WASHINGTON–Facing serious opposition from property-casualty insurers and other business interests, key Democratic legislators in Congress have backed away from an effort to take away insurance industry tax breaks.

At issue is language that was tacked onto a minimum wage bill barring insurers and other businesses from deducting the costs of punitive damage awards in civil suits and for deducting the cost of settlements with government agencies.

Following a decision Friday by Senate Finance Committee Chairman Max Baucus, D-Mont., and House Ways and Means Committee Chairman Rep. Charles Rangel, D-N.Y., those provisions the industry fought against have been stripped away.

Sen. Charles Grassley, R-Iowa, ranking minority member of the Senate Finance Committee, who has pushed to stamp out the industry tax breaks, said he thought the change came about because, “apparently, the [business] lobbyists' crocodile tears over those crackdowns were effective.”

“This package is stripped of a lot of meaningful tax relief,” the senator said.

However, final resolution of the issue is still perhaps weeks away because at this point the tax language and minimum wage increases are part of a bill that includes Iraq war troop withdrawal language, which President Bush is expected to veto sometime next month.

Insurance industry representatives said they expect the president will eventually be given a bill that he will sign and it will not contain the tax language they oppose.

The bill is titled H.R. 1591, U.S. Troops' Readiness, Veterans' Health, and Iraq Accountability Act of 2007.

The language agreement between Sen. Baucus and Rep. Rangel provides $4.8 billion in tax cuts for small businesses over 10 years.

Those tax cuts would mostly be offset by a series of' new Internal Revenue Service enforcement steps and higher penalties for erroneous returns. Approximately half of the tax relief would go to extend tax breaks for businesses hiring people on welfare and other difficult-to-hire workers.

The provisions dealing with the insurance industry were not included in the House version of the minimum wage increase bill, which was passed in January.

But they were included in a comprehensive tax package passed by the Senate in its version of legislation hiking the minimum wage in early February. The House responded by passing a smaller tax package later in February, and the two chambers have been wrangling over the size of the package ever since.

The House raised the stakes when it included its smaller version of tax hikes and minimum wage increases in legislation demanded by President Bush appropriating supplement funds for the Iraq war.

The Property Casualty Insurers Association of America (PCI) was among the industry groups reacting favorably to the decision by the two committee chairmen.

Cliston Brown, PCI director, federal public affairs, said yesterday, “Taxing punitive damages, which are casualty losses, essentially amounts to double taxation, because casualty losses are generally deductible.”

He added, “Making punitive damages taxable would create incentives for plaintiffs' attorneys to seek them more often. It would also pressure defendants to settle cases they might otherwise be able to win, because settlements would be deductible but punitive damages would not.

“This would provide powerful leverage against a defendant being able to exercise his constitutional right to a trial,” Mr. Brown said.

Several insurance industry trade groups, including the National Association of Mutual Insurance Companies, joined a coalition formed by the U.S. Chamber of Commerce to oppose the provisions allowing taxation of punitive damage payments in civil lawsuits.

Sen. Grassley, a key supporter of the p-c insurance industry provisions, reacted to the Democratic deal with anger.

Special Reports /

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