The Senate Finance Committee plans to hold a hearing this week to consider attaching a series of business tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s to legislation that will raise the minimum wage. Though their colleagues in the House are expected to pass a bill without such credits, Senators from both sides of the aisle and the President have suggested that Congress provide taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credits to certain businesses to offset the cost of the wage increase.
While some might consider this a wise compromise, it is not the best solution for from an economic perspective. There is no way hold businesses harmless through tax credits from a minimum wage increase; nor is it equitable to provide tax credits to some businesses that employ minimum wage workers and not others. Targeted tax credits simply cannot accomplish the stated goals and they have a number of negative consequences for the overall economy.
For these reasons, we encourage Congress to consider an alternative to targeted tax credits. Instead of allowing the minimum wage bill to become a vehicle for cluttering the tax code with more targeted tax credits, we ask Congress to consider the wisdom of simply lowering the tax rates for businesses large and small.
Targeted tax credits create a number of direct and indirect problems for businesses. The most obvious direct problem is that tax credits make compliance with the tax code much more complicated. Small businesses will likely be impacted most severely, as they currently spend significant resources to comply with an already complex system. Adding credits or deductions will only exacerbate the problem.
Second, providing targeted tax credits with the intention of affecting those businesses impacted by the wage increase means that some affected businesses will likely not receive the credits, and will thus be unfairly subject to higher taxes. For instance, in parts of the country where the minimum wage is already higher by state or county law, the new federal minimum will have no impact at all, yet those businesses will get the benefit of new credits. For many American businesses, navigating the new global economy is difficult enough without Congress picking out political favorites to receive tax credits.
Alternatively, reducing the corporate tax rate – ours is the second highest in the world – will help all American businesses compete in the global marketplace. Even in France, President Chirac recently proposed a dramatic drop in their corporate tax rate, putting us further behind in the race to attract and maintain corporate direct investment.
Businesses understand keenly the effect that tax rates have on global competitiveness, which is why many support rate cuts in lieu of more deductions and expensing. In his testimony before Congress last year, Matthew McKenna, Senior Vice President of Finance of PepsiCo said, “[I]f I were given a choice between increased expensing and a reduction in the corporate tax rate, my preference would be a lower tax rate.”
Tax credits are not good for Americans or the American economy – particularly when there are viable alternatives. Choosing to lower tax rates instead of offering deductions and credits will avoid further complications and unfairness in the tax code while also providing a positive benefit for all Americans.
Brian Phillips is the Manager of Media Relations at the Tax Foundation.