The Small Business and Work Opportunity Act of 2007 was recently approved by the Senate Finance Committee on a voice vote in an effort to provide a sweetener for business to accompany the minimum wage increase recently passed by the House.
It is a bill which enacts a number of changes in the tax law that do little or nothing to help impacted businesses, don't have a solid justification in tax policy, and in one case seriously impairs the constitutional rights of U.S. taxpayers. It is a poor example of Democratic party efforts to make Congress more ethical. This is to a great extent a business pork shifting bill.
The bill includes about $800 million over five years in S corporation and accounting method related tax breaks that don't help mimimum wage impacted businesses which are give aways rather than sound tax policy changes. Another $5.5 billion over five years of tax breaks have a mixed impact on minimum wage impacted businesses and are less than exemplary from a tax policy perspective. Only one tax break, costing $1.79 billion over five years, squarely addresses the needs of minimum wage impacted employers and employees, as does one no cost rule change.
The bill closes $5 billion over five years of abusive international taxation loopholes, and it closes about $1 billion over five years of domestic taxation loopholes, in an reasonable decent manner, but it also includes a very problematic provision that allows the I.R.S. to seize money for alleged unpaid employment taxes without providing taxpayers with due process protections until after the property has been seized, potentially having catastrophic effects on an innocent taxpayer in order to raise $156 million in revenues over five years.
Proposed tax breaks and their five year costs
1. Allows businesses to expense up to $112,000 of capital assets with a phase out starting at $450,000 of income in 2010, currently this expired at the end of 2009. Cost $4.86 billion. Impact on minimum wage impacted businesses: Moderate -- this does help small businesses, but encourages them to substitute machines for labor when it doesn't make economic sense absent taxes to do so. Tax policy impact: Mixed -- while de minimus Section 179 expensing can avoid costly depreciation accounting, the large amount of assets impacted give the size of the businesses that qualify go far beyond this justification and encourage irrational investments in capital assets especially if the business is a mature one and not a start up.
2. Reduces depreciation period for certain restaurant buildings and leasehold improvements from 39 years to 15 years for property put into service through March of 2008. Cost $724 million. Impact on minimum wage impacted businesses: Mixed -- creates unfair competition for existing impacted businesses, but encourages creation of new minimum wage jobs. Tax policy impact: Mixed -- There is a principled argument that restaurant improvements do not have a useful life of 39 years due to the nature of the industry, but short term incentives are bad tax policy.
3. Permanently allows partnerships with C corporation partners to use the cash method of accounting where they have gross receipts for the past three years of under $10 million indexed for inflation. Current law has a $5 million not indexed for inflation. Cost $547 million. Impact on minimum wage impacted businesses: Negligible. Tax policy impact: Negative.
4. Expands the Work Opportunity Credit which provides tax breaks to for employers that handle certain classes of people likely to have trouble finding a job. The credit would apply to the first $12,000 of first year wages, rather than the first $6,000, it would be extended by five years through 2012, and the age limit for "high risk youth" would be expanded from 18 to 39. Cost $1.79 billion. Impact on minimum wage impacted businesses: High. Tax policy impact: Modest (tax credits are often a form of welfare/spending program; stability and a more broad based definition are good and it encourages progressivity and future taxable earnings, but it is still a crude preference).
5. Provides tax relief to S corporations that used to be C corporation and accumulated profits in the process that sell stock or securities at a gain. Normally, these sales would be subject to capital gains taxes a C corporation rates as part of the S corporation to C corporation transition rules. Cost $111 million. Impact on minimum wage impacted business: Negligible. Tax policy impact: Bad.
6. Allows banks organized as S corporations to give directors token shares. Cost: $66 million. Impact on minimum wage impacted business: None. Tax policy impact: Bad.
7. Allows banks organized as S corporations which used to be C corporations to use a favorable method of accounting for and paying transition related taxes connected to bad debts. Cost: $60 million. Impact on minimum wage impacted business: None. Tax policy impact: Negative.
8. Clarifies rules governing an S corporation's sale of an S corporation subsidiary. Cost: $15 million. Impact on minimum wage impacted business: Negligible. Tax policy impact: Neutral to good.
9. Forgives tax liability of S corporations which were C corporations prior to 1983. Cost $11 million. Impact on minimum wage impacted business: None. Tax policy impact: Negative.
10. Allows certain trusts which are allowed to be S corporation shareholders to have non-resident aliens as beneficiaries. Cost: $10 million. Impact on minimum wage impacted business: Slight. Tax policy impact: Good -- This eliminates unnecessary complexity without reducing revenue.
11. Allows temp agencies to conclusively take responsibility of payroll tax liabilities. Cost: Negligable. Impact on minimum wage impacted business: Positive. Tax policy impact: Good -- this is a rules of the road provision clarifying tax law in a muddy area.
Offsets are tax increases used to pay for tax cuts, usually involving abusive interpretations of tax law, generally unrelated to the main bill.
1. Closes international tax loophole involving sale and lease out transactions. Revenue: $4.3 billion. Tax policy: Good.
2. Doubles tax penalties for offshore tax shelters. Revenue: $5 million. Tax policy: Mixed -- this adds complexity, but punishes particularly fraudulent conduct.
3. Increases tax barriers to expatriation of domestic corporation. Revenue: $449 million. Tax policy: Good.
4. Authorizes IRS to make rules limiting foreign tax credit abuses. Revenue: $4 million. Tax policy: Good.
5. Tightens rules for an obscure form of financial debts (contingent convertable debts under original issue discount rules). Revenue: $222 million. Tax policy: Good.
6. Makes government fines and punitives damages and the like non-tax deductible. Revenue: $302 million. Tax policy: Good.
7. Accellerate capital gains taxes on U.S. citizens who expatriate. Revenue: $220 million. Tax policy: Good.
8. Limits non-qualified deferred compensation to the lesser of $1 million or the average of the last five years of compensation. Revenue: $307 million. Tax policy: Mostly good -- Closes a major tax loophole for the rich in an inelegant way.
9. Increases criminal tax fraud penalties. Revenue: $1 million. Tax policy: Good.
10. Increases bad check fees. Revenue: $10 million. Tax policy: Good.
11. Moves hearings on employment tax liability property seizures from before the seizure to after the seizure. Revenue: $156 million. Tax policy: Negative. Constitutionality: Questionable.
12. Improves administration of whistleblower cases. Revenue: $77 million. Tax policy: Good.
13. Broadens the definition of certain people subject to rules for senior corporate officers of large corporations. Revenue: $104 million. Tax policy: Good.