WASHINGTON–Legislation to bar insurers and other companies from deducting legal settlement costs from their taxes would increase “the current, anticompetitive legal cost burden facing U.S. manufacturers,” a business advocate told a House committee today.

Representatives of two insurance industry trade groups later voiced the same concerns about the provisions, which are contained in the Senate version of minimum wage legislation.

Kenneth Petrini, vice president/taxes, for the Air Products and Chemicals Co., based in Pennsylvania, made his comments as a representative of the National Association of Manufacturers on provisions in the Senate version of minimum wage legislation.

The provisions–not contained in the House version–eliminate tax deductions for punitive damages and settlements of potential violations of law.

The House Ways and Means Committee held the hearing because the leadership of the Senate Finance Committee is holding up the minimum wage bill in order to pressure the House to accept the more expansive tax provisions in the Senate version.

The House version, by contrast, contains far more modest tax provisions designed to reduce the cost of raising the minimum wage on small businesses.

In his testimony, Mr. Petrini said “the proposals to eliminate tax deductions for punitive damages and settlements of potential violations of law represent significant changes to, and unnecessary expansion of, current law that will increase the cost of doing business in the United States for manufacturers.”

In comments associated with the hearing, both the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America voiced similar concerns.

“Making punitive damages taxable would create a situation where settlements would still be deductible as business expenses, but punitive damages resulting from trial would not be deductible,” said Cliston Brown, director, federal public affairs for PCI.

“The possibility of unpredictable, large and nondeductible punitive damages would provide a powerful incentive for defendants to settle cases which they otherwise might be able to win in court,” Mr. Brown said. “In the end analysis, consumers will pay the price in the form of higher premiums–and we don’t think that is a desirable result.”

Marliss Browder, NAMIC senior federal affairs director, said the punitive damages provision “would increase the cost of doing business for insurers, which will be forced to spend more money and time litigating cases.”

“Ultimately, this increased cost would be passed on to policyholders in the form of higher premiums,” Ms. Browder said.

Similarly, a provision regarding settlements in the Senate bill would increase costs to insurers by changing the rules regarding the deductibility of fines and penalties, she added.

Current law precludes businesses from deducting from income only those fines or penalties paid to a government or entity for the violation of a law, she explained.