Senate Finance Committee to Attach Tax Small Business Tax Breaks to Minimum Wage Hike - But at Least They'd Be Paid For

Contrary to the wishes of Democratic leaders in the House of Representatives, which last week passed a bill that would increase the minimum wage, the Senate Finance Committee on Wednesday approved a package of tax "sweeteners" 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 limit the amount of compensation that executives can postpone paying taxes on to $1 million a year (for most workers, the limit is $15,000). It would 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.

Senators from both parties say that the minimum wage hike will not get the 60 votes needed to pass if it's not combined with tax breaks for small business, although the rationale for "compensating" small businesses has been questioned. 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.

House of Representatives Passes CLEAN Act, First Step in Ending Subsidies to Big Oil

In what some Democratic members of Congress are calling a first step towards a larger change in energy policy, the House of Representatives on Thursday passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6). The legislation only repeals two of the tax subsidies directed at oil and gas companies that CTJ has criticized. One is the domestic manufacturing tax deduction, which is available for oil and gas companies only because a provision of the 2004 tax cut bill redefined manufactured goods to include oil and gas. The White House has argued that it would be unfair for manufacturing companies, but not energy companies, to take advantage of this tax subsidy. The other is the five-year amortization of geological and geophysical expenditures (the faster write-off of the cost of exploring for oil and gas, in other words), which would be changed to a seven year amortization. Other provisions would close loopholes that have allowed companies drilling on public lands to avoid paying royalties. Around $14 billion of savings would be reallocated towards the development of alternative energy sources.

Removing the Sales Tax on Food: Two Approaches On Wednesday newly elected Arkansas Governor Mike Beebe kept a campaign promise and proposed a cut in the state's sales tax on food. The proposal would cut the state's 6 percent sales tax, as it applies to groceries, by half. The Governor hopes to eventually repeal the tax on food altogether. However, the price tag for this cut is over $200 million and the benefits from this tax cut aren't targeted towards those who need it. Also, despite the state's recent higher-than-expected revenues, many advocates are worried the funding for the tax cut could come from education or other programs. A similar discussion is taking place in Idaho, where Governor Butch Otter is proposing a more progressive approach to this issue. His proposal would keep the grocery tax and would instead offer a low-income tax credit designed to offset it. For more on the relative merits of exemptions and credits as strategies for making sales taxes less unfair, check out this ITEP Policy Brief.

Hot Topic: Severance Taxes States that enjoy a large endowment of mineral resources usually levy a severance tax on the extraction of these resources and these taxes are receiving a lot of attention these days. In Colorado the Auditor's office found that many oil and gas companies may not be filing tax returns. Officials in West Virginia worry that coal severance taxes are on the decline there, while advocates in Arkansas say that now is the time for severance tax reform. For more on this, read the report "Digging Deeper," from Arkansas Advocates for Children and Families

Rural representatives in North Dakota's legislature have started a revolt against local option sales taxes used by some localities to help fund local education. State Rep. Mike Brandenburg argues that the lack of stores in more rural communities forces residents to shop in towns in more affluent districts, increasing the inequality between rich and poor districts. However, his proposed solution, House Bill 1314, may well create more problems than it solves. The bill would require stores to keep track of the home district of any shopper who spends more than $5, so the sales tax revenue can be directed to the shopper's home county. This system would create a huge administrative burden for both businesses and local governments. For a better solution to the problem of funding inequality between counties, North Dakota should consider revenue-sharing programs like those in Minnesota and Vermont.

Cigarette Taxes in the News Again

Iowa, Wisconsin, and Indiana are all again considering raising state taxes on tobacco. The so-called "sin taxes" are often seen by lawmakers as an easy way to raise extra money without the public anger that so often follows attempts to raise income or property taxes. However, as this ITEP policy brief shows, cigarette taxes are very regressive, forcing poor smokers to pay much more of their income in taxes than more affluent smokers. Perhaps more worrying is the fact that all three proposals discuss using some of the revenue from increased cigarette taxes to pay for increased health care funding. While providing extra funding for health care is a noble and popular goal, in recent years cigarette tax receipts have been declining. Indeed, higher cigarette taxes have proven effective in lowering the smoking rate, one of the goals of such tax increases. However, this means that cigarette taxes will be an unstable revenue source into the future. If lawmakers are serious about increasing the funds available for health care in their state, they must find a growing revenue source, not a shrinking one.

CONTACT: Citizens for Tax Justice Phone: (202)299-1066 Fax: (202) 299-1065

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