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If Congress votes to raise the federal wage floor, even businesses that don’t employ many minimum wage workers could find themselves paying for the increase. While small businesses could get tax credits to help them offset proposed wage requirements, higher-paid executives,along with midsized and large businesses, could fund those credits through changes to tax-deferred compensation and corporate tax deductions.

The U.S. Senate and House of Representatives recently approved two separate bills authorizing a minimum wage increase. Both versions would increase the federal minimum wage — for the first time in 10 years — to $7.25 per hour from $5.15 per hour. The increase would take effect in three steps over two years.

While the House originally produced a "clean" minimum wage increase, the Senate-approved version includes small-business tax credits worth more than $8 billion over 10 years. Senators included long-term changes to tax-deferred executive compensation and corporate tax deductions in the bill to pay for the tax credits.

President Bush says he prefers the minimum wage increase be accompanied by tax breaks for small businesses — time will tell which plan he supports to pay for those breaks.

"I believe we should do it in a way that does not punish the millions of small businesses that are creating most of the new jobs in our country," the president said during a news conference. "So I support pairing it with targeted tax and regulatory relief to help these small businesses stay competitive and to help keep our economy growing."

Potential tax breaks and increases

The $8 billion worth of tax breaks in the Senate bill are aimed at smaller businesses that may be more likely to experience higher labor costs due to an increase in the federal minimum wage.

Potential benefits to small businesses in the bill include:

• Extending tax breaks that allow small businesses to deduct up to $112,000 in new investments each year.
• Reducing the depreciation period for improvements to retail property.
• Extending the work-opportunity tax credit for employing welfare recipients and high-risk youth, and expanding the provision to include the hiring of disabled military veterans.

Some congressional leaders have promised to offset any new tax cuts with tax increases of equal value. Among the proposals to help pay for the small-business tax breaks are measures that would:

• Cap tax-deferred pay packages at $1 million a year or a total equal to the five-year average of taxable salary, whichever is less. Anyone found to exceed the allowable amount would be required to pay taxes on all income deferred since Dec. 31, 2006, plus a 20 percent penalty. This cap could generate$810 million in revenue in 10 years, according to the Senate Finance Committee.
• End a business deduction for the cost of court settlements, jury verdicts and fines in liability suits. This may generate revenue exceeding $540 million over 10 years.

Critics of the Senate bill say the tax breaks would be short-term, but the proposed means to pay for them — tax breaks for midsized and larger companies — would be long-term.

"The permanent tax law changes here far outpace and outweigh the few benefits," Bruce Josten, chief lobbyist for the U.S. Chamber of Commerce, told the Washington Post.

In addition to tax-law changes, the Senate bill contains an amendment that would ban companies that have hired illegal immigrants from receiving government contracts for 10 years.

Review your salary structure

Human resource experts say now is a good time to examine your company’s salary structure. If your business hires employees at or near the new minimum wage, you’d not only have to adapt your starting wages but alter your pay ranges for more-experienced employees. Failing to do so could result in newcomers and multiyear employees receiving the same salary, which may hurt morale among your more senior workers. A compensation expert can help you review your salary ranges and pinpoint needed adjustments.

You would have some time to fully adjust to a new federal minimum wage. Both the House and Senate versions call for the starting wage to increase over 26 months — from its current level of $5.15 to $5.85 60 days after enactment, to $6.55 one year later, and then to $7.25 a year later.

Current proposals do not contain provisions to index the minimum wage to inflation — as is the case in10 states — so it wouldn’t fluctuate annually.

Effects of a minimum wage increase

The number of employees earning minimum wage has decreased greatly in recent years. Fewer than 2 million people earned the federal minimum wage in 2005, down from 4.4 million in 1998. In 2005, about 1.2 million of these employees worked in the leisure and hospitality industry, holding positions such as restaurant cook and hotel housekeeper. Just 39,000 workers in the manufacturing sector earned the federal minimum wage in 2005, down from 299,000 in 1998, according to The New York Times.

The decrease in the number of workers earning the federal minimum wage is due in part to contraction in the labor market. Employers are finding they must pay more to attract and retain skilled employees. Minimum wage policies in individual states and cities are also a factor:

• Twenty-eight states and the District of Columbia have minimum wages that exceed the federal standard. The highest is the state of Washington at $7.93 per hour for workers age 16 and older, a rate that adjusts annually for inflation, according to the Washington Post.

• More than 70 cities have passed "livable wage" ordinances that require government workers and employees of businesses receiving government contracts or subsidies to be paid a wage higher than the minimum,according to the Economic Policy Institute. Many of these ordinances also contain provisions for benefits and hiring practices.

In addition to the 2 million minimum wage earners, an estimated 14.9million workers earning wages just above the proposed federal threshold may benefit from an increase in the federal minimum wage.

It’s possible to find economists both for and against a minimum wage increase. Some economists say the federal minimum wage should be $0, letting the market dictate salary levels.

However, formal economic studies indicate businesses haven’t suffered due to past minimum wage hikes. A recent study of increasing state minimum wages by the Fiscal Policy Institute concluded the raises do not negatively affect employment levels. And a 1998 Economic Policy Institute study failed to find significant job loss associated with the last federal minimum wage increase.

Surveys reveal the majority of U.S.citizens support increasing the federal minimum wage. About 86 percent of adults participating in an October 2006 Gallup poll said they approve of such an increase.

Economists and political pundits agree: It’s only a matter of time before the federal minimum wage will increase. Whether or not the legislation also includes tax breaks for small businesses and tax penalties for higher-paid executives and midsized and larger corporations remains to be seen. Consult your taxadvisor as the legislation progresses to prepare your business for the effects of any new minimum wage law.