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An Estate Tax Twist Reverses Party Roles On Minimum Wage

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Thursday, August 3, 2006

For years, organized labor has worked hard to raise the minimum wage, while business groups have campaigned to block such a change. This week in the Senate, however, the AFL-CIO is pushing to kill the wage increase while practically the entire business lobby is demanding that it pass.

The reversal is the product of election-year politics and clever -- critics say devious -- legislative packaging that has been dubbed the "trifecta." In the same bill, senators are being asked to raise the minimum wage (the liberals' goal), cut the estate tax (the conservatives' objective) and approve a laundry list of popular, though narrowly targeted, tax breaks.

"The sides have flipped," said Peter R. Orszag, an economics scholar at the Brookings Institution.

Prodded by moderate Republicans eager to undercut criticism by Democrats that GOP economic programs overwhelmingly favor the rich, the House approved the package last week, including a three-year phased-in boost in the nation's minimum allowable hourly wage to $7.25 from the current $5.15. It would be the first increase in the minimum wage in nine years.

The Senate intends to vote on the package this week, but the outcome is too close to call, lawmakers from both parties agree. Several Republican committee chairmen are unhappy with how the House GOP leadership stitched together the bill, and they may raise objections on the floor. But the biggest obstacle to passage is the strong opposition from Democratic leaders and their labor-union allies to the estate tax provision, which would permanently reduce the federal levy on estates left by the wealthiest Americans.

Labor officials say that their opposition is a matter of economic and social justice. They also say that reduced revenue from estate tax relief could lead to cuts in federal programs for the poor, such as food stamps.

"We don't think minimum-wage workers should have to wait for millionaires to get another tax cut before they receive a long-overdue pay increase," said Bill Samuel, the AFL-CIO's legislative director.

In contrast, business lobbyists are seeking "yes" votes. Dan Danner, executive vice president of the National Federation of Independent Business, the small-business lobby, sent lawmakers a letter of support this week.

"While we have strong concerns about the minimum wage hike, we're supportive of permanent relief of the estate tax," he wrote. "If Congress needs to address the federal minimum wage level this year, we believe it should be addressed in a package that also provides significant relief for small businesses. . . . The bill does just that."

Other longtime opponents of a minimum-wage increase who are now eagerly backing it as part of the larger bill include the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Association of Wholesaler-Distributors. The Tax Relief Coalition, which represents 1,000 business groups, also supports the plan.

Even the National Restaurant Association, which is among Washington's most entrenched nemeses of a minimum-wage boost, is debating what to do. "We are reserving the right to determine our position on the final package depending on the size of the wage increase and how much help small businesses get," said Steven C. Anderson, president of the association.

Business organizations have long opposed minimum-wage increases, arguing that the higher labor costs would force employers to lay off workers or eliminate some low-paying entry-level jobs. Opponents also say that prosperity is best generated by stronger economic growth rather than a mandated wage increase.

But business lobbyists said the trade-off between a lower estate tax and a higher minimum wage clearly favors the business community and upper-income Americans. The proposed reduction in the estate tax would lower federal tax revenue by $268 billion over the next decade, according to one estimate.

"Every closely held business in America today is either affected by the death tax or could be affected by it," one top business lobbyist said. "At the same time, less than 3 percent of the country's workers get paid at the minimum wage." In addition, the lobbyist said, "people in the business community understand that it is valuable to Republicans standing for election in November to demonstrate that they have compassion for folks at the lowest end of the economic ladder."

C. Eugene Steuerle, an economist at the Urban Institute, said: "Business groups are saying, in effect, the estate tax change is far more important to them than is the consequence of an increase in the minimum wage. And the unions are saying the increase in the minimum wage isn't as important to them as you might have thought it was."

In the Senate, Republican and Democratic leaders are playing hardball over the measure. Majority Leader Bill Frist (R-Tenn.) warned that he will not permit any other votes this year on any major element of the bill if the overall package is blocked this week. Minority Leader Harry M. Reid (D-Nev.) has pledged to do everything he can to defeat the bill because it includes estate tax relief.

Democrats have been accusing Republicans of ignoring the plight of low-income families and have used their call for a minimum-wage increase as an effective campaign issue. Polls show that a majority of Americans favor an increase in the minimum wage. But if Congress succeeds in passing an increase as part of the larger package, that will undermine the Democrats' effort and allow the GOP to claim credit for helping low-income Americans, some Democratic aides say.

The Republican Party has pushed for years to make estate tax reductions permanent and would be rewarded by the conservative part of its base if it could make that happen. Democrats, meanwhile, overwhelmingly condemn the estate tax cut as a gift to the rich that a government running a $300 billion budget deficit could ill afford.

The estate tax provision would exempt from taxation all estates worth as much as $5 million -- or $10 million for a married couple -- and apply a 15 percent tax rate to inheritances above that threshold and up to $25 million. For estates exceeding $25 million, the tax rate would be 30 percent.

The tactic of pairing the wage and tax provisions was devised by House Majority Leader John A. Boehner (R-Ohio) and Ways and Means Committee Chairman Bill Thomas (R-Calif.), in consultation with Frist.

To lure some lawmakers whose votes are up for grabs, the bill also includes a slew of special tax benefits. A provision that would provide extra write-offs for timber extraction was included to tempt such timber-state lawmakers as Sens. Mark Pryor (Ark.), Maria Cantwell (Wash.) and Patty Murray (Wash.), three Democrats whose votes may be crucial to passing the legislation.

The AFL-CIO is hoping Democrats can block the trifecta legislation so that organized labor can press Congress to approve a stand-alone minimum-wage increase in September. "We do want a minimum-wage increase, and we think we're going to get it," Samuel said.

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