The U.S. Senate has just voted to raise the federal minimum wage. After smooth sailing through the House, as part of the “100 Hours” agenda, things hit a snag in the Senate. It’s all about taxes — isn’t everything? The Senate so far is seems unlikely to pass a clean bill that does nothing but raise the minimum wage (as the House did), but instead seems determined to cut taxes for small business owners, who — it is argued — are adversely affected by the minimum wage. Will it be possible to raise the federal minimum wage — ever?

Is it really true that small business owners fare adversely when the minimum raise is raised? Or is that one of those political maxims that has been repeated so many times that everyone believes it? It may not even matter, if we can’t get the minimum wage raise through the Senate otherwise. But those who argue we shouldn’t couple the issue have some strong arguments. A recent Washington Post article by Steven Pearlstein demolishes the typical arguments for coupling minimum wage increases with small business tax breaks one by one.

1. Small businesses with low profit margins will not be able to pass along those costs to consumers.
Pearlstein responds:

To begin, both economic theory and history suggest that small business will, in time, pass on its increased costs to its consumers. Small businesses that pay low wages tend to compete with other small businesses that pay low wages, so they will all face the same cost pressures and respond in similar fashion. The worst that can be said is that a higher minimum wage will add, very modestly, to overall inflation.

(See Washington Post article.)

2. A minimum wage increase will cause small businesses to hire fewer workers.

There is also general agreement among economists that a higher minimum wage, at the levels we are talking about, will have a minimal impact on adult employment. Slightly higher prices might reduce, slightly, the demand for Wendy’s hamburgers, cheap hotel rooms and dog-walking services. But largely offsetting those effects will be the increased demand for goods and services by tens of millions of Americans who will finally be getting a raise. A higher minimum wage doesn’t lower economic activity so much as rearrange it slightly.

(See Washington Post article.)

3. Small business create the majority of new jobs in this country, so we should not pass measures discouraging them from doing so.

[A]s economist Veronique de Rugy of the American Enterprise Institute reported in a paper last year, new jobs have been created by both large and small businesses in roughly the same proportion. In truth, the bulk of new jobs have always been created by a relatively small number of new firms that grow fast and get quite big — think of companies like Southwest Airlines, Google, CarMax. Most have little in common with the small-business lobby in Washington or fast-food restaurant chains or the members of the Kiwanis Club in Helena, Mont. As a rule, companies like these couldn’t care less about the minimum wage or special tax breaks to offset it.

(See Washington Post article.)

Pearlstein also points out that small business owners have already benefited from business tax cuts enacted earlier in the Bush Administration, astutely opining, “If it is now imperative to reduce business taxes when the pay of minimum-wage workers is rising, you have to wonder if there will ever be a time when the small-business lobby thinks it doesn’t deserve a tax cut.”

Despite Pearlstein’s presence in the newspaper of our nation’s capital, and the fact that his ideological bent is hardly that of a flaming liberal, it’s not clear that anyone’s really listening. Except that some small business owners already know better, according to an article which says that a growing number of small business owners recognize that paying a decent wage lowers employee turnover, improves morale and is the right thing to do. “People who tell you that raising the minimum wage will hurt small business are flat out full of it…Small business owners know that keeping workers is easier and cheaper than finding and training new ones…Our long-term employees are way more likely to establish ongoing relationships with customers,” said Lew Prince, co-owner of Vintage Vinyl, a music retail business in St. Louis. (See TomPaine.com article.)

The minimum wage increase has already faced one setback, as an effort to pass a clean bill failed in the Senate. (See New York Times article.) As I write this, the Senate is likely to pass a minimum wage bill with small business tax cuts attached. (See The Reporter article.) Now the two houses of Congress have to reconcile the proposals — never an easy task — while contemplating what the President is likely to do. President Bush has indicated that he would consider signing a minimum wage bill with tax breaks attached, so there’s an interest in getting a bill that will actually be signed into law. (See Statement of Administration Policy.)

But there’s also the little wrinkle that the House of Representatives is supposed to be the body that originates tax bills, and Rep. Charles Rangel, now the Chairman of the House Ways and Means Committee, is insisting that the House take the lead on tax bills, which may delay working out the issues between the two bodies. (See Associated Press article.) Sen. Harry Reid, the Senate Majority Leader, has indicated that the Senate may be open to limiting some of the tax cuts. (See ABC News article.) So despite the House’s swift passage of a clean bill, we may still be in for a long, hard fight before those workers in states without a higher minimum wage are able to benefit from a federal minimum wage increase.

Those small business tax cut bills can occasionally carry the kind of tax cuts that employee advocates can support, such as a provision contained in 2004’s American Jobs Creation Act — part of the Civil Rights Tax Relief Act. (Ironically, the problem solved in part by the 2004 law arose from a provision inserted in the 1997 minimum wage bill, called — you guessed it, “The Small Business Job Protection Act.”) (For more information on the history of this issue, see “The Long and Winding Road.”)

But this time, workers really have to question whether more tax cuts for small businesses are really necessary, or just a way to keep a myth alive until the next opportunity to raise the minimum wage. Perhaps before assuming these accompanying tax cuts are necessary — it would be helpful for Congress and the President to separate economics from politics. They might even conclude — like the Economic Policy Institute did — that a minimum wage increase requires new small business tax cuts, “like a fish needs a bicycle.”

Tell the Senate to Keep It Clean: Pass the Minimum Wage Increase Now

UPDATE: The Senate on Thursday, February 1 overwhelmingly passed a minimum wage bill with the tax increases referenced above. (See New York Times article.) (The blog was originally published before the vote occurred, although the outcome was not in doubt.)