Monday, January 29, 2007

Cushioning the wage hike for small business
Jeffrey Gangemi, Businessweek

[Editor: I'd rather they passed a clean bill. But if we have to write in tax incentives for small businesses to get it passed, then that's fine with me.

If any legislators try to attach cuts for big business, or extate tax repeals, or anything similar, I'll be calling for pianos to fall on their heads.

It's important to remember: In my opinion, the minimum wage should be raised. But that is only the beginning.]

On a 54-43 vote in the Senate on Jan. 24, Democrats lost an effort to advance a House-passed bill that would lift the minimum wage from $5.15 to $7.25 an hour without any accompanying tax cut (see, 1/10/07, "More Than the Minimum Wage"). The federal minimum wage has stood at $5.15 since 1997.

The new take on the proposed legislation, led by Republicans, would provide $8.3 billion in tax cuts for businesses over the next 10 years and is designed to be coupled with the $2.10 increase in the federal minimum wage that would be put in place in three 60-cent increments over 26 months.

But because a minimum-wage increase will hit some small businesses hard, particularly retail and manufacturing companies, advocacy groups and economists say that the tax incentives may not make up for the burden and that alleviating poverty would be better served by beefing up the Earned Income Tax Credit (EITC).

Difficult Equation
The EITC is a refundable tax credit that reduces or eliminates the taxes that low-income working people pay and also frequently operates as a wage subsidy for low-income workers. Enacted in 1975, it was originally approved to offset the burden of Social Security taxes and to provide an incentive to work.

"Trying to figure out how to match the tax cut with people affected is going to be tricky. I don't think you will be able to do it very well," says William Dunkelberg, chief economist for the National Federation of Independent Business, a powerful Washington (D.C.) small-business advocacy group. "There's no evidence that government wage and price settings is beneficial—ever," he says.

By bundling the tax incentives with the minimum-wage increase, lawmakers are "trying through various means to maximize the number of winners and minimize number of losers," says Steve Mangum, professor of management and human resources, a labor economist, and senior associate dean at the Fisher College of Business at Ohio State University. "When it comes to fighting poverty, the EITC is by and large a more finely tuned weapon—it's like a rifle vs. the shotgun," says Mangum, who recommends a blend of increasing the EITC and minimum wage.

Cement Ceiling?
Minimum-wage increases indirectly affect employment rates, argue some labor economists. Instead of immediately causing greater unemployment, for every 10% increase in the minimum wage, there's a 1% "disemployment" that happens. Employers might not hire as many people, or they might eventually boost their troubled bottom line by sacrificing some of their labor costs, the labor economists argue.

The thinking goes that even if the tax credits reach the right people, it might not improve the disemployment problems caused by the minimum wage increase, thereby making it harder for the unskilled to find jobs. "When you push the bottom up, it's going to go up through the wage structure. If I'm looking at labor, I'm looking at the value each new person will bring in. I won't necessarily associate the hiring decisions with the tax credit," says Dunkelberg.

Though the details of the Senate version of the minimum-wage bill with the added small-business tax benefits aren't final, they would also include a provision to extend the Work Opportunity Tax Credit for five years.

Other Incentives
The credit, which has existed since 1996, is available to employers who hire disadvantaged workers, including disabled veterans, qualified food-stamp recipients, and ex-felons hired within a year of release from prison or the date of their conviction.

Other proposed tax incentives include an extension of favorable expensing provisions for small businesses that would allow restaurant owners and retailers to more quickly deduct the costs of remodeling leased buildings (see, 1/23/07, "Your Waiter Today Will Be a Computer").

It's unclear how long the process of amending the Senate bill could push back the final vote that will ultimately increase minimum wage. But small-business owners who employ the estimated 10 million to 13 million workers earning minimum wage or below will be watching intently.

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