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Senate Passes Small Business Tax Incentive Bill,
Including Minimum Wage Increase

Tuesday, July 9, 1996

OnLine

The Senate Tuesday approved 74-24 the Small Business Job Protection Act (HR 3448) after approving the bipartisan tax-related amendment offered by Senate Finance Committee Chairman Bill Roth, R-Del. This bill includes the controversial 90-cent minimum wage increase (from $4.25 an hour now, to $4.75 when the increase first takes effect, and then to $5.15 an hour a year later).

Ordinarily the next step in the legislative process is to convene a House-Senate conference to iron out the differences between the less ambitious House-passed version and the version approved by the Senate. The Senate version contains about $19 billion in tax relief compared to the House bill, which calls only for about $8 billion in tax breaks.

However, it is uncertain whether a House-Senate conference will be named because the House might decide to avoid another vote on the legislation, which includes a controversial increase in the federally mandated minimum wage. The House leadership could choose to accept the Senate version of the bill.

The bill would increase the expensing limitation for small businesses (from $17,500 to $25,000 a year), and it would extend the research and experimentation tax credit, the Section 127 education-assistance exclusion (which lets employers offer tuition assistance to their employees tax-free), and other expiring tax provisions. To pay for these changes, the possessions tax credit (a tax break for American companies that set up manufacturing plants in U.S.-owned possessions such as Puerto Rico) would be phased out and the airline ticket tax would be extended, among other things.

The measure’s fate rests more on its controversial minimum wage component than on its relatively non-controversial tax provisions. In this election season, Republican and Democratic leaders must decide who has the most to gain and who cannot afford to lose if the proposed legislation is enacted.

Poison Pill Defeated: In passing the bill, the Senate defeated 52-46 a potential "poison pill" amendment offered by Sen. Christopher Bond, R-Mo., that would have exempted certain workers (such as waiters and others who receive some wage income from tips as well as all employees in their first six months on the job) from the wage hike. Businesses with less than $500,000 a year in annual revenues would have been exempt from the increase as well. President Clinton threatened to veto the bill if the Bond amendment passed.

All 47 Senate Democrats voted against the Bond amendment as well as five moderate Republicans.

Bipartisan Amendment Approved: Prior to final passage, the Senate approved 96-2 a package of modifications to the Senate Finance Committee’s version of the bill.

Chief among the changes are a series of further extensions of language that will reinstate and extend a group of tax provisions already expired, most notably the research and experimentation tax credit. The approved language provides a Dec. 31, 1997, expiration date for the R&E tax credit, Section 127 exclusion for employer-provided educational assistance, the orphan drug credit, the fair-market value deduction for contributions of stock to private foundations, and the suspension of the excise tax on motorboat diesel fuel. The placed-in-service exception to the Section 29 non-conventional fuels credit would be extended through Dec. 31, 1998.

As a revenue offset, the amendment further extends through April 15, 1997, the airline ticket tax and related excise taxes. Additional offset provisions would allow a non-profit student loan funding corporation to convert to a taxable corporation, and would toughen the expatriation estate and gift tax rules pertaining to individuals who relinquish their citizenship to avoid paying U.S. taxes. Other miscellaneous provisions would extend until Dec. 31, 1999, the existing transition rule allowing certain publicly traded partnerships to be treated as a partnership for federal tax purposes.

The amendment also modifies the pension simplification provisions, adds language to the worker classification rules, and allows certain teaching hospitals to provide tax-free academic housing to faculty and medical and nursing students.