WASHINGTON–A House committee's action last night could thwart Senate efforts to take away a tax deduction for insurers when they pay off punitive damage awards.

The Senate included a provision barring the deduction for punitive awards in civil suits in language attached to Senate minimum wage legislation.

However, the House Ways and Means Committee did not include elimination of the deduction when it approved a bare-bones tax package expected to be ultimately twinned with legislation raising the minimum wage.

The committee's tax package, approved by bipartisan voice vote after minimal debate, is scheduled to be taken up by the full House today or tomorrow, according to the Office of the House Majority Leader.

Approval of the measure by the House would set the stage for a conference on differing versions of the same legislation as early as the week of Feb. 26, when Congress returns from its President's Day recess.

Carl Parks, senior vice president, government affairs, for the National Association of Mutual Insurance Companies, said the group is “pleased” that the House version of the bill did not include provisions that would prevent companies from deducting the cost of settlement agreements with government agencies and limit the deductibility of punitive damages.

“Such tax hikes would increase the cost of doing business, thereby making companies less competitive and weakening their economic growth,” Mr. Parks said. “We look forward to working with Congress to further develop tax policy that encourages economic growth while helping businesses better compete in the marketplace.”

Cliston Brown, director, federal public affairs for the Property Casualty Insurers Association of America, added, “Casualty losses are generally tax-deductible and punitive damages are casualty losses.”

He noted that “taxing punitive damages essentially amounts to double taxation and does not provide income to the insured business, even if insurance is available for the punitive damages.”

Mr. Brown also noted that the Senate proposal would create a powerful incentive for plaintiffs' attorneys to threaten the possibility of nondeductible punitive damages as leverage to force settlements, which are deductible.

“As such, we thought it was best for this provision not to be included,” Brown explained.

The House Ways and Means Committee package would extend business tax credits and increase the amount of capital spending that a business can write off. It also would give restaurants a break on how to calculate deductions for Social Security taxes paid on tips.

According to congressional estimates, the House tax cuts would cost the Treasury $1.3 billion in lost revenue over 10 years compared with the $8.3 billion in cuts over 10 years in the Senate version approved two weeks ago.

“The business community…appreciates the restraint you exercised in omitting onerous permanent tax increases from the package,” the Chamber of Commerce's top lobbyist, Bruce Josten, said in a letter to Ways and Means Chairman Charles Rangel, D-N.Y., and Rep. Jim McCrery, R-La., the committee's ranking Republican.

The Chamber assembled a group of 19 companies and trade groups to lobby against the punitive damages provision in the Senate bill. The signers included NAMIC.

Passage of the Senate bill (S. 2) set up a confrontation with the House, which passed a “clean” minimum wage bill earlier in January. Before the tax package demanded by the Senate was added, the House version was a bare-bones measure that just increased the minimum wage from $5.15 to $7.25 in just over two years.

The House action was expected because the formerly Republican-controlled House several times over the past few years has rejected provisions in Senate bills that would eliminate the tax deductibility of punitive damage awards.

Chamber of Commerce support for the House bill, coupled with pressure from labor unions on Democrats to keep the tax package small, means the final House-Senate compromise could be closer to the House version, lobbyists said.

Special Reports /

House Snagging Plan To Tax Punitive Damages

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