The Senate Finance Committee had approved the package of tax "sweeteners"... at a cost of $8.3 billion over ten years... for small business to be combined with the minimum wage hike. The biggest tax break is an extension and expansion of the Work Opportunity Tax Credit, an incentive for businesses to hire welfare recipients and individuals from other at-risk groups. Other breaks would allow restaurants and retail stores bigger tax write-offs, expand the number of businesses allowed to use the more advantageous cash method of accounting, and loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax).
To his credit, Chairman Max Baucus (D-MT) also included in his bill several revenue offsets to ensure that the bill as a whole is budget-neutral. The biggest offset would restrict an especially egregious form of tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision.
Another offset would increase restrictions on "inversion transactions," in which American companies set up phony offshore "headquarters" to avoid U.S. taxes. The bill would also crack down on wealthy people who renounce their U.S. citizenship and move abroad, by making them pay taxes on their unrealized capital gains when they leave the country.
Projected Costs of Individual Tax Break Provisions and Revenue-Raising Provisions, 2007-2017
Deferred Compensation Controversy
One provision, which constitutes a smaller fraction of the offsets but has caused surprising consternation among lobbyists, would end tax advantages for "non-qualified deferred compensation" over $1 million a year. To put this in context, the tax code allows employees to defer paying taxes on money that they or their employer put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan
Many corporate executives, however, have set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out (and which are not deductible by companies until then either). Currently, there is no limit on how much money executives can defer taxes on through these plans. The Senate bill would limit such tax-deferred compensation to $1 million a year. President Bush admonished business executives this week to "pay attention to the executive compensation packages that you approve" but did not endorse the Senate provision.
Future of Bill Uncertain
Senators from both parties said even before the vote on the "clean" minimum wage hike that it could not get the 60 votes needed to pass if it was not combined with tax breaks for small business, although the rationale for "compensating" small businesses. Under the U.S. Constitution, tax legislation must originate in the House, and House Ways and Means Chairman Charlie Rangel (D-NY) could use this rule to stop this legislation from moving if a deal is not worked out between him and Baucus.
The offsets are key because one hurdle any new tax breaks would have to overcome is the pay-as-you-go (PAYGO) rules that the Democrats in the House restored. PAYGO rules basically require that any new entitlement spending or any new tax breaks be paid for by either revenue increases or spending cuts. PAYGO was waived and then replaced with weaker rules while President Bush and his allies in Congress enacted deficit-financed tax cuts. Now, as lawmakers consider large tax proposals such as adjustments to the Alternative Minimum Tax (AMT) or large spending proposals, PAYGO will make it harder for Congress to take any action that increases the federal budget deficit.