WASHINGTON--The House gave its approval to legislation late last week that could hold off efforts in the Senate to eliminate a tax deduction for insurers paying off punitive damage awards.

The legislation, known as the Small Business Tax Relief Act, HR 976, was designed to extend key tax provisions for small businesses and to allow Congress to approve an increase in the federal minimum wage. The bill was approved by a vote of 360-45.

The Senate version of the legislation does not include that provision for insurers, meaning it will have to be worked out in a conference committee likely to take place as early as the week of Feb. 26, once lawmakers return from their President's Day recess.

Rep. Jim McCrery, R-La., expressed hope that the House would take a hard line on the tax relief language in the bill as it worked out a final product with the other chamber.

"Going forward, the amount of tax relief in this bill should serve as a floor, not a ceiling, in our negotiations with the Senate," he said. "While I hope we can agree on a larger figure, the challenge--in this new world of PAYGO budget rules--will be to find offsets that don't hurt more than the tax relief helps."

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 does not include the provisions that would bar 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 observed 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," he explained.

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