Pass the Buck: Business Tax Credits and a Minimum Wage Hike

February 16, 2007

The House of Representatives is set to pass a bill that includes $1.8 billion in business tax incentives as part of a deal that would also increase the minimum wage. The argument is that the Congress must offset the burden of an increased minimum wage that businesses face. From Yahoo News:

The fate of a higher federal minimum wage for the lowest paid workers no longer depends on whether small businesses will get tax breaks. The pending question is the size of the breaks.

The House on Friday was set to approve a tax package worth about $1.8 billion over 10 years, less than one-fourth as big as Senate-passed breaks.

With the vote, the House would set in motion negotiations that could ease the way for final passage of the first increase in the minimum wage in a decade.

The minimum wage bill has become a test case for the new Democratic majority in Congress. The $2.10 an hour increase – from $5.15 to $7.25 over two years – is one of the party’s legislative priorities. But the bill stumbled when House and Senate Democrats disagreed on the need for tax cuts.

Restaurateurs, retailers and other small-business owners who usually employ low-wage workers contend they need tax relief to make up for the higher overhead of a wage increase.

Unfortunately, economic logic has taken a backseat throughout much of this discussion and legislators are ignoring the fundamental law of economics: there is no such thing as a free lunch. It starts off with members of Congress wanting to pass a minimum wage increase, which someone must pay for. Then they try to compensate those whom they feel are hurt by the minimum wage increase (i.e. businesses) by passing special tax provisions they think will help offset that cost. But who pays for that? Trying to compensate businesses through special tax provisions inserted into the tax code for the higher costs imposed by the minimum wage leads to higher taxes on everyone else, lower spending, or increased deficits. Suddenly, you end up with a game of pass the buck with all taxpayers paying for much of the burden imposed by the minimum wage hike.

As we said in an earlier blog post, if Congress wants to compensate those harmed by minimum wage laws, they would be better off giving every American a $20 gift certificate to his/her favorite restaurant rather than trying to pass certain tax provisions targeted to various types of company behavior.


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