A standoff between the chairs of Congress's main tax-writing committees over tax breaks and efforts to hike the minimum wage ended this week. Senate Finance chairman Max Baucus (D-MT) and House Ways and Means chairman Charlie Rangel (D-NY) agreed to include a package of $4.8 billion (over 5 years) in tax breaks in legislation increasing the minimum wage, which was passed this week in both chambers as part of an emergency war funding bill. Rangel originally sided with Democrats in the House who pushed for and passed a "clean" minimum wage increase (without tax breaks). The Senate passed a package including $8.3 billion in business tax breaks on February 1, and Rangel compromised somewhat and passed a package of $1.3 billion that was approved and added to the minimum wage legislation.

Matters became more complicated when Democratic leaders in both chambers attached their respective minimum wage packages (including both the wage hike and tax breaks) to the emergency war spending bills they each passed. The President has vowed to veto this legislation because it includes timelines for withdrawing troops from Iraq, but the minimum wage and the accompanying tax breaks may be included in another emergency war spending bill that might not prompt a veto from the President.

Does Business Need to be "Compensated?"

While the new $4.8 billion level that both Baucus and Rangel have agreed to is a breakthrough, it is nonetheless disconcerting that several Senators on both sides of the aisle seem to believe that business should be "compensated" for raising the minimum wage from its lowest real purchasing power in 50 years. As we've pointed out before, business has received $276 billion in tax breaks since the last minimum wage hike in 1996. Remarkably, some members of Congress who are hostile to minimum wage legislation, such as Charles Grassley (R-IA), are actually complaining that the tax breaks are not big enough.

What's in the Tax Package

More than half of the tax breaks would take the form of a three and a half year extension for the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire welfare recipients and individuals from other at-risk groups, at a cost of more than $2.5 billion over ten years. Other tax breaks would loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax), at a cost of $892 million over 10 years. Also included is a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT.

Tax Breaks Technically Paid For

The best that can be said for the tax cuts is that they're technically offset so that they will not add to the federal budget deficit. The most significant offset would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest. Another provision would require that people under 19 years of age be taxed at the income tax rate their parents are subject to (which currently applies to people under 18). Other changes relate to how deficiency payments are treated as well as penalties and user fees.

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