Delaplane.

Financial executives largely support the bill. “This is a really important piece of legislation,” says William Diefenderfer III, former CFO and now president of E-Numerate Solutions Inc., an E-commerce infrastructure company in McLean, Va. “Pension plans are beyond the pale in terms of complexity. You spend so much on lawyers that it’s prohibitive, so a lot of small companies don’t bother with it.”

Diefenderfer knows a thing or two about the budget process. He served as deputy director of the White House Office of Management and Budget during President George Bush’s administration.

The bill would also restore higher limits on tax-free benefit contributions that companies and individuals can make to pension plans. Limits on what individuals can contribute to 401(k) plans would go from $10,000 annually to $15,000. The limit that employees and companies can contribute together would go from $30,000 to $40,000.

If passed, the bill would also improve companies’ abilities to fund their pension plans. Currently companies are limited to funding plans at 155 percent of current liabilities. Instead the bill would allow companies to place 100 percent of accrued liabilities in their plans, permitting them to place a greater portion of future expenses in the fund instead of paying it as tax to Uncle Sam. “It’s a more appropriate and realistic funding limit,” explains Delaplane.

Also rolled into the bill is a measure that would increase the minimum wage by $1 to $6.15 over two years. The increase is offset by $30 billion in tax breaks for small businesses that Clinton has already agreed to. “I don’t think the minimum wage increase will hurt businesses,” says Diefenderfer. “Now is the time, while we have a healthy economy, to make sure that the bottom economic segment shares in the prosperity,” he adds.

What Clinton doesn’t like about the bill, though, is that is doesn’t do enough for his initiative to rebuild and modernize some 6,000 public schools. The White House also claims that too much of the health care savings will go to HMOs, instead of hospitals and health programs for the poor.

Proponents of the bill say that increases in payments to private health plans are needed to prevent them from shutting their doors to Medicare recipients. Indeed, many companies were burned when they encouraged retiree beneficiaries to shift to Medicare HMOs, which were thought to provide more care for less, only to see many of the HMOs end their Medicare programs because they claimed they were losing money.

What hope pension reform and other pro- business initiatives have in passing could come down to whether Congress can agree on a level of Medicare spending that the President would support. “It’s a classic case of political wrangling holding up what most people already agree on,” says Diefenderfer. “This bill is the poster child for that.”

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