The decision by the Senate to attach small business tax relief to its minimum-wage bill ensured the inclusion by House lawmakers of a similar package in their minimum-wage measure.The catalyst for the bill was the Senate linkage of small business relief to the minimum-wage boost. Although House Democrats initially threatened to "blue slip" the Senate bill - send it back because it contains tax provisions, violating the constitutional requirement that revenue legislation originate in the House - they eventually acted on H.R. 976, a bill that contained some provisions similar to the Senate measure.

"The theory is that the small business relief will offset some of the costs of the higher minimum wage to employers," said Bob Scharin, senior tax analyst at Thomson Tax and Accounting.

The minimum wage, currently at $5.15 per hour, is set to increase to $7.25 per hour under the new legislation.

"When you look at individual employers, the ones paying the extra wages may not necessarily be eligible for a lot of tax savings, and the ones getting the tax relief may not be the ones affected by the higher minimum wage," Scharin said.

According to George Pieler, former tax counsel to the Senate Finance Committee, "The Senate position was always going to be like this: They were not going to pass a clean minimum wage increase without attaching some relief for affected businesses." The small business tax relief package will have some ameliorating effect on the negative effects of the minimum wage, but will not solve all of its problems, according to Pieler. "There's not a one-to-one match-up pro rata for businesses most affected by a minimum wage hike," he said. "If you weigh both ends of the scale, the best you can do is get rough guesses."

There's a further significance to the bill, Pieler added. "This is the first example of tax pay-go in action, and it has changed the dynamic of the way bills will be passed," he said. "It doesn't amount to a blip on the revenue-estimate radar screen, yet they thought they had to have some offsets. The House bill was smaller [in small business tax relief] because of pay-go. It's easier for them if they offend fewer people."

"The whole process was a lot of theatre - no one was surprised by the sequence," he said. "This way, the House prerogative [to originate revenue bills] is respected."

THE DETAILS

Both the House and Senate bills extend and modify the Work Opportunity Tax Credit, and increase and extend Code Section 179 expensing.

The WOTC provision expands the "qualified veterans" targeted group, and also expands the definition of qualified first-year wages from $6,000 to $12,000 for individuals who qualify under either of the new expansions of the qualified veteran group.

"The provisions are targeted to the kinds of businesses that would tend to hire minimum-wage earners," said Scharin. "The expansion of the WOTC is targeted to employers who are hiring people who would tend to be in the low-wage category."

Although the Senate package was bigger, the House expensing provision was more generous. Both versions extend the provision allowing small businesses to deduct up to $112,000 (for 2007, indexed for inflation) in expenses in lieu of depreciation, but the House proposal bumps the base up to $125,000 for tax years beginning in 2007 through 2010.

"The House provision is more generous than the Senate because of the bump up in expensing limits," said Macey Davis, tax counsel for the National Federation of Independent Businesses. "But generally speaking, the Senate bill goes a long way to provide greater tax relief for small business as a package."

To be sure, the expensing provision might be a boon to some small businesses, but not to others, according to Scharin. "It's only a help to those businesses making large purchases," he said. "For a small business making $10,000 to $20,000 in purchases a year, the higher amount is irrelevant. And a business that makes a million in purchases a year wouldn't be eligible for Code Section 179 expensing ... because of the phase-out."

Part of the problem is the meaning of small business, according to Roger Harris, chief executive of Padgett Business Services. "There are a lot of definitions of a small business, and what is at the upper end of the spectrum is vastly different from what would impact at the other end," he said. "The difficulty is that the definition we use determines what breaks we want. Many of our clients are not concerned that they can write off $100,000 of equipment, because they're never going to buy $100,000 of equipment."

Meanwhile, a rise in the minimum wage may work to the detriment of many lower-wage earners, according to Houston-based CPA Ken Decker.

By Decker's calculations, a family with two children that takes the maximum Earned Income Tax Credit sees a benefit equal to $2.18 an hour under the current wage and tax laws that it will lose when the minimum wage is raised. "Without raising the income guidelines to qualify for the Earned Income Tax Credit, some families receiving the minimum wage will actually take home less even if the minimum wage goes up," he said.

The overall dynamic effect of this type of legislation may be negative, Pieler said: "If this is the future of tax legislation - time-limited tax breaks coupled with permanent tax hikes - that gives a lot of juice to the people who want to raise money for political campaigns. Tax issues will be coming up year after year. That's great for the guys on K Street."

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