A 'Trifecta' for Small Business?

Legislation that passed the U.S. House prior to the August recess — yet failed in the U.S. Senate — would increase the federal minimum wage from $5.15 to $7.25 over three years (by 41 percent) and reduce estate taxes beginning next decade (a $5 million exemption per individual and $10 million per couple, pegged to inflation, beginning 2015).

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Other elements of the beltway "trifecta" package, the "Estate Tax and Extension of Tax Relief Act of 2006" (H.R. 5970), would extend the state and local sales deduction, the research and development (R&D) tax credit, an above-the-line deduction for higher education expenses, the New Markets tax credit and twenty other provisions, some of which have been expanded or modified.

It also includes eighteen other provisions "designed to provide additional tax relief and certainty to taxpayers," according to a Ways and Means Committee summary. Such provisions include a deduction for qualified timber capital gains, mine safety tax incentives and tax credit bonds to finance certain rural development projects, a deduction for the cost of travel expenses incurred by an employee on behalf of a spouse when he or she accompanies the employee on business-related travel, among other measures.

(Click here to review Ways and Means materials on H.R. 5970)

The health of the small business sector was cited by Members of Congress as rationale for both opposing and supporting the legislation. Rep. Mike Pence, R-Ind., said that despite some good tax measures, including permanent death tax relief, he could not "in good conscience vote for a bill that also contains an excessive minimum wage increase that will hurt small businesses and cost American jobs."

Pence also pointed out that the bill provided nearly $4 billion in new mandatory spending dedicated to the Abandoned Mine Land Program (ostensibly a "sweetener" for Senator Robert Byrd, D-W.Va., to sway his vote). The budget-busting spending, coupled with the wage hike, was simply too much for Pence and a limited number of GOP conservatives who eventually voted against the bill.

Acknowledging divergent views among GOP members regarding the economic impact of the minimum wage hike, Rep. John Boehner, R-Ohio, house majority leader, said that the R&D tax credits and incentives aimed at small businesses who seek to employ welfare recipients, as well as other tax provisions enabled the GOP "to reconcile these differences to pass a jobs-neutral bill."

In Pence’s view, H.R. 5970 was not, in its totality, a jobs-neutral package. To Boehner it was. Who’s right? And, is the "trifecta" bill a good deal for small business? Several think tank and advocacy group economists weighed in on the matter.

Raymond Keating, chief economist, Small Business & Entrepreneurship Council (SBE Council, disclosure: the writer’s organization) said it was impossible to say whether the package would be jobs neutral – that is, whether the tax incentives would neutralize the effects of the wage hike. Also, there are too many unknowns with respect to future political variables.

"It would be a clear negative for young, inexperienced, low-skilled workers as most economists understand," said Keating referring to the minimum wage hike provision.

Likewise, Keating adds, many labor-intensive small businesses would get hit hard by the wage hike as their costs would increase, which means a reduced bottom line and fewer resources for investment and jobs for other workers.

John Berthoud, President & CEO, National Taxpayers Union called the bill "pretty close to a wash."

"The impact for business would be mixed – some would probably end up small winners, some would end up losers," said Berthoud. Low-skilled workers (who would lose job opportunities) and minimum-wage sensitive small business owners are definite losers, according to Berthoud.
William Beach, Director of the Center for Data Analysis at The Heritage Foundation, called the bill "stunningly unprincipled." In an issue brief analyzing H.R. 5970, Beach asserts that the bill "reaffirms Congress’s control over labor markets, reinvigorates federal death taxes, and strengthens Washington’s top-down management of the economy through the tax code." He, like Keating and Berthoud, noted the wage hike’s impact on low-skilled workers and slower job growth among small businesses.

What about the death tax piece?

Keating contends the death tax compromise is an improvement over what would happen under current law. However, he adds, it’s "a negative compared to what was promised by Republicans and the White House."

Keating notes that looking down the road, a key negative is that it’s far easier to increase a tax currently in existence, than it is to re-impose a tax that has been eliminated. Berthoud agrees that it’s much harder politically to re-create a tax.

"Fixing the estate tax takes the issue off the table and effectively ends any chance of elimination for at least five years," he says. Berthoud predicts that re-raising the estate tax would probably be one of the first tax-hike proposals of, say, a Hillary Clinton Administration.

Beach agrees with some of the positive attributes of the bill with respect to its improved exemptions and lower rates. But, he argues, the current legislative initiative "stops the movement toward death tax repeal in its tracks."

Beach contends the current death-tax timeline – that is, the tax being eliminated in 2010 but returning in full force in 2011 – has kept Congress focused on repeal. The current reform proposal "keeps estate taxes in place even in 2010 and allows future Congresses to increase tax rates and expand the pool of estates that must pay this tax," he writes.

What about the politics – will the GOP get a trifecta-sized pay off with the voters?

Berthoud’s not so sure. He thinks that Republicans probably won’t get political plaudits from the base as they got credit on death tax issue several years ago.

"For the base, the only real forward progress would be elimination. It’s likely that the capitulation on the minimum wage increase would be viewed as a greater concession than any tax relief ‘victory,’" he predicts.

Beach believes that this particular legislation deviates from what Congress has said they will do – that is, "follow principle on the big matters of the day."

Most Members of Congress use the August recess to get feedback from constituents. This reality check will drive the agenda when they return in September. The voice of small business matters on critical issues such as H.R. 5970, and if they act on this package (and others) it would be good to have heard from small business owners in guiding such votes.

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Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council, a research and advocacy group based in Washington, D.C. that works to protect small business and promote entrepreneurship. She is also founder of Women Entrepreneurs, Inc., an association helping women business owners succeed through education, networking and advocacy. Kerrigan can be reached at kkerrigan@sbecouncil.org.