New tax breaks soon to close ‘pay gap’

Tom Philpott

Civilian employers of Reserve and National Guard members who are mobilized longer than six months could be offered new tax breaks soon to close a “pay gap” between employees’ military income and lost civilian wages.

Senate Republicans, before adjourning for fall elections, yielded to threats from Sen. Mary Landrieu, D-La., to block a $137 billion corporate tax break bill if mobilized troops and their civilian bosses didn’t get to sip at the same tax-break trough.

An angry Landrieu said on Oct. 15 that House Republican leaders, in closed-door deliberations with Senate colleagues, had tossed out her Senate-passed amendment to give Reserve and Guard employers up to $2 billion in tax breaks to continue paying some wages to mobilized employees.

The idea was to entice more employers to make up any difference between temporary military compensation and pre-mobilization civilian pay.

“We thought that at the top of the list of people deserving help would be the Guard and Reserve on the front lines taking the bullets. But obviously we were wrong. Silly us,” Landrieu said.

She blamed House Speaker J. Dennis Hastert of Illinois, Majority Leader Tom Delay of Texas and Ways and Means Committee Chairman Bill Thomas of California.

Landrieu said 41 percent of reserve component members deploying to Iraq and Afghanistan “take a pay cut.” Many employers “do the patriotic thing” and make up the difference “so if the guy was making $50,000 when he left the states, and he’s making $30,000 on the front line, some of them are sending them paychecks for $20,000 to keep his family whole.”

Small businesses “doing the right thing” deserve tax credits more than most businesses so her initiative should have survived House scrutiny, she said.

“We had a $137 billion benefit package basically going out to a wide variety of industries, large and small, none of which would actually be in business if it wasn’t for the soldiers on the battlefield.”

But as Congress shaped its tax bill, she said, service members “were slapped in the face.”

On Oct. 15, Landrieu vowed to “do everything in my power to slow this process down if not disrupt it entirely.”

Senate leaders apparently took her threat seriously By Oct. 17 they had worked out a deal with Landrieu. By voice vote, senators attached a modified Landrieu initiative to the House-passed Guardsmen and Reservists Financial Relief Act (HR 1779).

Introduced by Rep. Bob Beauprez, R-Colo., the relief act would allow activated service members to make penalty-free withdrawals from individual retirement accounts if mobilized six months or more. It would apply to anyone activated since Sept. 11, 2001, or before Sept. 12, 2005.

Those who made withdrawals without tax penalty also would have two years after leaving active duty to reimburse their retirement plans.

Landrieu broadened Beauprez’ bill by providing small businesses with a 50 percent tax credit on any pay still provided to activated employees. Total tax credits per employee would be capped at $15,000 (or $30,000 in wages).

Small businesses also would receive up to another $6,000 in tax credits per temporary employee hired to fill in for activated employees.

Landrieu made two big concessions, however, to lower the $2 billion cost. The employer tax credits would end in two years. Also, they would be made consistent with the retirement plan withdrawals, becoming available only when mobilizations last longer than six months.

With the Senate modifications, HR 1779 went back to the House for final passage. Republican leaders will have to decide during the post-election (or lame duck) session whether to schedule a fresh House vote.

Tom Philpott can be contacted at Military Update, P.O. Box 231111, Centreville, Va. 20120-1111, or by e-mail at: