AP: Proposed minimum wage increase divides business over tax breaks, executive pay

By Jim Kuhnhenn
Associated Press, 1/30/07

America's businesses are at odds over minimum wage legislation, but the rift has little to do with a $2.10 hourly raise.

A Senate bill that could win final passage this week has divided the private sector, pitting small businesses and retailers that would benefit from tax breaks in the bill against the larger corporations and manufacturers that would have to pay for them.

At issue are tax breaks contained in the Senate bill as sweeteners to attract Republican votes for the minimum wage increase. The legislation would increase the federal minimum from $5.15 to $7.25 an hour in three steps over the next two years.

The bill also includes business tax credits, deductions and other tax advantages worth $8.3 billion over 10 years that are designed to help small businesses overcome potentially higher labor costs.
To help pay for the cost of those 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.

The House version of a minimum wage increase does not contain tax breaks for small businesses, a potential obstacle to getting a final bill to President Bush for his signature. House Speaker Nancy Pelosi has said she would prefer to address small business needs in a separate tax package.

On Monday, a coalition of business owners, including Costco Wholesale Corp. chief executive officer Jim Sinegal, called on Congress to pass the minimum wage increase, arguing that it would help business by increasing the purchasing power of workers. Congress last raised the minimum wage in 1996.

"It's long overdue," Sinegal said in an interview. "In my view, it is the best thing for the country."

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.

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."