The Senate cleared the way for an increase in the minimum wage Tuesday, but only with business tax breaks that House Democrats want removed.
Final Senate passage of the legislation is expected later this week, setting the stage for a round of difficult negotiations between House and Senate Democrats over how to get the legislation to President Bush for his signature.
In a key test, the Senate voted 87-10 to end debate on the bill Tuesday, well clear of the 60 votes needed.
Earlier this month, the House passed the same increase in the wage floor — from $5.15 to $7.25 an hour over two years — without any tax provisions. Senate Democrats tried to push through the House version last week, but failed to get the 60 votes to end debate.
The vote Tuesday emphasized how Senate passage of the bill depends on the tax package to attract Republican votes. The White House has also signaled that Bush wants tax breaks in the legislation.
“Raising the minimum wage will cost some jobs,” Al Hubbard, the director of the president’s National Economic Council told reporters aboard Air Force One Tuesday. “We think it’s important to counter that with tax breaks that will replace those jobs.”
“The Senate has recognized that our economy is interdependent,” said Sen. Michael Enzi, R-Wyo. “One simply cannot claim credit to be helping workers at the same time that they’re hurting the businesses that employ them.”
Small businesses against large corporations
The tax breaks in the Senate bill have divided the private sector, pitting small businesses and retailers that would benefit from them against the larger corporations and manufacturers that would have to pay for them. The package costs $8.3 billion in lost tax revenue over 10 years.
To help pay for the tax breaks, corporations no longer would be able to deduct the cost of jury verdicts or settlements in liability suits against them and their executives’ tax-deferred pay packages would be capped at $1 million a year.
The bill’s business critics are especially annoyed that the tax benefits would be short-term while the provisions that pay for them would alter tax law for the long-term.
“The permanent tax law changes here far outpace and outweigh the few benefits,” said Bruce Josten, the chief lobbyist for the U.S. Chamber of Commerce, which opposes the bill.
The bill would extend tax breaks that allow small businesses to deduct up to $112,000 in new investments a year. It also would reduce the depreciation period for improvements to retail properties and extend a tax credit for businesses that hire low-income or disadvantaged workers.
“We think they are all significant,” said Dan Danner, an executive vice president at the National Federation of Independent Business, whose membership consists mostly of business owners with 10 or fewer employees.
The rift stems from the new Democratic Congress’ approach to tax relief, which requires that every tax dollar lost to a new tax break be offset by a tax increase or closed loophole elsewhere. It also signals the new Democratic majority’s willingness to pay heed to the small business community even as it irritates larger corporate interests.
Still, House Democrats want to pass a clean bill — without tax breaks — and cite constitutional precedents that require tax legislation to begin in the House. Some Democrats want their leaders to dare Senate Republicans to vote against the minimum wage increase. House Democratic Leader Steny Hoyer said Tuesday that House and Senate leaders have not decided how to proceed.
“The Senate has different challenges than we do,” Hoyer said, referring to the 60-vote thresholds needed in the Senate to end debate.
Concern for entry-level positions
In the Senate, Republican critics of the legislation have argued that raising the minimum wage might force some businesses to stop hiring entry-level employees. They also contend that beneficiaries of a higher minimum wage likely will be teenagers working part-time jobs, not the working poor. But few if any Republicans have protested the revenue provisions in the tax package.
Ending the business deduction for court settlements, jury verdicts and fines would generate about $540 million over 10 years. Josten said such a provision would eliminate the incentive for companies to settle liability lawsuits out of court.
The cap on tax-deferred compensation responds to congressional and public criticism of large executive pay packages, including a $210 million severance package for ousted Home Depot Chairman-CEO Bob Nardelli. The Senate bill would allow employees to defer up to $1 million a year or a figure equal to the five-year average of their taxable salary, whichever is less. That cap would generate about $810 million in revenue over 10 years, according to the Senate Finance Committee.
Who will be affected?
Brigen Winters, an executive compensation attorney at the Groom Law Group in Washington, said the five-year average could end up taxing deferred compensation for middle managers or employees of startup businesses who are offered deferred compensation based on the performance of the enterprise.
“It affects various types of compensations for a very broad array of employees,” Winters said.
But congressional tax writers dismissed the complaints, saying the vast majority of people affected by the cap would be highly compensated executives.
“These hypotheticals are really red herrings,” said Carol Guthrie, a spokeswoman for the Senate Finance Committee. “When most Americans would be thrilled to be able to put away even a portion of the $15,000 the average worker is allowed to save in a 401(k) every year, it’s a pretty hollow argument that $1 million or 100 percent of pay is not enough for executives and managers to add to their tax-deferred accounts.”
Danner, speaking of the NFIB’s small-business membership, said: “Our guys could not be worried less that you could only roll over $1 million in compensation.”