Some policy issues seem fixed on Congress's legislative agenda. A case in point is the taxation of small firms and its effect on their rate of formation, economic performance, and prospects for growth. Many bills to assist small firms through new or enhanced tax preferences were introduced in the past few Congresses—though relatively few of the proposals were enacted. The perennial congressional interest in small business taxation stems from the interplay of a combination of factors. Chief among them are the economic importance of small firms as a whole, the widely held belief that such firms are a major driving force behind technological innovation over time, and relentless pressure from the small business community for additional tax relief. The powerful allure of small entrepreneurial firms and the considerable political clout of small business owners are reflected in the federal tax code, which contains a number of tax benefits for small firms across a broad range of industries. Nonetheless, some lawmakers say existing tax relief for small firms is inadequate; thus, they favor the adoption of further targeted reductions in the tax burden on small business owners. In the 110 th Congress, a growing number of proposals to enhance certain existing small business tax preferences or create new ones are being considered. This report describes those proposals and discusses how they would change current tax law. Firm size plays a significant role in the performance of certain industries and behavior of certain markets, but it exerts no similar influence on the organization of the federal tax code. The code makes no formal or explicit distinction between the taxation of small firms and all other firms. For example, there are no separate sections in the code for the tax treatment of small and large firms. Instead, current tax law contains numerous provisions, scattered throughout its many sections, that confer preferential treatment on small firms, but not on firms that many would regard as large. Small business tax benefits differ in kind. Most take the form of deductions, exclusions and exemptions, credits, deferrals, and preferential tax rates. In combination, tax benefits such as these lower marginal effective tax rates on the income earned by small firms, relative to all other firms. Still, existing small business tax benefits are not confined to those that shrink tax burdens. A few tax code provisions benefit small firms by reducing their cost of tax compliance. Research has indicated that this cost tends to be regressive with respect to firm size, which means that tax compliance costs typically claim a larger share of pre-tax income as firm size shrinks. In addition, some other provisions grant tax relief to eligible small firms in exchange for the provision of certain fringe benefits (e.g., pension plans) to employees. Not only does the federal tax code make no formal distinction between the taxation of small firms and all other firms, it also incorporates no uniform definition of a small firm, nor any consistent criteria for identifying the firms that qualify for current small business tax benefits. As a consequence, eligibility criteria can vary from one such benefit to the next. For example, some tax benefits are available only to firms with annual gross receipts below a certain level, while other benefits are limited to firms beneath a certain asset or employment size. Some may find it surprising that among the eligibility criteria for current small business tax preferences, employment size is seldom found. By contrast, the Small Business Administration relies heavily on employment size to collect and publish data on the economic condition of small business, and to provide support to small business through the programs it administers. Existing small business tax benefits also differ in scope and economic importance. Some apply to small firms in specific industries only (e.g., life insurance, banking, and energy production and distribution), while others can affect nearly every small firm, regardless of industry affiliation. Those benefits with the broadest reach outside agriculture include the rules governing the taxation of passthrough entities (including subchapter S corporations), graduated corporate income tax rates, the expensing allowance for certain depreciable business assets, the exemption of small corporations from the corporate alternative minimum tax, the amortization of business start-up costs, cash-basis accounting, the exclusion of gains on certain small business stock, and the tax credit for a portion of the start-up costs of pension plans offered by certain small firms. This report deals only with small business tax benefits with such a reach. All small business tax benefits, except those intended to ease the tax compliance burden for small firms, entail a loss of federal revenue—at least in the short run. But owing to insufficient data and disagreement among budget analysts over which provisions in the tax code rightfully constitute small business tax benefits, it is difficult to derive an accurate and widely accepted estimate of the revenue cost of existing small business tax preferences. Nevertheless, recent estimates by the Joint Committee on Taxation and the Treasury Department of the revenue loss caused by a variety tax expenditures indicate that the cost exceeded $8 billion in FY2005. While many bills with provisions intended to enhance or create new small business tax benefits were introduced in the 109 th Congress, only two were enacted: the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA, P.L. 109-222 ) and the Pension Protection Act of 2006 (PPA, P.L. 109-280 ). Among other things, TIPRA extended for two years (through 2009) the enhanced small business expensing allowance enacted under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and extended through 2007 by the American Jobs Creation Act of 2004 (AJCA). The PPA permanently extended some of the provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 dealing with pensions, including a non-refundable tax credit for a portion of the start-up costs for qualified pension plans offered by eligible small employers. A growing number of proposals to enhance existing small business tax preferences or create new ones have been introduced in the current Congress. They vary in scope, potential economic effects, revenue cost, and the support they command among the Republican and Democratic leaders in the House and Senate. Several such proposals merit discussion because they played a central role in congressional approval of legislation to increase the federal minimum wage. They are H.R. 2 / S. 349 , H.R. 976 , H.R. 1591 , and H.R. 2206 ( P.L. 110-28 ). The House took the first major step in enacting an increase in the federal minimum wage by passing H.R. 2 on January 10, 2007. H.R. 2 would have increased the federal minimum wage from its current level of $5.15 to $7.25 over two years, but it would have done so without extending tax benefits to small firms likely to be affected by the increase. The Senate responded by passing an amended version of H.R. 2 on February 1. Its version of the bill replaced the text of the House-passed version with the text of S. 349 , which was introduced by Senator Max Baucus and unanimously approved by the Senate Finance Committee ( S.Rept. 110-1 ) on January 17. S. 349 paired the same increase in the federal minimum wage with a package of tax benefits intended to mitigate the impact of the increase on the financial conditions of small firms. In addition, the measure would have offset the estimated revenue cost of those benefits ($8.3 billion from FY2007 to FY2016) with a package of revenue raisers, none of which would have disproportionately affected small firms. For Senate Democratic leaders, a chief motive for combining an increase in the minimum wage with a package of small business tax benefits was to secure the 60 votes needed for passage of the measure in the Senate. Republican leaders in the Senate and House had said that they would support legislation increasing the minimum wage only if it included significant targeted tax relief for small firms. Despite news reports to the contrary, not all of the six tax preferences included in the Senate-passed version of H.R. 2 would have benefitted small firms exclusively, or even predominantly. But some of them would have benefitted small firms more than others. Three of the preferences would have bestowed most of their benefits on such firms: a one-year extension of the expensing allowance, an increase in the threshold for using cash accounting methods, and a modification of certain rules governing the formation and taxation of subchapter S corporations. But the measure also included two tax preferences that could have benefitted firms of all asset or employment sizes: namely, (1) an extension of the straight-line 15-year depreciation life for restaurant and leasehold improvements through March 2008 and an expansion of the property eligible for this tax treatment to include comparable improvements in retail property and new restaurant construction; and (2) an extension of the work opportunity tax credit (WOTC) for five years (through 2012), and an expansion of the credit to include veterans disabled after September 11, 2001, and certain high-risk youths. In a bid to pave the way for a conference with the Senate over H.R. 2 , the House passed H.R. 976 on February 16. Though the measure did not address the minimum wage, it contained a more modest package of tax benefits targeted at small firms than the package of business tax benefits in the Senate-passed version of H.R. 2 , and it would have offset their estimated revenue cost ($1.3 billion from FY2007 to FY2016) with a package of revenue raisers that also differed in kind and size from the revenue raisers in H.R. 2 . Once again, none of the revenue raisers in H.R. 976 would have disproportionately affected small firms. H.R.