Congress acts on minimum wage: bills pas house, Senate; one has tax breaks, one doesn't

Hardware Retailing, March, 2007

For the first time in 11 years, Congress voted to raise the federal minimum wage--almost.

The House of Representatives passed the Fair Minimum Wage Act, which would raise the minimum by $2.10 an hour over two years. Specifically, the minimum would go to $5.85 an hour 60 days after enactment, to $6.55 a year later and to $7.25 a year after that.

The Senate accepted the bill and added an $8.3 billion package of tax breaks for small businesses. This bill, the Small Business & Work Opportunity Act, would extend the $100,000-plus cap on Section 179 expensing through 2010 and allow business owners to use 15-year depreciation for interior improvements; current law limits the 15-year depreciation to leased property.

The bill would open eligibility to use the cash method of accounting to any company with less than $10 million in annual revenue, regardless of the presence of inventories. Under current tax rules, retailers are precluded from using cash accounting because they maintain inventories.

Hurdless to Final Passage

The minimum wage increase may still have a long road to go before becoming law. First, the two houses must reconcile differences between the two bills. Second, they will have to overcome a Constitutional hurdle.

Democrats in both houses wanted a minimum wage bill with no other provisions. Their majority in the House was enough to do that without Republican votes. In the Senate, Democrats needed enough Republican votes to reach 60 to overcome any threat of a filibuster and Republicans insisted on the small business tax breaks.

Further, under the Constitution, tax bills must originate in the House. Rep. Charles Rangel (D-NY), the chairman of the House Ways & Means Committee, raised a Constitutional objection to the small business tax package because it had not originated in the House. Sen. Max Baucus (D-MT), chairman of the Senate Finance Committee, thought the Senate might hold the minimum wage bill until a revenue bill arrived from the House and then attach the minimum wage/small business tax bill to it. In the meantime, negotiations over the final version of the bill were going on.

At last report, Rangel was softening his objection to the tax breaks a bit. He indicated he would be willing to negotiate a less expensive package of tax breaks. He was also objecting to revenue raisers included in the Senate bill to offset the cost of the tax breaks. He was quoted as saying he wanted to save them for use later.

Budget Rules Require Cost Offsets

Why? Because House and Senate Democrats approved pay-as-you-go (pay-go) rules for budgeting and appropriating federal funds.

Pay-go rules require new spending or new tax cuts to be offset with savings elsewhere in the budget. Offsets are significant because Democrats have big plans to make tax law. There is strong sentiment to repeal the individual alternative minimum tax (AMT) and to close the tax gap. It is estimated That repealing the AMT could cost some $1 trillion in lost revenue over 10 years. The Internal Revenue Service's last estimate placed the tax gap--the difference between taxes owed and taxes collected--at $290 billion. Under pay-go rules, those amounts would have to be offset and finding that much money won't be easy.

Finishing Up Last Year's Work

The last Congress passed only two of 11 spending bills before adjourning, leaving the government operating under a short-term continuing resolution that ran out Feb. 15.

In an effort to deal with the matter once and for all, the House passed a $463.5 billion spending bill to fund much of the government through the rest of the 2007 fiscal year.

Last year Congress capped 2007 discretionary spending at $873 billion. They passed appropriations for defense and homeland security totaling $409.5 billion, leaving $463.5 billion for all other government operations. In addition to allocating funds, the bill imposed a moratorium on "earmarks," spending on pet projects in lawmakers' home states.