PUBLIC RADIO'S MARKETPLACE COMMENTARIES:

Small Businesses Don’t Need a Minimum-Wage Tax Cut

Robert B. Reich

Marketplace, January 3, 2007

One of the first items of business when the new Congress convenes will be to increase the minimum wage from $5.15 to $7.25. The President says he’ll sign the bill, but only if it contains new tax breaks for small businesses that will offset the increased cost resulting from a minimum-wage hike.

Congress should pass the minimum wage increase without any small-business tax break. Small businesses don’t need new tax breaks because the minimum wage increase won’t actually impose new burdens on them.

First, virtually all small businesses that pay the minimum wage compete in the local service economy. They’re retailers, contractors, providers of elder care and child care, local hospitals. They don’t compete internationally or even nationally. Their competitors are in same city or town, and all of them will be paying the same minimum-wage increase. So it’s likely that the increase will be passed on to consumers.

Besides, it’s not really an increase anyway. The current minimum wage was enacted ten years ago, and inflation since then has eroded its value so much that the new proposed minimum is more like an inflation adjustment than a real increase. Most small businesses charge prices that have risen with inflation. It’s only fair that their employees’ wages should rise with inflation, too.

In fact, a minimum wage hike may actually help small businesses. Evidence from states that have already increased their own minimum wages suggests that a modest increase convinces more people to enter the labor market – people like retirees, spouses, or teenagers who wouldn’t bother working at a lower minimum wage. With more people willing to work, small businesses have more choice of whom to hire. That means they can find more reliable employees, and reduce costs associated with turnover.

The nation can’t afford a tax cut anyway. That’s why Democrats have pledged to restore fiscal responsibility by requiring that any new tax cuts be fully paid for.

Maybe this is why the President says he’ll sign the minimum wage increase if it’s tied to a tax cut for small business. He knows that if the Democrats are true to their word, there can’t be any such tax cut. But he also knows how popular the minimum wage increase is. So by tying the two together, he can say he’s supporting the minimum wage and then veto it anyway.