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Proposed tax breaks split state's businesses

A federal minimum wage bill pits the interests of small companies against those of large corporations.

February 02, 2007|Molly Hennessy-Fiske | Times Staff Writer

WASHINGTON — Tax provisions in the landmark minimum wage bill passed by the Senate on Thursday have divided the California business community, pitting the interests of small businesses against large corporations.

The tax provisions were added to the legislation by Senate Democrats as a concession to small businesses and Republicans who initially opposed the bill, which would raise the federal minimum wage for the first time in a decade.

Under the bill, which passed the Senate by a 94-3 vote, the federal minimum wage would go to $5.85 from $5.15 an hour within 60 days after the legislation became law, then rise to $6.55 in 2008 and $7.25 in 2009. If the measure can be reconciled with a House version that passed without the tax package Jan. 10, millions of workers could see their wages increase in 21 states that pay the federal minimum, including three in the West: Idaho, Utah and Wyoming.

The new federal minimum wage would not affect California, where the state-mandated minimum rose to $7.50 an hour Jan. 1.

The Senate bill includes extensions of business tax credits, deductions and other new tax breaks totaling an estimated $8.3 billion over 10 years, designed to offset the effect on small businesses of a higher minimum wage.

To help pay for the tax breaks, the bill would raise revenue by preventing companies from deducting the cost of jury verdicts or settlements against them in liability suits and by capping executives' tax-deferred pay packages, among other changes.

California small-business owner Mike Horner said the proposed tax breaks would help him cover rising costs.

Horner is president of Pasadena-based Tom Sawyer Camps Inc., which runs summer and year-round after-school camps. The company employs 20 full-time staff and 200 seasonal workers, about 60% of whom earn minimum wage, Horner said.

The tax breaks include a one-year extension of a provision that allows small businesses such as Horner's to combine as much as $112,000 in expenses into one annual tax deduction.

They also would speed up the depreciation schedule for improvements to restaurants and retail properties -- where most minimum-wage workers are employed -- and extend for five years a tax credit for businesses that hire low-income or disadvantaged workers.

Horner said he relied on one of the tax provisions extended in the Senate bill to deduct the $200,000 cost of buying 10 passenger vans in the last two years.

"I'm sure it's very valuable to a lot of other small businesses and probably has encouraged a lot of capital purchases," Horner said of the tax break, especially for California businesses struggling with rising payroll costs. "We've been well ahead of the [federal] minimum wage, so anything to help us offset that cost increase here will be good."

Many small-business groups that once opposed legislation to raise the minimum wage came out in support of the Senate bill because of the tax breaks.

"We're holding our nose, but we're supportive of it because there are small-business tax cuts included," said Susan Eckerly, vice president of federal policy at the national Federation of Independent Business, which includes 600,000 businesses, most with fewer than 10 employees.

But the U.S. Chamber of Commerce and some large businesses oppose the Senate bill, arguing that it helps small businesses at their expense.

Bruce Josten, the chamber's top lobbyist, said the Senate bill would temporarily extend tax cuts for small businesses while imposing huge new burdens on big businesses. "Those provisions are not enough to make up for the tax increases that pay for it," he said of the bill.

Ending the business deduction for court settlements, jury verdicts and fines would generate about $540 million over 10 years. The provision that caps tax-deferred compensation at $1 million a year, or a figure equal to the five-year average of an employee's taxable salary, whichever is less, would generate about $810 million in revenue over 10 years, according to the Senate Finance Committee.

"You'd be effectively penalizing large businesses while trying to laudably raise the minimum wage," said Scott Dunham, partner and chair of the labor and employment law practice group at O'Melveny & Myers, a Los Angeles-based law firm that employs more than 1,000 lawyers internationally.

Dunham called provisions in the bill concerning tax deductions for settlements, fines and jury verdicts "fairly far-reaching and draconian in scope" and said they could affect many of the firm's corporate clients. He added that if companies were unable to deduct the cost of settlements, they could decide to litigate more cases, further clogging California's courts.

The Senate bill would also close certain loopholes for companies that set up foreign tax shelters and would bar firms caught hiring illegal immigrants from federal government contracts for as many as 10 years.

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