WASHINGTON (Bloomberg) ? The US Senate Finance Committee yesterday voted to impose penalties on companies that redomiciled in Bermuda for tax-avoidance reasons between March 2002 and March 2003 and for a $1-million limit on executive compensation that qualifies for US tax-deferred status.

Those moves were all part of a wider plan to raise extra taxes to finance $8.3 billion in tax breaks for small businesses to help them deal with the extra costs of an increased US minimum wage.

The panel also voted to penalise Americans who renounce their citizenship for tax reasons.

The committee voted unanimously to approve the tax measures, including a an extension until 2012 of the Work Opportunity Tax Credit, which benefits companies such as Wal-Mart Stores Inc. and Olive Garden restaurant owner Darden Restaurants Inc. that hire workers on welfare. The legislation offsets the cost of the tax breaks with about a dozen revenue-raising proposals,

Committee Chairman Max Baucus, a Montana Democrat, said the tax cuts were necessary to help the minimum-wage increase pass in the narrowly divided Senate.

?By acting today, we can help to create a sounder minimum-wage bill,?? Baucus said. ?We can help to create a minimum wage bill that can get more than 60 votes and pass the Senate. And we can help to create a minimum wage bill that the president will sign.??

The tax cuts will become part of Senate legislation that would raise the minimum wage by $2.10, to $7.25, over two years, the first such increase in a decade.

Experts said Congress is ratcheting up proposals to restrict executive pay after a public outcry last year over compensation arrangements at companies such as Pfizer Inc. and Exxon Mobil Corp. The Senate proposal comes two weeks after investors protested the compensation of ousted Home Dept Inc. chief executive officer Robert Nardelli, which included the acceleration of $77 million in deferred stock awards.

?We are seeing the legislative response to the extraordinary pay-outs given to top executives that have been hidden from investors for years through deferred-compensation schemes,?? said Richard Ferlauto, director of pension investment policy at the American Federation of State, County and Municipal Employees in Washington, whose union represents members with $1 trillion invested in public pension funds.

The limits on deferred pay, if enacted by the full Senate and the House, may have wide repercussions on the compensation agreements that are common at many US companies, said Robert Willens, a tax accounting analyst at New York-based Lehman Brothers Holdings Inc. ?There isn?t a company out there of any size that doesn?t have an extensive deferred-compensation arrangement,?? he said.

The compensation arrangements typically allow employees, usually the top executives, to defer part of their pay package, including salary, bonuses and stock incentives.

By deferring, executives are often guaranteed a higher return from the company later and may pay lower taxes when they have left their job. Under federal law, companies can only deduct $1 million in base salary annually, though they generally can deduct excess compensation that takes other forms.

The House of Representatives voted on January 10 to raise the minimum wage; the House measure doesn?t contain tax provisions.

Baucus said the tax cuts in the legislation are designed to compensate the small businesses that would bear the brunt of a higher minimum wage. The tax-raising measures would limit the effect of the tax breaks on the budget deficit, he said.

Andrew Liazos, a partner at the law firm McDermott Will & Emery LLP in Boston who specialises in deferred-compensation arrangements, said the proposal has a good chance of becoming law if it passes the Senate because it would be attached to the popular minimum-wage measure.

?If this is attached to a bill that otherwise would be enacted it?s going to be very hard to lobby against,?? he said.

The Senate proposal would allow employees to defer the lesser of $1 million a year or the average of their taxable compensation over the previous five years, according to a draft of the legislation posted on the panel?s Web site. Any deferred compensation above those amounts would be immediately subject to taxes as high as 35 percent, the document said. Those who violate the proposed rule would be subject to an unspecified penalty, according to the draft.

The provision would raise taxes on wealthy individuals by a net $810 million over a 10-year period, according to preliminary committee estimates. Individuals would pay taxes they had been deferring and companies would be required to immediately claim compensation deductions.

Some activist investors said they opposed the Senate proposal. Companies, they said, should be free to pay executives however they like, so long as they first get approval from shareholders.

?A limitation on the deduction of deferred compensation for executives would only be advisable if shareholders were not provided an advisory vote on executive compensation,?? said Lynn Turner, the head of research at Glass, Lewis & Co. Inc., in Broomfield, Colorado.

At least one lawmaker agreed. As the panel began deliberations of the measure yesterday, Senator Jim Bunning, a Kentucky Republican, said the deferred-compensation provision ?seems to be a little Draconian??.

Patrick McGurn, executive vice president at Institutional Shareholder Services, a Rockville, Maryland firm that advises clients on proxy issues, said the deferred-compensation legislation would force companies to restructure the way executives are paid. Pay deferral is primarily used by companies as a tax-avoidance tool, he said.

The measure ?has the potential to definitely have a very significant impact on compensation programmes,?? McGurn said. ?Deferral for tax purposes has become one of the linchpins of executive-compensation packages in the US.??

Nell Minow, a prominent activist shareholder who is editor of the Corporate Library, said the effort by lawmakers to put a lid on executive pay is ill-conceived. ?The US Congress should not be in the business of deciding how much executives make,?? she said. ?They should be in the business of making sure that boards can do an effective job of tying pay to performance.??