Regretably, the Senate Finance Committee seems to think that there is some reason for passing even further revenue reduction bills this year, in order to get recalcitrant Republicans to finally raise the minimum wage after years of stagnation. The Small Business and Work Opportunity Act of 2007, summary and revenue effects of which are available at the Joint Committee on Taxation and report and text at the Senate Finance Committee, would provide a potpourri of further tax breaks for small business taxpayers, including (to name a few of the more egregious provisions):
- further super-accelerated cost recovery provisions
- expanding availability of the cash method of accounting for businesses to those that have $10 million rather than $5 million average annual gross receipts
- permitting banks to transition from the reserve method (and then elect S corp status) without the double-rate of tax expected for such transitions, and
- changes in S Corporation requirements and rules that eliminate taxes in various ways (including letting nonresident aliens own small business trusts that hold S corporation stock and eliminating the treatment of capital gains as passive investment income).
There is little justification for any of these provisions. Continued acceleration of expensing--already much faster than economic depreciation and operating as a pure tax subsidy for these taxpayers--cannot be justified especially in an era of runaway deficits that are being made up for, in part, by the surplus from taxes borne only by lower and middle-income wageearners. Congress should be eliminating business use of the cash method of accounting, not expanding it to an even broader category of businesses!
Here's what Citizens for Tax Justice had to say on in its January 5 report about the proposal to link tax breaks for small businesses to a minimum wage increase.
"Polls indicate that at least 80 percent of Americans — including majorities of Democrats, Republicans and Independents — want to see the minimum wage increased. One poll even shows that three out of four small business owners think a minimum wage increase will have no effect on them. Yet President Bush and his Republican allies in Congress have come to the strange conclusion that in order to pass both chambers of Congress, any bill increasing the minimum wage must include new tax breaks for business in order to compensate companies for the alleged damage it will cause them. As Jared Bernstein and Lawrence Mishel explain in the American Prospect, the idea that business needs to be compensated because Congress is raising the minimum wage from its lowest inflation-adjusted level in 50 years is nonsensical."
The offset provisions, on the other hand, are generally reasonable ones that should be passed--such as denying a deduction for punitive damages, and other fines and penalties, granting Treasury authority to address foreign tax credit transactions that allow taxpayers to strip the credit from the related income, and making somewhat stricter the corporate inversion provision (though still not enacting the reasonable "headquarters" rule that other countries use).
The problem is that the Senate Finance Committee is putting another revenue reduction bill through as the "price" for passing minimum wage reform. It looks like the Senate Finance Committee can't imagine passing any single measure that would benefit ordinary--and especially low-income--Americans without yet another huge dose of tax breaks for the well-to-do. That likely makes the business lobby happy, but it is a lamentable development in a democratic institution that should be thinking a good deal more these days about ordinary Americans.
The House has it right--pass a minimum wage bill, and quit linking wage rules to inappropriate tax subsidies for businesses.
Revised 2/1/07 to provide updated links
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