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39–478—PDF 2007

S. HRG. 110–244

TAX INCENTIVES FOR BUSINESSES IN RESPONSE

TO A MINIMUM WAGE INCREASE

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JANUARY 10, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Chuck, a U.S. Senator from Iowa, chairman, Committee on

Finance .................................................................................................................. 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 4

Lott, Hon. Trent, a U.S. Senator from Mississippi ............................................... 7

WITNESSES

Bernstein, Dr. Jared, director, Living Standards Program, Economic Policy

Institute, Washington, DC .................................................................................. 8

Sabia, Dr. Joseph, assistant professor of housing and consumer economics,

College of Family and Consumer Sciences, University of Georgia, Athens,

GA .......................................................................................................................... 11

Kadish, Matthew, vice president of legislation, Small Business Council of

America, Cleveland, OH ...................................................................................... 13

Ratner, Dave, owner, Dave’s Soda & Pet City, Agawam, MA ............................. 15

Obenour, Bruce, president, Akwen, Ltd, Dublin, OH ........................................... 17

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 4

Bernstein, Dr. Jared:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 37

Responses to questions from committee members ......................................... 53

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 62

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 1

Background information on the impact of the minimum wage .................... 63

President Clinton’s signing statement on the Small Business Job Protection Act of 1996 ............................................................................................. 69

Floor statements of Senators Roth and Moynihan, Congressional Record,

August 2, 1996 .............................................................................................. 71

Hatch, Hon. Orrin:

Prepared statement .......................................................................................... 75

Kadish, Matthew:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 77

Responses to questions from committee members ......................................... 98

Lott, Hon. Trent:

Opening statement ........................................................................................... 7

Obenour, Bruce:

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 107

Responses to questions from committee members ......................................... 111

Ratner, Dave:

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 115

Responses to questions from committee members ......................................... 121

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 123

Page

IV

Sabia, Dr. Joseph:

Testimony .......................................................................................................... 11

Prepared statement with attachments ........................................................... 124

Responses to questions from committee members ......................................... 246

Salazar, Hon. Ken:

Prepared statement .......................................................................................... 253

COMMUNICATIONS

American Health Care Association ........................................................................ 255

American Society of Pension Professionals & Actuaries (ASPPA) ...................... 261

International Franchise Association (IFA) ............................................................ 288

National Restaurant Association ............................................................................ 290

Professional Beauty Association ............................................................................. 294

S Corporation Association ....................................................................................... 305

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TAX INCENTIVES FOR BUSINESSES IN

RESPONSE TO A MINIMUM WAGE INCREASE

WEDNESDAY, JANUARY 10, 2007

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Chuck Grassley (chairman of the committee) presiding.

Present: Senators Hatch, Lott, Snowe, Kyl, Thomas, Bunning,

Roberts, Baucus, Rockefeller, Lincoln, Wyden, Stabenow, Cantwell,

and Salazar.

OPENING STATEMENT OF HON. CHUCK GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

Chairman GRASSLEY. The hearing will please come to order.

This hearing touches on two topics. The first one is the proposed

increase in the Federal minimum wage. The second topic is tax incentives to assist workers and businesses burdened by the increased Federal minimum wage.

Popular support for raising the minimum wage is based on a

number of widely held beliefs: first, no one can support a family on

$5.15 an hour; second, minimum wage earners will not get a pay

raise unless Congress gives authority and makes it happen; and

third, raising the minimum wage helps millions of poor workers

and hurts no one.

Unfortunately, these popular beliefs are either misleading or

wrong. First, most minimum wage earners are not trying to support a family. Those who are can receive substantial government

benefits to supplement their income, thus no one has to rely solely

on the minimum wage to support a family.

Second, minimum wage jobs are generally entry-level jobs. Most

workers who start at the minimum wage quickly earn more. Few

workers remain stuck at the minimum wage for a long time. Unfortunately, those who do are most at risk of losing their job from a

minimum wage increase.

Third, most minimum wage earners are not poor. Only 15 percent of the proposed minimum wage increase goes to those living

below the poverty level. Increasing the minimum wage would result in higher prices for consumers of minimum wage products,

higher unemployment among the least-skilled minimum wage

earners, increased poverty among minimum wage families, or some

combination thereof.

2

Much of the popular support for the minimum wage is based on

the fallacy that the government can help the poor without hurting

anyone. But if the government can increase wages with no ill effects, why stop at $7.25 an hour? Why not $10 or $20 an hour?

Popular support for increasing the minimum wage is tempered

by the fact that virtually everyone agrees that there is some level

at which the minimum wage would produce obvious negative effects.

In the past, policy makers have attempted to mitigate any negative effect by limiting the size of the minimum wage increase, providing tax credits to employers who hire at-risk workers, and providing tax or regulatory relief to business.

However, additional research in recent years has cast some doubt

on the effectiveness of these previous efforts. First, this research

suggests raising the minimum wage does not reduce poverty among

minimum wage earners. Instead, it most likely increases poverty.

Second, legislative action by various States to adopt their own

higher minimum wage has led to significant differences among

States. Finally, research shows that the Earned Income Credit

could provide a cost-effective way to help the poorest workers. I am

pleased that over the last few years we have enhanced the Earned

Income Credit for many families by making the Child Tax Credit

refundable.

Despite the serious policy concerns, public support for increasing

the minimum wage remains very strong. It is one of the most popular things out there. It was one of the most important issues in

the last election.

The purpose of today’s hearing then is to review the pros and

cons of raising the minimum wage and determine what steps Congress should take to mitigate the negative impact of raising the

minimum wage.

I ask unanimous consent to insert into the record some additional background material on the impact of the minimum wage.

[The information appears in the appendix on p 63.]

Chairman GRASSLEY. Let us move to the second topic. Tax incentives targeted to small businesses or other businesses impacted by

a minimum wage increase have been linked to the minimum wage

legislation by Republicans for over a decade.

Democrats have, at times, joined Republicans in support of this

language. Senator Baucus and I have worked very closely on this

issue over the period of our working together as the leaders of the

Republicans and Democrats on this committee.

I would like to quote from two former Chairmen of this committee in their opening remarks on the conference agreement on

the last piece of legislation that raised the minimum wage.

Senator Roth, then chairman, described taxes as ‘‘the sand that

grinds the gears of small business,’’ so he saw merit to small business tax relief. Senator Roth said, ‘‘[We will] proceed to the legislation on the minimum wage and small business taxes. We’re anxious to move ahead on the small business tax legislation.’’

Senator Moynihan said, ‘‘My distinguished chairman, as always,

has so stated the facts. But there is a small semantic issue here.

Some call this the small business relief act; others on this side call

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it the minimum wage bill. But we will not resolve that tonight, nor

need we.’’

Senators Roth and Moynihan were right then. If they were still

living today, I would tell them that they are right on, right now.

To different groups of Senators, these topics carry their own benefit or burden. Many on my side do not like the idea of secondguessing the labor market. I pointed out some of the related issues

that should give us all pause when considering such legislation.

Those on the Democratic side want a straight minimum wage

hike and refuse to consider the burden that that policy puts on employers. Those members do not want any linkage between minimum wage and small business relief. Senator Moynihan, however,

made clear we do not have to agree now whether the upcoming legislation will be a minimum wage bill or a small business tax relief

bill.

Some, mostly Democrats, will call it a minimum wage bill. Some,

mostly Republicans, will call it a small business tax relief bill. Still

other members will call it both minimum wage and small business

tax relief.

President Bush, like President Clinton did years ago, will recognize both parts of the package. So I ask unanimous consent to insert in the record President Clinton’s signing statement on the last

minimum wage/small business tax relief bill.

[The signing statement appears in the appendix on p. 69.]

Chairman GRASSLEY. I also ask unanimous consent to insert in

the record the closing remarks of Senators Roth and Moynihan on

that same piece of legislation.

[The remarks appear in the appendix on p. 71.]

Chairman GRASSLEY. The bottom line is, there is a well-known

set of small business tax relief measures. We will examine them in

this hearing. I look forward to moving these proposals to the floor.

Once again, to emphasize, Senator Baucus and I have always

worked closely on this issue. There was an article this morning in

the Washington Post in the Business section that I feel was very

unfair to Senator Baucus, considering the fact that this is a very

bipartisan issue of trying to bring forth a solution of small business

tax relief, in conjunction with helping people who are earning the

minimum wage, to move a bill forward to benefit people who need

help and to offset some of the negative impact.

So I hope that we can understand, or I hope the Washington Post

understands, that this is not something Senator Baucus has been

working on and should be condemned for, because obviously I do

not think he should be condemned for it. It is something that he

and I are working together on. If they want to condemn people,

condemn people of all stripes, where it is so strongly bipartisan

that we ought to move forward.

Now, I have one last thing to do as chairman of this committee,

and I am still chairman because we have not officially organized.

But whenever we organize, as of this very minute, I want to welcome Senator Baucus back to his chairmanship that he has held

for a short period of time before.

During our last hearing in December, I went for 5 minutes on

very nice things about the close working relationship we have had

and how it has been very productive for this committee.

4

There is no issue that has come out of here in a bipartisan way

that the bill has not been signed by the President of the United

States, and most of the things coming out of this committee are

somewhat controversial. I think that is quite a record for he and

I to have in the last 4 years, and it has been because of his cooperation.

He has told me privately and publicly that he intends to continue

that cooperation with his being chairman, and I want to thank him

for doing that and welcome him to leadership. It is not going to be

an easy 2 years, as the last 4 years have not necessarily been easy.

So, congratulations, and the gavel is yours.

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. Thank you very

much. Thank you for those very kind comments, too. Thank you for

your graciousness in asking me to chair this hearing.

As you noted, Mr. Chairman, until the Senate passes its resolution naming the new committee chairman, you are the chairman.

The Senate is a continuing body and the Finance Committee is

a continuing entity, continuing actually since 1816. Since the Senate formed the committee, 343 Senators have served on it, but just

39 have chaired it.

It is a distinguished group. Among those 39 were Daniel Webster, Henry Clay, John Calhoun. Among those 39 were five Treasury Secretaries and a Majority Leader. But among those 39 there

has only been one Senator from Iowa, the Hawkeye State.

Chairman GRASSLEY. I did not know that. [Laughter.]

Senator BAUCUS. And even more importantly, there is only one

Chuck Grassley. I am very grateful to have been associated with

you, Mr. Chairman. You have been wonderful to work with.

Frankly, I want to say that I know of no finer man. You are a

tremendous human being, and I just thank you very much for giving us the privilege of serving under you as chairman of this committee, and also for our friendship. It has been really wonderful to

be with you. It has been a genuine partnership, and it is going to

continue.

Today, Chairman Grassley has graciously handed me the chairman’s gavel. I am happy to chair this meeting. But I want to take

a moment to recognize the service of Chuck Grassley as chairman

by presenting him with this gavel as a permanent memento of his

service as chairman, because I think that is the least we can do.

Chairman GRASSLEY. Well, thank you. Thank you very much.

[Applause.] Thank you very much. Thank you. Well, I appreciate

it very much. It probably cost more than it should, and more than

I would have spent on somebody else. [Laughter.]

Senator BAUCUS. No, no. It is your old gavel. [Laughter.]

Chairman GRASSLEY. Oh, it is? All right. [Laughter.] All right. So

it is worn out.

Senator BAUCUS. You wore it out.

Chairman GRASSLEY. Thank you very much.

Senator BAUCUS. You bet. You bet.

I might say, too, that only 28 Senators have served on the committee for more than 20 years. Senator Rockefeller joins me, litVerDate 11-MAY-2000 16:54 Jan 24, 2008 Jkt 095484 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 39478.000 SFIN1 PsN: SFIN1
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erally and figuratively, and Senator Grassley. I might say, we are

now the three who are now in our third decade on this committee.

I would like also to welcome new members. First, the Senator

from Michigan. Senator Stabenow is the tenth Senator from Michigan to serve on the Finance Committee. The Wolverine State is

among the States that has most frequently been represented on

this committee. Not many States are more frequently represented

than the State of Michigan. Many of my colleagues will remember

Senator Regal, who ably represented the State of Michigan, and a

fine member of this committee. I welcome Senator Stabenow.

Senator STABENOW. Thank you.

Senator BAUCUS. In addition, I would like to welcome Senator

Salazar, the ninth Senator from Colorado to serve on the Finance

Committee. Now, many of us remember Senator Armstrong, who

served with us, a great man. He liked cutting taxes, Senator Armstrong.

The Centennial State’s members have also included a chairman

of the committee, and that was Senator Eugene Milligan, who

chaired the committee during the 80th and the 83rd Congresses,

and served as ranking minority member during the 81st, 82nd, and

84th Congresses. So you can see, this is not the first time the

chairmanship has gone back and forth. It did back then in that era

as well.

Senator Cantwell is not here. I hope I can welcome her a little

later when she does appear. But I would like now to welcome the

distinguished Senator from Kansas.

Senator Roberts is the fifth Senator from the Sunflower State to

serve on this committee. And, of course, most of us remember the

former Senator from Kansas, Senator Dole, who served as chairman of the committee and went on to serve as Republican Leader,

and also Majority Leader. So, expectations are very high for you,

Senator Roberts, with your service in this committee.

America’s founders held it to be self-evident that all men are created equal. It is that same belief and equality in the dignity of

every person that led the Congress, in 1938, to enact the Fair

Labor Standards Act. That Act put into effect President Roosevelt’s

call, in his words, ‘‘to put some floor below which the wage ought

not to fall.’’

My colleagues know that our constituents hold it to be selfevident that we should raise the minimum wage. One hardworking

Montanan wrote to me, ‘‘I used a third of my income tax just to

pay for energy costs this year. The day-to-day life expenses such as

rent, heating, and transportation leave me with nothing in case of

an emergency.’’

Continuing, he wrote, ‘‘Why has our minimum wage stayed the

same within the past 10 years, yet inflation, including rent, has

risen dramatically in the same amount of time?’’

Continuing, ‘‘I really hope that you take the time to thank your

grocery bagger the next time you shop in the grocery store, and I

hope you keep in the back of your mind that they make under poverty level and are not at home with their families.’’

I might say, Montanans recognize that the minimum wage must

be increased. I am proud to state that in November of last year,

Montanans voted to raise the State’s minimum wage from $5.15 to

6

$6.15 an hour. Some worry, however, that an increase in the wage

will burden small businesses.

Small businesses, of course, are a vital source of job creation, economic opportunity, and technological innovation. There are about

23 million small businesses in America. Businesses with fewer

than 500 employees represent more than 99.9 percent of all American businesses.

They pay nearly half of total American private payroll, generating 60 to 80 percent of new jobs annually over the last decade,

and they employ 41 percent of high-tech workers.

Small business is particularly important in rural States like

mine. Rural communities generally do not have large employers.

Rural families rely on small businesses for jobs.

This committee has the opportunity to help small businesses

through tax incentives that stimulate their rates of formation and

growth. Today we will hear about some of those incentives.

We will hear about helping business owners to afford new equipment and property for their businesses. We will hear about allowing lease holders and restaurants to quickly recover the cost of improvements to their establishments.

We will hear about simplifying the way that small businesses

keep records for tax purposes. We will hear how small businesses

provide jobs for workers who have experienced barriers to entering

the workforce.

These are all important ways to help small businesses succeed.

They all enjoy strong support. I look forward to hearing our witnesses testify about their experiences with these provisions.

I am also committed to introducing a responsible tax package

that is fully offset. I am committed to a package that will ensure

the continued growth and success of small businesses.

It is my preference that the committee report such a package

next week. I want us to move it, with or without the minimum

wage increases, although I think it will be with the minimum wage

increases.

The small business tax provisions have traveled with minimum

wage increases before, and I believe the Senate will probably vote

to include these provisions in this year’s minimum wage increases

as well.

I think that the Finance Committee ought to conduct a hearing

on this subject, as we are today, and a mark-up of such legislation

before we go to the floor. I think that is the proper process. It is

the process that I hope to continue, intend to continue, in this Congress. That is, to have hearings on significant issues and legislation, have mark-up on those provisions before they are offered as

amendments to legislation on the floor.

So let us raise the minimum wage. Let us help small businesses

cope. Let us do as much as possible through the committee process.

That way we can honor the hardworking Americans who earn minimum wage, we can honor the small businesses that create American jobs, and we can honor the institution in which we serve.

Senator LOTT. Mr. Chairman?

Senator BAUCUS. Senator Lott?

7

OPENING STATEMENT OF HON. TRENT LOTT,

A U.S. SENATOR FROM MISSISSIPPI

Senator LOTT. Thank you for recognizing me. I ask my more senior colleagues to bear with me just a moment, since I do have another meeting I have to go to. But I want to congratulate you on

your ascending to the chairmanship soon.

And while sometimes I suspect it makes both Democrats and Republicans a little nervous about how closely the two of you work,

you and Senator Grassley, I think it is highly commendable.

Senator BAUCUS. I know I have heard that from you.

Senator LOTT. Yes. Well, I have expressed that, jointly and severally, to the two of you.

Senator BAUCUS. Yes.

Senator LOTT. But if we had more of that approach, I think the

whole atmosphere in this institution would be different and would

be better.

Senator BAUCUS. Thank you.

Senator LOTT. So I congratulate you both. The fact of the matter

is, the proof is in the pudding. Sometimes how we have gotten

there has been very long and difficult, working with our colleagues

in the other body. But the fact of the matter is, most of the time

we have produced a pretty good product, and I think you deserve

credit for that.

I want to thank Senator Grassley for his service as our chairman. I am sure that we are going to see continued cooperation between the two of you, and I hope between all of us, and we can

produce good packages.

I want to welcome the new members. I am looking forward to

working with them. Senator Roberts, the new kid down here on

this end. I am looking forward to proper respect from the more junior member down there. [Laughter.]

By the way, I think it should be noted, while you are recognizing

history, that the chairman of this committee when we first passed

the minimum wage increase and Social Security was Pat Harrison

of Mississippi, who went on to lose, by the way, to be Majority

Leader by one vote because his colleague, Bilbo, voted against him.

So there is an interesting history there.

One other bit of history. The last time we passed the minimum

wage I was in a position to have to deal with it. It was a very difficult issue in 1996. The Senate was completely balled up over it.

But we worked together. I worked with Senator Daschle. We

worked with the then-chairman and ranking member. We produced

a minimum wage increase and we had attached to it small business

incentives which had the desired effect.

I talked to some of the small business men and women, and they

said that, actually, the small business incentives did allow them to

provide the minimum wage increase, to not have to go out of business, to not have to lay people off.

The second step up was a little more problematic, but that is the

way we did it, and it worked, I think, quite well. So I think, obviously, the minimum wage is overwhelmingly supported by the

American people and by members of the Senate, and it is going to

pass.

8

I also think these small business tax incentives would be constructed on their own. In my State, where we are still struggling

to recover from Katrina, these tax incentives we are talking about

here, the accelerated depreciation for small business, expensing,

and cost accounting, will make a huge difference at a relatively

small cost to the people who create over half the jobs in America.

So, I want to thank you for having this hearing. You are going

about it in the right way. Let us have a hearing. Let us hear what

experts have to say. Let us hear what small business men and

women have to say. Let us put together a sensible package. Let us

report it out, and let us go forward.

If we do it that way, I predict we will produce a good product,

and working Americans at the entry level and small business men

and women who carry the load of jobs creation in America will benefit. I thank you for allowing me to start off with those comments

today.

Thank you very much.

Senator BAUCUS. Thank you, Senator, very much. Thanks for the

comments.

I would like to begin with the panel now. The first witness is Dr.

Jared Bernstein, who is the director of the Living Standards Program at the Economic Policy Institute; next, Dr. Joseph Sabia, assistant professor of housing and consumer economics at the College

of Family and Consumer Sciences at the University of Georgia; Mr.

Matthew Kadish, vice president of legislation, Small Business

Council of America; then Mr. David Ratner, owner of Dave’s Soda

& Pet City; and, last, Mr. Bruce Obenour, who is president of

Akwen, Limited.

Thank you all for coming. By the way, if you have longer statements than the 5 minutes allotted, we of course will put those in

the record, and I urge you now to proceed.

First, Dr. Bernstein. Let us hear what you have to say.

STATEMENT OF DR. JARED BERNSTEIN, DIRECTOR, LIVING

STANDARDS PROGRAM, ECONOMIC POLICY INSTITUTE,

WASHINGTON, DC

Dr. BERNSTEIN. Chairman Baucus, Ranking Member Grassley,

members of the Finance Committee, I thank you for this opportunity to testify on the proposed legislation to raise the Federal

minimum wage.

This is a critically important issue to millions of low-wage working Americans, many of whom have seen their economic fortunes

dwindle in recent years, even as the Nation’s economy has prospered.

I urge you to speed congressional passage of the proposed increase, and to do so without potentially expensive and poorly targeted tax provisions. Such provisions are unwarranted given the

extensive tax cuts to businesses, both small and large, over the

past decade, the relative small magnitude of the current minimum

wage proposal, the difficulty targeting effective firms, and the lack

of a clear incentive to offset the potential costs of this wage proposal.

Our economy, in many ways, is the envy of the world, currently

characterized by strong productivity growth and low unemployVerDate 11-MAY-2000 16:54 Jan 24, 2008 Jkt 095484 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 39478.000 SFIN1 PsN: SFIN1
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ment. Profits to the Nation’s businesses have soared throughout

this recovery and, as a share of national income, profits stand at

a 56-year high.

Yet, amidst all this prosperity, too many families have been left

behind. The income of the typical working age family is down 5

percent, or $3,000, since 2000, and at the low end of the income

scale where the minimum wage makes a real difference, poverty is

up significantly, from 11.3 percent of the population in 2000, to

12.6 percent in 2005.

One factor that has undoubtedly played a role in the long-term

decline is the real value of the minimum wage. Congress legislated

a two-step increase in the minimum wage in 1996, and the wage

floor has not been raised since September of 1997, making this the

longest period on record in which Congress has failed to raise the

minimum wage.

My written testimony stresses the following points. In terms of

its buying power, the Federal minimum wage now stands at a 52-

year low. Since the last increase in the minimum wage, inflation

has eroded one-fifth of its value. For someone working full-time,

full year at the Federal minimum, this represents a loss of over

$2,500 per year.

While opponents of the increase stress job loss effects, recent research on the employment impacts of minimum wage increases

show such effects to be negligible, with estimates that hover about

zero. High-quality research tapping the geographical variation in

State minimum wage has been particularly enlightening in this regard.

The last increase in the minimum wage at the Federal level did

not result in any of the negative predictions made by opponents.

Instead, it was followed by the strongest job and wage growth in

the low-wage labor market in decades.

Economists and policy makers are recognizing the importance of

this new research and these actual outcomes. In 2006, over 650

economists, including five Nobel Prize winners and six past presidents of the American Economics Association, signed a statement

that said, ‘‘We believe that a modest increase in the minimum

wage would improve the well-being of low-wage workers and would

not have the adverse effects that critics have claimed.’’

The proposal under consideration is very modest. We have forecasted it would directly lift the earnings of about 4 percent of the

workforce, about half the share affected by the 1996–1997 raise.

Given this moderate result, Congress should pass a clean minimum

wage bill without tax cuts.

Only one Federal increase in the minimum wage, the last one,

was accompanied by such cuts. Since then, businesses, small and

large, have benefitted from $300 billion of tax cuts. Any further

cuts should be debated on their own merits outside of this minimum wage debate.

I am going to devote my remaining minute or two to amplifying

these two points. First of all, opponents of the increase often argue

that, instead of raising the minimum wage, we should increase the

Earned Income Tax Credit.

10

I urge policy makers not to view these two policies as mutually

exclusive. They are not substitutes, they are compliments. First,

low-wage workers need both policies to lift their living standards.

As shown in a recent analysis by the Center on Budget and Policy Priorities, a family of four with one full-time minimum wage

worker today remains below the poverty line, even when we account for the EITC and the market value of food stamps. But once

we increase the minimum wage to $7.25, that family’s income goes

above the poverty threshold.

Now, since it is conditioned on income, EITC benefits will be

more concentrated among low-income workers than the gains from

the minimum wage increase. But the incidence of the minimum

wage is far more progressive than its opponents maintain.

Over half of the benefits flow to families in the bottom 30 percent, families that receive 14 percent of total income and whose average income is $25,000. True, that is above the poverty line, but

every member of this committee knows that working families at

this income level face a tight squeeze trying to make ends meet.

We also must not lose sight of the fact that the minimum wage

was not designed solely as an anti-poverty program. It is a minimum labor standard wherein Congress states that we will not let

market forces push wages down to privation levels, regardless of

the income of the person earning that wage.

Finally, while the EITC is a highly successful policy tool, Congress cannot place the full social cost of working poverty reduction

on the U.S. taxpayer. Both of these policies, as well as others, are

needed to accomplish this goal.

Now, some members of Congress, as well as President Bush,

have argued that the increase in the minimum wage should be accompanied by tax cuts. Now, these cuts may or may not have

merit, but there are good reasons to separate the two ideas in the

policy process and pass a clean minimum wage bill.

Unless they are strictly temporary, any tax cuts are likely to cost

more and last longer than the minimum wage increase. That is, the

offset will deprive the Federal budget of more revenues than the

policy it is supposed to be offsetting.

Since the proposed increase is a Federal mandate, except for

those States with minimum wages above $7.25, every firm faces

the same minimum. The fact that no firm is at a competitive disadvantage also militates against the need for offsets.

Since many businesses with low-wage workers are already paying wages above $7.25, or will be by 2009, or are in States with

higher minimum wages, it will be very difficult to target any offset

to firms actually facing higher labor costs due to this proposed increase.

Even if Congress could target these cuts, it is not clear what the

cuts are supposed to offset. Since the employment effects are negligible at best, these cuts will not lead businesses to retain workers

they would otherwise have let off.

This, along with the targeting challenges, raises the possibility

that these cuts could end up being a windfall for businesses that

have already received billions in tax cuts in recent years.

Senator BAUCUS. I would ask you if you could kind of wind up,

please.

11

Dr. BERNSTEIN. All right. I have two more sentences.

The Democratic majority is committed to a pay-as-you-go budget

rule, meaning that the cost of these taxes will have to be made up

with either more revenue or less spending in some other part of the

budget. Any offsets that are used for this bill will, thus, not be

available for other, more pressing priorities such as providing

health coverage for all eligible children through SCHIP and reversing the loss of subsidized child care payments.

More tax cuts for business may or may not be warranted, but I

urge Congress to save that debate for a different day. Today there

should be little debate. Low-wage workers have waited long enough

for this much-needed increase in the Federal minimum wage.

Thank you.

Senator BAUCUS. Thank you very much.

[The prepared statement of Dr. Bernstein appears in the appendix.]

Senator BAUCUS. Dr. Sabia?

STATEMENT OF DR. JOSEPH SABIA, ASSISTANT PROFESSOR

OF HOUSING AND CONSUMER ECONOMICS, COLLEGE OF

FAMILY AND CONSUMER SCIENCES, UNIVERSITY OF GEORGIA, ATHENS, GA

Dr. SABIA. Thank you. Thank you for the opportunity to talk to

you today about the likely effects of a minimum wage increase on

the working poor.

Nobel Laureate Milton Friedman once said, ‘‘One of the great

mistakes is to judge policies and programs by their intentions rather than their results. Programs that are labeled as being ‘for the

poor,’ ‘for the needy’ almost always have effects exactly the opposite

of those which their well-intentioned sponsors intend them to

have.’’

The minimum wage is an example of this type of ill-conceived

policy. Minimum wage advocates argue passionately that no one

who works hard and plays by the rules should be poor. I agree, as

do most Americans. But I also agree with Milton Friedman that

good intentions are not enough to make good policy.

The real test of this legislation is how its passage will impact the

working poor. Here, the evidence is clear. Past minimum wage increases have not alleviated poverty, and this legislation will not do

so either.

A forthcoming peer-reviewed publication, co-authored with my

colleague Richard Burkhauser of Cornell University, examines census data from 1989 to 2004 and finds that minimum wage increases had no effect on overall poverty rates, on poverty rates

among workers, or, importantly, on poverty rates of working single

mothers.

There are two reasons for this somewhat surprising result. First,

workers who lose their jobs or have their hours substantially reduced because of a minimum wage hike are clearly worse off. While

some low-skilled workers who remain employed after a minimum

wage are moved out of poverty, other low-skilled workers are

moved into poverty as a result of these adverse employment effects.

Recent evidence shows that the net effect of past minimum wage

increases leaves low-skilled workers worse off. David Neumark and

12

William Wascher recently published a paper for the National Bureau of Economic Research in which they critically reviewed nearly

90 empirical articles that have been published since the early

1990s on the effects of the minimum wage.

They conclude that the evidence is ‘‘overwhelming’’ that the

least-skilled workers experienced the strongest disemployment effects from minimum wage increases; you always hurt the one you

love. Those workers most harmed are disproportionately young African Americans, workers without a high school diploma, and single mothers.

In fact, among single mothers, minimum wage increases have the

unintended consequence of increasing welfare use due to job loss.

Moreover, it is primarily sectors of the economy that employed lowskilled laborers, particularly retail and small businesses, that experienced these adverse employment effects.

However, adverse employment effects are not the only reason, or

even the central reason, why minimum wage increases fail to reduce poverty. A second reason is that, in contrast to 1938 when the

minimum wage was first mandated, today the vast majority of

workers who benefit from a minimum wage increase do not live in

poor, or even near-poor, households. Most are second or third earners in households with incomes that are more than 2, or even 3

times, the poverty line. Less than 5 percent of minimum wage

workers are poor, single mothers.

In our new paper, Burkhauser and I simulate the effects of this proposed Federal minimum wage hike from $5.15 to $7.25 an hour

to see exactly who would benefit. In fact, to give the minimum

wage increase its best chance to do what its proponents say it will

do and reduce poverty, we put on rose-colored glasses and assumed

there would be no adverse employment effects at all. We are giving

it its best chance to do what folks say it is going to do.

Even in this best-case scenario, we found that just 13 percent of

the benefits would go to workers in poor households, two-thirds of

the benefits would go to those living in households with incomes at

least 2 times the poverty line, and 40 percent of the benefits would

go to workers in households with incomes over 3 times the poverty

line. For a household of four in 2006, that corresponds to a household income level of $60,000.

Poor African Americans would receive only 3.7 percent of the

benefits, and poor single mothers, only 3.8 percent. The evidence

clearly shows that minimum wage increases are a poor way to help

the working poor.

A far more effective anti-poverty tool is the Earned Income Tax

Credit. Most poor workers, especially single mother and African

American households, would benefit from the EITC, while only a

small minority would gain from a minimum wage hike.

Because EITC costs are not borne by employers, there would be

no reduction in the demand for low-skilled workers, as is the case

with a minimum wage increase. My most recent work shows that

a 10-percent increase in the maximum EIT refundable credit reduces poverty rates by 7 percent among full-time working single

mothers.

Let us all agree that no American who works hard and plays by

the rules should be poor, but good intentions cannot justify bad polVerDate 11-MAY-2000 16:54 Jan 24, 2008 Jkt 095484 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 39478.000 SFIN1 PsN: SFIN1
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icy. Minimum wage increases should be abandoned and placed in

the museum of antiquated anti-poverty policies.

Thank you.

Senator BAUCUS. Thank you, Dr. Sabia, very much.

[The prepared statement of Dr. Sabia appears in the appendix.]

Senator BAUCUS. Mr. Kadish?

STATEMENT OF MATTHEW KADISH, VICE PRESIDENT OF LEGISLATION, SMALL BUSINESS COUNCIL OF AMERICA, CLEVELAND, OH

Mr. KADISH. Mr. Chairman, members of the committee, my name

is Matthew Kadish. I am vice president of legislation of the Small

Business Council of America, and I am also a practicing attorney

whose practice focuses on representing small businesses in tax and

estate planning matters in Cleveland, OH. Thank you for the

chance to present our ideas on behalf of small business.

As discussed, small businesses are critical to our economy. It is

essential that tax incentives be given so that they can grow and

thrive.

We have identified, after study, seven tax legislative priorities

which we believe would best help promote small businesses. We believe that several of them would be a good fit for the legislation

being considered today, and we would urge that the others be given

consideration as soon as possible in the appropriate context.

Our first tax legislative priority involves the estate tax. The current situation in the estate tax is uncertainty. People cannot plan

their estates. The system has become hopelessly complex, with repeal slated for 2010 and a re-start of the estate tax at a $1 million

exemption in 2011, in somewhat of a Cinderella-at-midnight scenario.

When clients come in to talk to me about this, they shake their

heads. It is bizarre. They are losing faith in the system. That trainwreck-waiting-to-happen is only 3 to 4 years away, and we urge

Congress to act on this now and not to put it off until the last

minute.

One prominent attorney in the estate planning area is recommending three estate plans for each client, one for 2007 to 2009,

one for the repeal year of 2010, and another one to cover 2011

when the estate tax comes back in at a $1 million exemption. Is

that the kind of system we should have?

We believe Congress should increase the exemption now to $3.5

to $5 million. Do not wait until 2009. Retain the basis step up. Reunify estate and gift taxes. Exempt retirement plan assets for an

additional million as an incentive to save, and exempt real small

businesses from estate tax, or reduce the rate on them if that is

not feasible.

Second, there is a code section that is affectionately known as

section 409A. In 2004, 409A was enacted in the Enron/Worldcom

aftermath. Shareholders throughout the country had just watched

in helpless horror as key executives drained their non-qualified deferred compensation plans right before their companies went into

bankruptcy; 409A imposes fearsome tax, interest, and penalty results on employees who are involved in a deferred compensation arrangement which does not meet the requirements of 409A. The deVerDate 11-MAY-2000 16:54 Jan 24, 2008 Jkt 095484 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 39478.000 SFIN1 PsN: SFIN1
14

tails of those requirements and consequences are contained in my

written materials.

Importantly, the IRS and Treasury are broadly interpreting what

constitutes a deferred compensation arrangement, leaving employers and business owners scrambling to review many standard business arrangements, including partnership agreements, buy-sell arrangements, and a lot of other things that Congress likely did not

intend when they passed this statute.

Unlike public companies where shareholders normally have little

direct voice or supervision over the executives, shareholders and

management are tightly aligned in a closely held business. Therefore, the shareholders of a closely held business do not need Enrontype protection from 409A.

Pre-2004 law is adequate to address deferred compensation arrangements outside of the publicly traded area, and the complexity

is causing too much time and money to be wasted, and too much

uncertainty. We urge Congress to scale 409A back to apply only to

public companies.

Third, we urge Congress to enact SIMPLE cafeteria plans. Under

current law, small businesses are effectively precluded from having

cafeteria plans because their owners cannot participate due to the

application of the non-discrimination rules.

Under the SIMPLE cafeteria plan proposal patterned after the

successful SIMPLE defined benefit plan and supported by Senators

Snowe, Bingaman and Bond, small businesses would be able to

have the same kind of cafeteria plans as big businesses and government, and the owners would be able to participate, provided they

made certain minimum contributions to the health plans for their

employees.

Fourth, Alternative Minimum Tax. We applaud the work that

the chair and the incoming chair are doing on this issue. We realize that, given the revenue implications, this is a titanic task. However, it is growing exponentially. We believe this is a serious issue,

and it is a serious issue for small businesses, and we would like

to lend our support to their efforts.

Fifth, on expensing, we would like to make the increased limits

currently set to expire in 2010 as extended permanent, and increase the amounts, if possible. That would be very helpful.

Sixth, on the cash method of accounting, we would like to increase the true safe harbor for the use of the cash method from

$1 million to somewhere in the $5 to $10 million range. That would

be very helpful to allow small businesses not to have to use the

complicated and burdensome accrual method.

For taxpayers who switch over to the accrual method from the

cash method, we would like to give them a 4-year spread on the

section 481 adjustment, regardless of whether or not the change is

made voluntarily, because the IRS can currently come in, change

them, and cause a catastrophic change to their cash flow which

they may not have budgeted for.

Finally, and in conclusion, our last item is on personal service

corporations. Cleveland in particular, but probably the rest of the

country, has shifted very much to a service-based economy, and the

tax code contains a surprising number of disincentives to service

15

professionals, taxing them at unfair rates and in unfair ways, and

it is greatly complicated.

Our written materials set forth a series of proposals to even the

field for these professionals, including not just lawyers, doctors, actuaries and accountants, but also consultants who are currently

subject to surprisingly unfair rules.

Thank you once again for the opportunity to be here today.

Senator BAUCUS. Thank you, Mr. Kadish. That is an interesting

list, and we deeply appreciate that.

[The prepared statement of Mr. Kadish appears in the appendix.]

Senator BAUCUS. Mr. Ratner?

STATEMENT OF DAVE RATNER, OWNER,

DAVE’S SODA & PET CITY, AGAWAM, MA

Mr. RATNER. Chairman Baucus, Senator Grassley, members of

the committee, my name is Dave Ratner. I am the owner of Dave’s

Soda & Pet City, a mini-chain of four stores in Agawam, Springfield, Amhurst, and Northampton, MA.

I am appearing today on behalf of the National Retail Federation

and thousands of other small businesses like me. I am also a member of the board of directors of the Retail Association of Massachusetts.

I am really more than pleased to have the opportunity to testify

today on tax incentives for businesses in response to a minimum

wage increase, especially tax incentives that would help small businesses like mine.

In particular, I am testifying in support of legislation that would

level the playing field for retailers like myself who own the buildings in which our stores are located. I want to thank Senator

Snowe for introduction of this in the last Congress.

By way of background, I founded Dave’s Soda & Pet City in 1975.

I started with one store and one employee in Hadley, MA. Today

I have four stores, 86 employees, and way less hair. [Laughter.]

I am proud to say that the reason my business has grown, and

even thrives, is that we have the best and the nicest folks in the

world working at Dave’s. Dave’s has always been an integral part

of the community. We sponsor a gazillion teams, plays, community

events, library functions, charity events; you name it, we sponsor

it.

Chairman Baucus, I commend you for holding this hearing. I am

not here today to voice any opposition to the Federal minimum

wage increase. I am in Massachusetts. I am already living it. As

a representative of the National Retail Federation, I am here representing thousands of small retailers like me from all over the

United States.

Retailers, who employ 1 in 5 American workers, are among the

industries hardest hit by a minimum wage increase. For many, the

current proposals would represent a whopping 41-percent increase

in entry-level wages. For small business, these governmentmandated increases in overall payroll take a wicked-heavy toll as

we strive to compete with the big guys.

As a result of the January 1st Massachusetts minimum wage increase, my stores have implemented a hiring freeze, and we will

16

adjust our workers’ schedules to avoid overtime, steps that I am

sure will be replicated by small businesses all over the country.

In the longer term, we will need to find other cost reductions to

make up for the wage hike because we simply cannot raise prices

or you will go to our competition. We will certainly not be able to

do some of the innovations we were hoping to do to help us better

compete against the big guys.

Within the context of this hearing, I advocate eliminating the tax

code that discriminates against retailers that own their own businesses. Under the current law, retailers that own their stores must

write off improvements to those stores over 39 years, while the retailers that lease their stores can write those improvements off in

15 years.

For me and thousands of small retailers across the country,

eliminating this discriminatory treatment would greatly reduce the

cost of improving our stores and free up capital as wages go up and

we strive to compete with the large national chains that benefit

from economies of scale.

S. 3806 would eliminate this unfair treatment. I urge you to include this legislation as part of the minimum wage tax package.

For me, both the major national chains that I compete with lease

most of their stores in shopping centers. When they renovate their

stores, they write off these costs over 15 years. With respect to the

stores that I own, I have to write them off in 39 years. Frankly,

I do not get it.

Retailers generally make more of an investment in the community when we own our own stores. When a neighborhood deteriorates, the retailer who leases his store can break the lease or wait

for it to expire and move to a new location.

Retailers that own their own stores have a way bigger investment in the community. They have a stronger bond and an incentive to work towards revitalizing the community. But we still need

to keep our stores fresh.

For some of my independent retailer buddies and colleagues, the

store may have been passed down from previous generations and

the store, the building, is the principal asset of the family-owned

business. We should not have to pay a higher price for our renovations because we own the store rather than lease it.

If you are thinking, well, then, why do you not lease your stores

to get the 15 years? We cannot get into the good malls. The developers will not lease to us because we are not credit-worthy.

If you think about it in your States, all the great strip centers,

the real high-flying places, they have no independents in there. We

cannot get in there, so we have to buy our own buildings, usually

not in the A locations.

So, Mr. Chairman, thank you again for holding this timely hearing. I would be happy to answer any questions after.

Senator BAUCUS. Thank you, Mr. Ratner.

[The prepared statement of Mr. Ratner appears in the appendix.]

Senator BAUCUS. Mr. Obenour?

17

STATEMENT OF BRUCE OBENOUR, PRESIDENT,

AKWEN, LTD, DUBLIN, OH

Mr. OBENOUR. I am Bruce Obenour, owner of Akwen, Ltd., a

Wendy’s franchisee in Northeast Ohio. Thank you for the invitation

today to testify about the Work Opportunity Tax Credit and the

impact of the minimum wage increase.

Ten years ago, my family and I took a risk and started a business. Today, we own 21 restaurants and provide jobs for about 100

full-time and 650 part-time workers. Our hourly crew rate for those

part-time workers last month was $6.44 an hour.

Mandated increases in the starting wage may or may not result

in quality of life improvements for low-skilled and entry-level workers. There is certainly a broad spectrum of opinion. As an employer

in the industry with a majority of these workers, I assure you there

are consequences to our business and our employees.

I have lived in Ohio all my life. My stores are in Northeast Ohio

in the Rust Belt. Many are in older buildings and older neighborhoods. On January 1, the minimum wage in the State of Ohio increased to $6.85. That may not sound like much, but the cost of 41

cents more an hour equates to $370,000 annually to my business.

An increase in the minimum wage comes with an increase in Social Security, employment, and workers’ compensation taxes. In

fact, we just closed a store in Cuyahoga Falls, OH.

The decision was a difficult one because we have long been a

part of that community, but with the looming minimum wage increase in the State of Ohio, that store was no longer economical.

The wage increase was not the only factor in the closing, but it was

certainly a significant one.

More than any other private industry sector, restaurants provide

the most on-site job training for entry-level, especially teens, in the

workforce. It is more than putting the pickles on first.

Our employees are required to be rigorously trained through a

specialized and highly structured format, and at considerable cost.

The training we provide prepares them for future work opportunities and self-sufficiency later in life.

We give our crew opportunities to gain specialized training in not

only food preparation and equipment use, but we also provide technology training for point-of-sale systems, inventory control, security

systems, and the like.

Our trainees learn compliance with basic workplace laws like

OSHA, ADA, wage, hour, civil rights, sexual harassment, discrimination, and other employment laws.

When we hire someone, we teach the fundamental expectations

all employers have for on-time arrival to work, scheduling, proper

procedures for absences, being prepared for work—meaning uniforms, appearance, and attitude—and learning what is acceptable

behavior in the workplace.

Often, we are the first to teach these young people basic workplace values, teamwork, and personal responsibility. Consequently,

hiring teens and low-skilled workers is more expensive than you

might think, especially when our cost of labor goes up.

Current minimum wage proposals call for a 41-percent increase.

As a labor-intensive business with a low-skilled workforce, we are

disproportionately challenged to manage the resulting margin presVerDate 11-MAY-2000 16:54 Jan 24, 2008 Jkt 095484 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 39478.000 SFIN1 PsN: SFIN1
18

sure. The quick-service restaurant segment is different from other

industries.

We will not manage our labor costs by shipping our jobs overseas. Our option is to run our stores with less labor. In 2001, I had

roughly 900 employees. At the end of last year, I had 750, even

though the total number of my restaurants remained static.

We cannot eliminate large numbers of jobs at the store level. Instead, we are forced to work relentlessly to take labor out of the

restaurants one hour at a time, and we do it by installing high-tech

equipment.

We need WOTC. It is well-intentioned and can be effective. However, it should be strengthened and expanded. To do that, I recommend the following: the credit should be made permanent or

have a longer extension; the targeted groups under WOTC should

be expanded to include teens in the quick-service restaurant segment. Our segment is burdened most by the increase because of the

nature of our workforce and our business model.

In December, the unemployment rate was 4.5 percent; in my part

of the country it was significantly higher. Significantly higher still

is the national unemployment rate for teens, at 15.2 percent, and

for African Americans, at 26.2 percent.

In light of these high rates and the costs associated with training

teen workers, it makes sense to enact a narrow incentive intended

to help us hire those who need these job opportunities the most.

For small businesses like mine and many other franchisees, we

run our businesses through pass-through entities. Adjustments to

the Alternative Minimum Tax are necessary for us to make the

most use of the WOTC and other tax incentives.

Because of the AMT, which often kicks in due to deductions for

State and local taxes, and in our case depreciation adjustments, we

cannot take advantage of the WOTC credits, thereby eliminating

the program’s effectiveness. The law should be amended to permit

WOTC to offset AMT liability.

These recommendations will contribute to the reinvestment in

the workforce and our businesses in the near term to benefit the

economy.

I thank the committee for its work and sincerely appreciate your

focus on these important policy issues.

[The prepared statement of Mr. Obenour appears in the appendix.]

Senator BAUCUS. Thank you, Mr. Obenour, very much. Thanks

for the suggested refinements, for example, to the AMT. I appreciate that very, very much.

I would like to just generally ask your reactions to a tentative

package we are thinking about here to help small business. There

is going to be an increase in minimum wage, which means I cannot

get into too much of a debate between Dr. Bernstein and Dr. Sabia.

I think it is going to happen.

But I very much agree that the EITC certainly helps poorer people much more directly. You made some very, very good points. I

am a big fan, frankly, of the Earned Income Tax Credit. It has

helped a lot of people in a lot of ways.

What I would like to do is just get the panel’s reaction generally

to the package we are thinking about. Maybe you can suggest some

19

changes. Maybe you can suggest some better ideas on how to deal

with the small business portion. We will just see what you have to

say. We are dealing with, maybe, roughly, $8 to $10 billion total, so

the sky is not the limit here. We have to make choices. But the

general thought is to continue the section 179 expensing provision—it is $100,000, indexed a little bit—at least for a year. My

guess is, like some of the taxing standards, those just tend to continue over time, hopefully indexed, and maybe make some changes.

Second, the leasehold improvement change includes some modifications that you have suggested, Mr. Ratner, namely, that it

apply not just to those who lease, but to owners, too. He made

some very good points, and I think they are very valid. That is extended for one year.

The WOTC is made permanent, the Work Opportunity Tax Credit, with some additions. We can look at the additions you suggested, Mr. Obenour, but at this point we are thinking of helping

veterans, disabled veterans and families of disabled veterans, and

so forth. It is an expansion to the definition that was included in

the Work Opportunity Tax Credit.

Let me see what I have forgotten. Cash accounting. We would raise that to $10 million businesses and make that permanent. So

any business that grosses under $10 million can use the cash basis.

That would be a permanent provision in the law.

So, I guess, your reactions? Let me go backwards this time. I will

start with Mr. Obenour. Actually, I will make this kind of freewheeling. Just, anybody jump in. If somebody says something that

needs a response, pipe up, all right?

Mr. Obenour?

Mr. OBENOUR. I would suggest to you that, when we look at

WOTC, it is a well-intended program. The benefits are minuscule

in reality. We have roughly 550 of our 650 hourly folks that are

under the age of 20. Forty-five percent of our folks are under the

age of 20.

It’s my opinion that these folks need to be included in the WOTC

program, and WOTC needs to be adjusted such that we can derive

the benefit from it, because these are the large numbers of folks

that we are employing.

Senator BAUCUS. All right.

Mr. Ratner, your thoughts?

Mr. RATNER. I agree with him completely. We employ lots of

teens as well. These are the kids that we are trying to make into

our future citizens. We are their teachers, for crying out loud. So

that is a big deal. It should be happening.

As far as my main point with the leaseholds, the only way that

guys like me—and all of you have lots of small businesses in your

communities—can compete with the big guys, because we cannot

do it on price—they buy better than us, they get leases better than

us, they do everything better than us—is to own our location and

to provide better service. If our service is not good, there is no reason to go to an independent.

We all go to independents because we expect better service. For

us, owning our own business means that the landlord cannot sell

it and throw us out and put a Wal-Mart in. It means that, in my

20

case—and I called five of my friends who all own our own buildings—every one of us needs to redo our buildings.

I am in the pet business. The new PETCOs and PetSmarts are

just God-awful gorgeous. Our stores have to be like that. We cannot afford to do it and write it off in 39 years. Plus, the fact that

a floor does not last for 39 years. It is our retirement. These buildings are our retirement.

Senator BAUCUS. All right. Good.

To you, Mr. Kadish, generally.

Mr. KADISH. On the cash method, I applaud the idea of bringing

it up to $10 million. I would suggest, though, that there are a number of different cash method thresholds. There is a $5 million

threshold in the statute. There is a $1 million and a $10 million

administrative one.

There is more stuff in my materials, and I can go into it if you

would like. But the test that is set forth in Rev. Proc. 2002–28,

which provides that small businesses currently below $1 million do

not need to maintain inventories or use the accrual method, would

be the one to bump the limit up on. If we adopted that, that would

be of the most help.

Senator BAUCUS. My time has, frankly, expired. Just very quickly, Dr. Sabia and Dr. Bernstein, your thoughts on what works best

here, your perspective.

Dr. BERNSTEIN. Two quick thoughts. First of all, I appreciate the

fact that you are talking about something like $8 to $9 billion of

tax cuts. Incoming Chairman Baucus mentioned that these will be

offset.

Senator BAUCUS. Right. That is completely offset.

Dr. BERNSTEIN. And so I think we need to know what those offsets will be.

Senator BAUCUS. You will find out. [Laughter.]

Dr. BERNSTEIN. We are all engaged in tooth-and-nail arguments

and fights over $1, $2 billion.

Senator BAUCUS. Sure.

Dr. BERNSTEIN. Do we expand child care?

Senator BAUCUS. But you make a good point. We have to have

offsets for future provisions later this year, and we are keeping

that well in mind.

Dr. BERNSTEIN. So we are fighting tooth and nail for $1 to $2 billion for child care slots to complement welfare reform, and if the

community is able to come up with $8 to $9 billion in these tax

cuts, then I would hope we can turn there as well.

On WOTC, the Work Opportunity Tax Credit, there are two

views. One is the view that Mr. Obenour expressed, and I take that

view very seriously because he is at the ground level.

The research on this has found that it tends to be more of a

windfall for employers who are essentially taking the credit for

workers they would have hired anyway. I think both are probably

true. I take the comments we heard earlier seriously in terms of

streamlining the process.

Senator BAUCUS. We haven’t got time here, but I see Mr.

Obenour shaking his head. He does not really agree with all that.

But I appreciate that very much. I might say, my time has expired,

21

too. I am sorry, Dr. Sabia. Maybe we can get to you a little bit

later, but my time has expired.

Senator Grassley?

Chairman GRASSLEY. Dr. Bernstein, I would like to refer to 1996

when a New York Times reporter asked you whether any argument

could be made that would change your mind about supporting minimum wage. You were quoted as saying, ‘‘If someone could show me

you were hurting the people you were trying to help, that would

change my mind, but I don’t think anybody can do that.’’

Now, since that time that you gave that interview in 1996, there

have been a number of studies, some of them referred to by Dr.

Sabia, that show an increase in the minimum wage will increase

the number of families living in poverty.

Considering those studies, would you agree that raising the minimum wage hurts people that you were trying to help?

Dr. BERNSTEIN. I think the benefits of raising the minimum

wage, including the proposal that is on the table today, far outweigh any potential job losses. I absolutely agree that you can find

good-quality research that shows employment losses. But we have

to be careful not to say, somebody lost the job, therefore the policy

is not worthy.

Even research that Dr. Sabia cited, research cited in this exhaustive review by Neumark and Wascher, has shown that the typical

job loss effects, among the studies that find such effects, are 1 to

2 percent for a 10-percent increase in the minimum wage, meaning

that, again, the vast majority of affected workers are beneficiaries.

And by the way, you can talk about the studies that find negative effects. We can talk about studies on the other side of the ledger that find zero effects. Some of those are very high-quality studies that compare two places that are very much the same in terms

of their economic conditions, yet one had the increase and one did

not. It is a pseudo-experiment that is so rare in empirical economics and it has changed economists’ views in the sense that I said

back in 1996, and maintain today.

Chairman GRASSLEY. All right.

Dr. Sabia, would you please comment? I presume you have a different view.

Dr. SABIA. Sure. I think Dr. Bernstein is probably referring most

dramatically to the Cardin-Kreuger studies of the early 1990s,

which found no evidence of significant employment effects.

Since that time there have been dozens and dozens of studies—

nearly 100 empirical studies, as I said, reviewed in the Neumark

and Wascher study—findings of consistent evidence of these adverse employment effects.

Now, it is no doubt true that, after a minimum wage increase,

some low-wage workers who keep their jobs may—and this is what

is found—move out of poverty as a result of the wage increase because they have kept their jobs, but other low-wage workers, in

fact, will fall into poverty as a result of the adverse employment

effects, and also the reduction in hours.

Employers can respond to minimum wage hikes not just by laying people off, but also by cutting back the number of hours they

can work. On net, what has been found is that those who move into

poverty outweigh those who are lifted out of poverty. So on that,

22

the minimum wage increases are not doing what its proponents say

it ought to do, which is to reduce poverty.

If I could make a quick comment on this Work Opportunity Tax

Credit and minimum wage sort of combination of policy. It is not

clear that the Work Opportunity Tax Credit is going to be any better targeted than the minimum wage if the goal is to reduce poverty. As we heard, most workers who are going to receive that credit are going to be teenagers in middle-class families.

This idea of sort of combining work opportunity tax credits and

minimum wage increases has this feel of Ronald Reagan’s old line

about government: if it moves, tax it; if it stops, subsidize it. It

seems to me it is not the right approach if the goal is to reduce

poverty. We know what we can do to achieve that goal.

Chairman GRASSLEY. I would like to go to Mr. Kadish and ask

him about the extent to which he believes 179 expensing encourages growth in small business. You might have specific examples

since you advise, as an attorney, people on the use of that.

Mr. KADISH. Yes, sir. We think that 179 expensing is terribly

helpful to small businesses. They have equipment to put in place.

They need to make decisions on when and whether to make expenditures.

As a practical matter, if they can deduct more, they spend more,

they invest more in their businesses, and we think that is good for

their businesses. It just helps them do their jobs.

Chairman GRASSLEY. All right. I am going to put a couple of

questions in in writing.

Senator BAUCUS. All right.

[The questions appear in the appendix.]

Senator BAUCUS. Next, as all Senators know, the rule, just to remind us all, is that Senators, but for Senator Grassley and myself,

who arrive before the committee begins will be recognized in order

of seniority, but alternating back and forth on each side of the

aisle. Senators who arrive after the committee hearing begins will

be recognized in order of appearance, irrespective of political party.

So combining all that together, the next Senator to be recognized

is Senator Stabenow.

Senator STABENOW. Thank you, Mr. Chairman.

First, let me say that it is a real honor and pleasure to serve

with you and with Senator Grassley on this committee. I want to

thank both of you.

As a person, in the past, interested in many issues before the

committee but not serving on the committee, I have appreciated

your graciousness, and the graciousness of your staffs, in working

on many issues that affect Michigan. I am proud to be the tenth

member here from Michigan.

There is no question that even in a State like mine that is a

large industrial, large business State, that small business is our

economic engine in terms of growth, entrepreneurship, not only in

the service industry, but in suppliers, entrepreneurs, high-tech

across the board. We have tremendous strength and growth in

small business. So, I am very interested in what we can do on an

ongoing basis as it relates to small business.

I also know that the picture in my State is different than what

has been described today in terms of who is on the minimum wage,

23

and I would be remiss if I did not say that we have a lot of folks

in their 50s who have lost a job with a factory in other places who

have now gone back to not only one minimum wage job, but possibly two, in some cases two and a half or three.

It is not surprising to see an older person standing at the window of a fast-food restaurant rather than a younger person. So, I

come to this with a different experience than has been related in

many cases today.

But, nonetheless, we are in a situation where we are balancing

on this committee the need to value work and the need to value

those who create the work: the owners, the entrepreneurs, the business people. And when we look at the last minimum wage increase

on September 1, 1997, since that time the GDP has increased over

32 percent.

Corporate profits have increased 46 percent. S&P 500, adjusted

for inflation, has increased 58 percent, but the purchasing power

of our minimum wage earners has deteriorated by 20 percent. So,

that is what we are grappling with, valuing those who are working

and trying to make sure they can have what they need to take care

of their families.

Dr. Bernstein, on October 1, 2006, first, Michigan became one of

28 States to increase our minimum wage. I personally believe we

are better off, from a national standpoint, rather than having

States competing among wage differentials to actually have a national minimum wage. I think that is better for small businesses

in America.

Although it is too early to tell exactly the impact on this current

increase in Michigan, I am very hopeful, based on a Fiscal Policy

Institute study that occurred in the past—and I recall that in 2004

you testified before a House committee regarding the minimum

wage and its effect on small businesses, and in that testimony you

cited a Fiscal Policy Institute study that compared the impact of

higher minimum wages on small businesses in States with minimum wages above the Federal level and those at the Federal level.

That study actually discounted the theory that higher minimum

wages hurt small businesses. Instead, the study showed employment actually grew more quickly, by 1.5 percent, in high minimum

wage States.

I am interested in knowing your view today as it relates to that

study since 2004 and whether you have found areas of the country

that counter that study. Have there been areas that have faced a

decrease in small businesses due to an increase in the minimum

wage?

Dr. BERNSTEIN. I know of no studies that have found that last

point. In fact, one study that I also cited in that earlier testimony

shows that there is no correlation across States between increases

or changes in the minimum wage and small business start-ups or

failures.

That makes a lot of sense, because if you think about just the

past 9 years, at least at the Federal level, when the minimum wage

has eroded, we have not seen a dramatic increase, or for that matter a decrease, in business start-ups.

Basically, when you get right down to it—and this is what the

Fiscal Policy Institute study found—what really drives business

24

creation tends to be the macro economy, tends to be the demand

for the goods and services that businesses are producing and selling. The quality of that job has a lot to do with the minimum wage,

as well as a set of other policies that we have talked about today.

I will only add that I think the study you mentioned is important

in the following regard. Once again, we have the opportunity to

look at different States’ experiences, States like your own, and

what that study that you mentioned did was, it looked at job

growth and payroll among small businesses in States with higher

minimum wages and States without and found that there were relatively small differences between them, and if anything the differences seemed to favor small business, both in terms of employment and payroll growth, in States with higher minimum wages.

Senator STABENOW. Thank you, Mr. Chairman. My time is up.

Thank you.

Senator BAUCUS. Thank you, Senator.

Senator Salazar?

Senator SALAZAR. Thank you very much, Chairman Baucus. It is

good to be here and to be a part of this committee. Let me just,

first of all, say to you and to Senator Grassley, and to all the members of the committee, that I think you set a very high standard

for how people in the U.S. Senate should function.

For me, a part of being in this committee is very much looking

forward to working with you in the bipartisan fashion in which you

have dealt with some very, very difficult and complex issues.

So I will say, as my first statement on this committee, that it is

truly a day of honor for me to be able to sit here with all of you

as we deal with this particular issue.

Let me also say that I know that that extends to the staff of this

committee. All of us, I know, serve on other committees, but I think

the reputation of this committee is that the staff works for all of

us and is very helpful, and I certainly have found that in my first

few weeks. So, thank you very much.

Second, in terms of just my own interest on this issue and some

background, I look at this from a lot of different points of view, including the workers who are minimum wage workers, as well as

small business.

My life history has taken me through a wife who ran a Dairy

Queen franchise in Westminster, Colorado for a number of years,

so she understands the same kinds of issues that Mr. Obenour was

talking about, and as a farmer and rancher in southern Colorado,

dealing with many of the small business issues that you have all

addressed today.

I want to make just two quick points. The first is that I think

that it is important that we in the U.S. Congress act on increasing

the minimum wage, and that we ought to do it this year, we ought

to do it quickly, we ought to do it soon.

In Colorado this last year, we had a ballot initiative that increased the minimum wage from $5.15 to $6.85, and to many of my

friends in the business community who would come and talk to me

about that particular campaign, I said the reason Colorado was acting on its own is, frankly, because the Congress has failed to act.

So my hope is that this committee does move forward with legislation and that we would move forward with legislation that does

25

increase the minimum wage. It seems to me that it makes much

more sense to do it on a national basis as opposed to doing it

through the kind of patchwork that we otherwise will see across

the Nation. So, I am supportive.

Second, I also think that the suggestions that have been made

by Chairman Baucus and other members of this committee that we

create some incentives for small businesses are a very important

way for us to go.

At the end of the day, small businesses contribute hugely to the

economic well-being of our country to create jobs for about 80 percent of the people whom we employ here in the United States of

America.

As you struggle to make ends meet at the end of the day, the

kinds of incentives that we have been talking about here today and

the package, I think, are important.

I think the two witnesses at the end are sort of ideological in

terms of their point of view, one opposed, one for this minimum

wage. I want to ask the other three witnesses, Messrs. Kadish,

Ratner, and Obenour, a very simple question.

That is, if we look at three of the kinds of tax credits for small

businesses—one, a depreciation schedule for leasehold improvements from 29 years to 15 years; second, the WOTC, Work Opportunity Tax Credit; and three, the increased expensing for small

businesses, those three—how would you rate those three in terms

of their importance, if you could quickly respond to that question?

Mr. KADISH. I will go first, I guess. In terms of the types of clients that I work with and the membership of our organization, I

would rank them: expensing, one, depreciation, two, and WOTC,

three, but I think you will find that that varies from industry to

industry and sector to sector.

Senator SALAZAR. Mr. Ratner?

Mr. RATNER. I would do the depreciation first, the expensing second, and the WOTC third.

Senator SALAZAR. Mr. Obenour?

Mr. OBENOUR. I would do the depreciation first, the expensing

second, and WOTC third.

Senator SALAZAR. All right. Thank you. Thank you very much.

Thank you, Mr. Chairman.

Senator BAUCUS. Thank you, Senator Salazar.

Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman, and congratulations 1 day early, or 2 days early.

Senator BAUCUS. Whatever. [Laughter.]

Senator BUNNING. Mr. Kadish, one of the proposals under consideration, and it was not mentioned by prior committee members, is

to change the ability of small businesses to use the cash method

of accounting for tax purposes.

Can you explain why small businesses generally prefer the cash

method over the accrual method of accounting, and why is more

flexibility in this area appropriate?

Mr. KADISH. Yes, sir. Under the cash method of accounting, a

business takes items into income as they are received and deducts

expenditures as they are paid. The advantage of the cash method

26

is simplicity. It makes sense and it works the way that a small

business person and an average lay person thinks.

They do not need to hire an accountant in order to understand

that when they get a check in the mail, they need to consider that

to be something that they have gotten. When they make an expenditure, they need to treat it as an item paid.

The accrual method, by contrast, is more complex. It is perhaps

a more refined accounting concept. The IRS generally prefers it because they feel that it more correctly reflects the proper incidence

of taxation. The problem is, your average taxpayer does not understand it and they generally need to get an accountant involved in

order to properly implement it.

Senator BUNNING. So it would be the simplification.

Mr. KADISH. It is simplification. And the cost which comes with

complexity. Yes, sir.

Senator BUNNING. All right.

Dr. Sabia, do you have a different opinion on the Fiscal Policy

Institute’s employment study than Dr. Bernstein?

Dr. SABIA. Yes. In fact, you should have a study of mine in your

packet——

Senator BUNNING. I do, right here.

Dr. SABIA [continuing]. Which looks at the effects of minimum

wage increases on small business and retail employment. In fact,

the Fiscal Policy Institute’s study, while interesting descriptively,

was not particularly—how do I say this? Statistically rigorous.

Econometrically rigorous.

That is to say, it did not approximate close enough the conditions

of an experiment. It did not control for anything else, any other

changes in the economies of the respective States that were being

compared.

The study that you have before you that looks at the effects of

minimum wage increases on small businesses’ attempts to control

for lots of other things, like changing demographic characteristics

of the States, changes in the macro economy, changes in State

economy, and so on, comes to a very different conclusion: the fact

that a 10-percent increase in the minimum wage would reduce

small business employment by between 1 and 1.5 percent.

Senator BUNNING. Completely different than prior.

Dr. SABIA. That is right.

Senator BUNNING. Last, but not least, the two small business

men, Mr. Ratner and Mr. Obenour. Tell the committee about the

increase of expensing 179, your personal experience with that, because you are the only two here who have small businesses.

I was a very strong supporter of this provision when it was first

passed in 2003. I would like to hear from the small business owners about whether they have taken advantage of it.

Mr. OBENOUR. Senator, my experience is that I generally have

been unable to take advantage of it because my business is very

capital-intensive in short-term assets that I have to replace on a

regular basis, and my capital spending generally overruns the

number, so I have not been able to take advantage of it.

Senator BUNNING. You cannot take it up to $100,000?

Mr. OBENOUR. My understanding is that my capital spending is

in excess. I can take the first 100 but I cannot go beyond that.

27

Senator BUNNING. Well, then it does help to that degree.

Mr. OBENOUR. It does help, but it needs to be expanded.

Senator BUNNING. All right.

What about you?

Mr. RATNER. You bet. Every one of my stores has electric pallet

jacks. We have forklifts. We all got new telephone systems.

Senator BUNNING. Because of that fact.

Mr. RATNER. Absolutely. It never would have happened if we did

not have that law.

Senator BUNNING. All right. Thank you, Mr. Chairman.

Senator BAUCUS. You bet. Thank you, Senator.

Senator Roberts?

Senator ROBERTS. Thank you, Mr. Chairman.

It is a privilege to be the 343rd member of this committee. I am

not sure I can fill the shoes of Bob Dole. Lord knows, I have toted

enough buckets for him, so perhaps he can give me some advice.

[Laughter.]

I have to apologize to Senator Grassley, who has left. I usually

have the obligation to provide him a glass of ethanol every morning

and it warms him up. [Laughter.] I tried that with Senator Rockefeller, but it did not work, on the Intelligence Committee.

Chairman Baucus, I do want to congratulate you, sir. I look forward to working with you. I am sorry. I got your windows cleaned

up yesterday; I will have your shoes shined like you intended as

of tomorrow. [Laughter.] We are working on that.

I want to refer to Senator Grassley’s comments about the Washington paper—I think it is called the Post—and complaining, or at

least having some concern, about the Business section.

I would like to have everybody in the audience, all the witnesses,

and all the remaining members, all four of us, to read the firstpage story about Atchison, KS, America and a fellow named Jack

Bauer. Now, this is not the Jack Bauer who is going to be on Sunday and Monday. He can take matters in his own hands.

This is Jack Bauer who is a small business person who cannot

take matters in his own hands. It is about what he is going to face,

life at $7.25 an hour, which is going to happen. The chairman is

right, we are going to pass this.

But the key is, what we pass basically works with this increase

to be of benefit to small business. So it is an interesting story. It

is a micro-story. Dr. Bernstein, you are a macro guy. I am a micro

guy. I have to tell you, I get letters all the time from Kansas, from

small business people, and we are talking about 60,000, at least.

They are not writing me saying I want more regulations, or I

want this bill passed or that bill passed. They say, what on earth

are you doing back there, passing bills with more regulations, burdensome paperwork, putting me out of business, and so on and so

forth? They do not look at it as tax cuts, they look at it as tax relief. There is a big difference.

I know everybody says tax cuts, and then the favorite line

around here is ‘‘for the rich.’’ Well, or to spend it somewhere else.

These folks cannot afford that. They are looking for tax relief because they are on the margin.

Now, Jack Bauer has a choice. He has four employees. He operates a store that is called Wow-Only One Buck! That is the name

28

of his store. David, that is even smaller than your stores, or

Wendy’s. So everything in there is $1.00 and he has four employees. So he says he wonders whose hours he will have to cut if he

has to give his employees a raise. And he is for it, as are all his

employees.

Now, let me go down these employees. It is not that he is against raising the minimum wage. I do not think $5.15 is adequate. That

is what he pays. He says, adding the $7.25 seems fair, but his profit margin is very thin. His wages are his biggest controllable expense, so if his wages go up, he said, hours will have to come down.

The question will become, whose?

Who will it be? Neil Simpson, 66, works 6 hours a day as a stockman, 5 more hours somewhere else, and he is cleaning floors. He

takes care of a wife who is blind and has arthritis.

Will it be Susan Irons, who is 57, who was infected with hepatitis C from a blood transfusion and is on a waiting list for a liver

transplant and needs more hours rather than fewer?

Will it be Christina Lucks, who is 22 and 13 weeks pregnant?

Will it be Robert Eylas? There is a big story about Robert. He

takes care of his dad, who is very ill, and his mom, who is also taking care of his dad. He lives in a trailer. The story goes on from

there.

So I guess my question to you is a very generic question. I just

do not see how we can pass a minimum wage without some package that, as has been proposed by the chairman and the distinguished ranking member-to-be, without giving some help to these

people.

That is the real story that we are dealing with here, time after

time after time in many small communities in Kansas and many

rural States. Ken Salazar also represents a State like that.

Would anybody like to comment? I love your studies. I love the

macro studies. I love all the percentages. I am talking about people. I am talking about people that I visit with every time I go back

home.

Any comments? Yes, sir?

Dr. SABIA. Again, I believe that the best way to help those types

of workers is through expansions in the Earned Income Tax Credit.

Those are the ways that you are going to be able to transfer income

to these people. These tax benefits to small business might have

some indirect effect in which some of these workers may be able

to work more hours because firms will keep them on because they

have this tax break. But the most direct way to help these workers

is through expansions in the Earned Income Tax Credit.

This discussion of, well, let us join together this minimum wage

increase and the Earned Income Tax Credit and have both sort of

happen at the same time, in combination they can reduce poverty,

well, there is strong evidence that the EITC reduces poverty. There

is no evidence that the minimum wage increase will decrease poverty. So will a combination of the two together decrease poverty?

Well, I mean, maybe.

But that is like saying the Aaron brothers, Hank and Tommy, in

combination hold the baseball home run record. Well, I mean, if

you want to achieve the goal of winning the game, who do you

want at the plate, Hank’s 755 or Tommy’s 13? You want to go with

29

the Earned Income Tax Credit, just like you would go with Hank,

to get the job done. The minimum wage is not going to help these

workers, it is probably going to hurt them.

Senator ROBERTS. My time is up, Mr. Chairman. Thank you very

much. I urge everybody to read the story. Thank you.

Senator BAUCUS. Thank you.

Before we wrap up here, is there anyone who would like to say

something because somebody said something outrageous? Oh, Senator Rockefeller. I forgot you. [Laughter.] My good friend, Senator

Rockefeller. You have clean-up now.

Senator ROCKEFELLER. All right. Thank you, Mr. Chairman.

A couple of things. I would just, again, say to you, Dr. Sabia, that

you sort of take the minimum wage all by itself. I do not think we,

in the Senate or on this committee, think of it that way. We think

of it as being a part of a series of efforts to try to raise the condition of the poor.

We have spent a lot of time on the Earned Income Tax Credit

over the last number of years. Now, that is a very expensive thing,

and it is at a pretty high level right now. The food stamps is another aspect. I think in the farm bill this year there is a very good

chance that there will be an increase in that.

Then, also, the refundable Child Tax Credit is very much—children are very much—on the minds of the entire Congress if we are

going to do anything about health care. So I would just say, I think

you sort of take it by itself, the direct effect of it as opposed to some

of the indirect aspects that come from other public policies.

I will not ask you to respond to that unless you want to. Senator

Stabenow was describing Michigan. West Virginia has always been

among the three or four most challenged States in terms of job opportunities.

We figure that there will be about 59,000 people who will be directly benefitted from the exact minimum wage aspect—in other

words, what you were talking about, the exact amount of increase—but that there will be close to 133,000 who will get more

than that and who will be helped in a variety of other ways.

To Dr. Bernstein, something that is really difficult for me to understand, actually, which I would like to have you try to interpret

for me. Usually when you have a panel of this sort you get a very

negative aspect about minimum wage or other matters, how the

government is doing. I understand that.

But there was a Gallup poll last year specifically on this subject

which said that 86 percent of small business owners do not think

that the minimum wage affects their businesses.

Would you try to put that in perspective in terms of what the

general talk is about minimum wage, and then what this particular

poll seemed to say and what your own thoughts might be?

Dr. BERNSTEIN. Absolutely. Let me just begin by reflecting on the

article that Senator Roberts mentioned. He noted a number of people who are affected by this increase whose ages were 66, 57, and

22 and whose families clearly depended on their increase.

So, I very much disagree with the notion that Dr. Sabia and others have put forth that this just does not help people who need the

raise. I mean, I think that is demonstrably untrue.

30

Regarding small business, I mean, we are talking about a minimum wage that is at a 52-year low. The reason why so many

small businesses answered that poll question in the way you correctly cited is because many of them are already paying wage levels that are at or close to the proposal to go up to $7.25, at least

in 2009.

So the fact has been mentioned today, this is a 40-percent in- crease, from $5.15 to $7.25. That is irrelevant. What matters is the

share of workers that is affected by the increase. The last increase

was a 20-percent increase, from $4.25 to $5.15. It affected 9 percent

of the workforce. This increase is going to affect about 4 percent

of the workforce directly.

The reason is, because we have waited such a long time to fix

the wage floor, lots of workers have passed through that threshold

and it is not a very binding increase.

You are always going to find people and business persons who

will reasonably tell you, we do not want our labor costs to go up.

Totally understandable. But the magnitude of this increase, in historical terms, is really very small.

Senator ROCKEFELLER. Thank you.

Thank you, Mr. Chairman. Mr. Chairman, can I put my opening

statement in the record?

Senator BAUCUS. Certainly.

[The prepared statement of Senator Rockefeller appears in the

appendix.]

Senator BAUCUS. I would now like to turn to a Senator who has

mastered the art of timely arrival. [Laughter.] Senator Lincoln?

Senator LINCOLN. Well, thank you, Mr. Chairman. I just passed

Senator Grassley in the hallway. We were switching places over

there in the Agriculture Committee, I suppose.

But I want to thank you today for bringing up the ability to discuss two very important, yet separate, issues: minimum wage and

small business tax relief. They do have some bearing on one another, but I think they are so important in regard to quality of life,

as well as the ability to grow our economy.

In places like Arkansas where we find our small businesses to

be our largest employer, they are both very important. Of course,

in a State like Arkansas where we do have a large percentage of

minimum wage workers, they are both very important. So, increasing the minimum wage certainly is long overdue.

Our workers’ wages have remained stagnant, while they have at

the same time seen nothing but increases in their costs of living;

multiple, multiple different increases in their costs of living.

I think we all agree, as we raise our families, that any American

who works 40 hours a week should not have to raise their family

in poverty. My children are going through tennis shoes like water

right now, and I know when other families and other mothers see

that happen, dealing with that on the basis of the minimum wage

salary or minimum wage is very, very difficult.

So I do appreciate the chairman bringing this up, and I think

you have dealt with it in a very balanced way. I appreciate the fact

that you have brought these issues together and allowed us to have

this discussion, and hopefully to move forward on issues that I

think are very important.

31

As I mentioned, Mr. Chairman, in my State of Arkansas, as in

so many of our rural States, most of our businesses are small businesses. They are family-owned businesses. They provide the bulk

of our jobs and they are the backbone of our rural communities.

They are the ones that sponsor the Little League team. They are

the ones that sponsor the high school band in their trip or in their

uniforms.

They are truly the backbone of rural America and our small communities. Just like our workers who face obstacles as a result of

stagnant wages, our small businesses also face their fair share of

obstacles, whether it is the skyrocketing costs of health care, the

globalization of the marketplace, or the increased competition from

their larger competitors.

As a result, I am so pleased that we have this opportunity, just

as the Congress and President Clinton did in 1996 when the last

minimum wage increase was passed, again, to look at the ways

that we might be able to provide some relief to our small businesses that are so important to our small rural communities.

Just a couple of questions I hope I can slide in, Mr. Chairman.

Dr. Bernstein, I would like to hear your thoughts regarding the

value that indexation of the minimum wage could bring. I bring

this up because I have been extremely frustrated with the impact

that wage stagnation has on, in particular, one very important tax

policy to me which you all hear me repeatedly talk about, and that

is the Child Tax Credit.

Because we index the income threshold to qualify for the refundable Child Tax Credit, every year we have more and more of our

working families that are living on minimum wage and are not

even getting to the threshold to qualify for that tax credit.

So, I guess, maybe your thoughts on the benefits of indexation

of the minimum wage or the bigger picture, and also the interaction between the minimum wage and our tax policies that are designed to really benefit low-wage working families, such as I mentioned with the Child Tax Credit.

Dr. BERNSTEIN. Thank you. Senator, we have been talking about

tax policy before you arrived.

Senator LINCOLN. I am sorry. I hope you are not repeating.

Dr. BERNSTEIN. No, no. I want to highlight a point that is very

relevant to your question which has not come up yet. The point is

that the policies that we have been talking about, policies that

every member on this panel, except for myself, in some cases, has

been advocating are all indexed for inflation.

If they were not indexed for inflation, there would be tremendous

concern among folks at this table and members of this panel. The

Earned Income Tax Credit is a good example. We talked about how

the section 179 is now indexed for inflation and how important that

is to other folks who are testifying today, and maintaining that indexation.

Yet, the minimum wage is not indexed. Its value, as you correctly

pointed out, erodes every week and every month as prices increase.

There is just no good rationale why this wage floor should be allowed to collapse as it has.

What you are essentially doing is putting the fates of low-wage

workers in the hands of a political body that may or may not pay

32

attention to the issue and, in fact, is on record now for the longest

period of ignoring that very point.

In terms of the interaction of the minimum wage with other programs, in some cases, because of the marginal tax rates of the

Earned Income Tax Credit, the Child Tax Credit, certainly food

stamps, families can actually end up gaining from the minimum

wage and losing on the credit side.

Senator LINCOLN. Right.

Dr. BERNSTEIN. I think that is clearly an inappropriate outcome,

given that these policies are targeted to raise the income of families

who very much need both the minimum wage lifting their market

earnings, but some of these credits to help fill out the gap between

what they earn and what they need. So, I urge the committee to

keep those kinds of ‘‘cliff effects,’’ as they are called, in mind as

they negotiate these issues.

Senator LINCOLN. Well, it really does have such an incredible impact, not just on the economics of our families, but also the sentiment of our children.

There was a very incredible piece that I got during the holidays

in solicitations from nonprofits and it was for food banks, and it

had a picture of a child with a backpack who said, ‘‘The other kids

know that I am poor. They do not have to know that I’m hungry.’’

But when you look at working American families across this

country, and my husband and I both produce an income in our

household, yet looking at saving for college or trying to make sure

that our kids get to join the chess club, and participate in Odyssey

of the Mind, and the Cub Scouts, and all the different activities

that kids want to do and be a part of, they take resources.

No matter how hard those low-income families work to pinch and

save and shift those dollars, it is so critically important to at least

give them the benefit of the doubt in these instances.

So I am extremely hopeful that we will address this issue one

way or another in the coming year to ensure that we really live up

to our promise to make the tax code for all working families fair

and equitable and helpful.

So, Mr. Chairman, I appreciate your patience in allowing me to

slip in and ask at least one question, and I look forward to working

with all the gentlemen on the panel in the future. But we have lots

to do.

Mr. Chairman, can I just make one quick comment? I have not

heard much testimony today regarding the small business subchapter S corporation reform. Small businesses are often organized

as S corporations.

In fact, we have more than 3 million of them in our country

today. So I know the chairman and the ranking member, in the

past, have supported a number of our S corporation updates, and

I appreciate your past help.

I also appreciate the support of so many of our colleagues, Senators Hatch, Smith, and Snowe, and just want to urge the committee to work with us to include some of the much-needed updates

on those S corporation rules for our small businesses.

Senator BAUCUS. You bet.

Senator LINCOLN. Thank you.

33

Senator BAUCUS. You bet. Those are very good suggestions.

Thank you very much, Senator.

Now it is my honor to welcome a new member of the committee,

Senator Cantwell, from the Evergreen State, the State of Washington.

Senator Cantwell is now the second Senator from the State of

Washington to serve on the Finance Committee. One little interesting historical note here. Senator Cantwell can very quickly become the longest-serving member from the State of Washington by

just completing this Congress, because there was an earlier Senator, Senator Wesley Jones, in the 72nd Congress who just served

that one Congress.

Senator CANTWELL. Mr. Chairman, I am not sure exactly what

that says about Washington State. [Laughter.]

Senator BAUCUS. We are very honored to have you, Senator, on

the committee.

Senator CANTWELL. I, too, am very honored to be here and honored to work with you as chairman of the committee. I apologize.

I was at another committee on China trade-related policy, and I

know that is something that you care about.

But I, too, will be brief this morning and wanted to come and,

if I could, just offer a perspective and ask Dr. Sabia a question.

In your testimony, you assert that raising the minimum wage is

an ineffective anti-poverty tool, which is, I think, how you described it, because it does not target the poor population who need

the help most and because it diminishes work opportunities for

low-skilled workers.

Washington State has had a different experience. Back in 1998,

by initiative of the people, I think with 60 percent of the vote, we

passed a minimum wage law indexed to the rate of inflation. In

fact, we just increased that index recently, so we are at $7.93. I

think that puts us at the highest in the Nation.

At the same time, according to the 2005 Small Business Survival

Index, which I think is done by the Small Business Entrepreneur

Council, so it is a private organization, Washington is ranked

fourth nationwide as the friendliest policy environment for entrepreneurship.

So Florida is another State where the minimum wage is also

higher than the Federal minimum wage and is ranked sixth on

that same list. So you have a couple of States—in fact, 5 of the 10

States—in the Retail Trade Group that have had higher than a

Federal minimum wage. So, here is this Small Business Council

Economic Index saying that these States have this great environment.

So, clearly Washington and Florida are examples of higher minimum wages that have maintained competitiveness for small business and work opportunities, obviously, for low-skilled workers. So

how do you reconcile what is going on in Washington State and

Florida with your testimony?

Dr. SABIA. Sure. Those are interesting sort of correlations, but

what they may reflect is, in fact, that States with better environments for small businesses may be the types of States that have

legislatures that are more likely to either pass minimum wage

hikes or have the people support higher minimum wage hikes.

34

That does not necessarily mean that the higher minimum wage

hike has caused this more favorable business environment.

Senator CANTWELL. Well, I would think the statistics would show

it certainly has not hurt.

Dr. SABIA. Well, no. The more precise sort of question, if you

want to do sort of an experimental analysis, is to see what would

small business growth be in the absence of a minimum wage. What

you may see is, in fact, a reduction in the rate of growth in jobs

as a result of the minimum wage.

That is an explanation for why you might see States with more

sort of pro-business attitudes that might have legislatures or populations that vote for a higher minimum wage increase. That does

not suggest there is a causal relationship between the two.

In fact, more detailed econometric studies that have attempted to

control for lots of other factors that are correlated with both the

sentiments that lead to higher minimum wage hikes and to different business environments have concluded that minimum wage

hikes reduce employment of small business. So you have a reduction in the rate of growth, for instance, in small business employment.

Senator CANTWELL. Washington State can have a cyclical economy, primarily because of the Boeing industry and aerospace, and

now it has diversified in the last couple of years to software, so we

have lessened that impact.

But I would say that Washington State has had some very robust

job creation activity over the last several decades. Taking out those

periods of—as I said, we have a very cyclical nature to our economy. And, of course, we have a different tax structure than most

of the Nation, too. But I think it is a very positive sign. I do not

know, Dr. Bernstein, if you would like to comment on that.

Dr. BERNSTEIN. I think your points are very well taken. I think

you can always say, boy, things look like they have worked out

pretty well here, and have somebody like Dr. Sabia say, well, yes,

but they would be even better without the minimum wage increase.

That is the unknowable counter-factual. I do not find it a convincing argument at all.

The question is, the way you framed it, has the increase in the

minimum wage precluded positive economic outcomes? We know

that it has very much helped positive microeconomic outcomes regarding the living standards of affected workers, and we also know

that it has not precluded some positive macroeconomic outcomes as

he has articulated.

And by the way, this is precisely the argument we had in 1996

when we went from $4.25 to $5.15. Doomsayers predicted that the

economy, and particularly the low-wage labor market and particularly the opportunities of our least-advantaged workers, would be

slammed by this increase. Precisely the opposite occurred. 1996 to

2000 was the best low-wage labor market we had achieved in 30

years.

Now, I am by no means, just as in answering your question, saying that the reason that occurred was because we raised the minimum wage. By no means. The minimum wage did help to improve

the job quality of workers at the low end, but we saw steep reductions in single mom poverty.

35

We saw black poverty rates fall to their lowest level on record

over this period, driven largely by a full employment macro economy that was running on full bore, and some good fiscal policy, too.

The point is that the higher minimum wage does what it is supposed to do, it helps raise the living standards of the workers who

need the raise without significant adverse effects.

Dr. SABIA. I should just say, in 1996 I was just coming out of

high school, so I cannot be deemed as one of those doomsayers. And

I am not predicting even doomsday as a result of this Federal minimum wage increase. What I am suggesting is that its effect will

be to cause job loss and not improve poverty.

Senator CANTWELL. Well, I would just say, Mr. Chairman, because I know my time has expired and I know you want to end this

hearing, that I, too, heard all the doomsday when I was in the

State legislature in the mid-1980s. I also saw Washington State

citizens take over by initiative and pass this.

I would hope that Congress could act to increase the minimum

wage, but I would encourage people to look at the Washington

State experience at $7.93 in a very robust economy and what it has

done for individual families. I thank the Chair.

Senator BAUCUS. Thank you very much, Senator.

Any Senators who have additional questions that they want to

ask of the witnesses, we would like to have them in by close of

business tomorrow. Tentatively, we plan to mark up this legislation

on Wednesday of next week and then bring it to the floor as quickly as possible.

Thank you very, very much for taking the time, all of you. I

know it is a bit of an expense for all of you, and we appreciate all

the comments you have made. It has been very, very helpful, very

interesting. Thank you very much.

The hearing is adjourned.

[Whereupon, at 11:52 a.m., the hearing was concluded.]

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