October 19, 1999

Tax Cuts in Lazio Minimum Wage Bill
Overwhelmingly Benefit High-Income Taxpayers

by Iris J. Lav

Legislation to raise the minimum wage introduced by Representatives Rick Lazio and Gary Condit and expected to be considered on the House floor this week includes a set of tax breaks for high-income individuals, most of them from the tax bill Congress passed in August. These tax breaks include significant reductions in the estate tax. In fact, the estate tax provisions constitute the largest single set of tax changes in the bill. The bill also features a series of changes in tax laws related to pensions that would make pension tax breaks considerably more lucrative for highly paid executives and other highly compensated individuals.

The argument usually advanced for including tax measures as an accompaniment to a minimum wage increase is that small businesses need to be compensated for the increased wages they would have to pay under a higher minimum wage. This argument is not well-founded; the evidence does not indicate that modest minimum wage increases have significantly negative effects on small businesses. For example, recent research that examined whether minimum wage increases contribute to the failure rate of businesses found "...there seems to be no discernible correlation between minimum wage increases and a rise in business failures, either in the year the increase occurred or in the following year." (1) But whatever the merits of compensating small businesses, the tax cuts in the Lazio-Condit proposal go far beyond any reasonable bounds for what might be justified as measures to cushion the effects of a higher minimum wage on small businesses.

The Lazio-Condit bill would confer the vast majority of its tax reduction benefits on high-income taxpayers who do not operate small businesses. An analysis by Citizens for Tax Justice finds that 92 percent of the tax cut benefits in the Lazio-Condit bill would go to the 10 percent of taxpayers with the highest incomes.

Moreover, neither the estate tax reductions nor the pension provisions of the bill bear much relationship to any possible effects of a minimum wage increase on small businesses. These tax cut proposals would provide only an extremely small proportion of their benefits to small businesses.


Estate Tax Cuts Not Tied to Small Business Issues

Reducing the estate tax has little connection to any claimed effects of a minimum wage increase on small businesses. Only a tiny fraction of the estate tax is paid on small businesses that are included as part of estates. The overwhelming bulk of the large tax reductions that would result from the estate tax provisions of the Lazio-Condit bill, all of which were contained in this summer's vetoed tax bill, would accrue to wealthy individuals who are not owners of small family businesses.

IRS data show that individually-owned or family-owned small businesses account for a small fraction of assets subject to the estate tax. An analysis of 1995 estate tax returns found that business assets, such as closely-held stocks, limited partnerships, and non-corporate businesses, accounted for only 2.3 percent of the value of all taxable estates. These assets accounted for only 2.7 percent of the value of smaller estates, those with a value of less than $2.5 million.(2)

Furthermore, several provisions of tax legislation enacted in 1997 already are reducing estate taxes on small family businesses and farms. The amount of an estate that is exempt from taxation is now higher for family-owned businesses and farms than for other types of estates. Instead of the $650,000 general estate tax exemption (which is scheduled to rise to $1 million in 2006), the 1997 tax law increased the total exemption for most estates that include family-owned businesses to $1.3 million; in other words, most estates including a family-owned business that are worth less than $1.3 million already entirely escape the estate tax. The 1997 law also liberalized various other estate tax provisions that help small businesses, including rules that reduce the taxable value of small businesses.

The Lazio-Condit bill would make a number of changes that would further reduce the taxation of all estates, not just estates with family businesses. The changes include reducing the highest marginal tax rate that is applied to the largest estates from 55 percent to 48 percent, reducing by two percentage points each of the other graduated marginal estate tax rates, and eliminating a surtax that currently applies solely to estates valued at over $10 million. Another proposed change would substitute a deduction for the credit that implements the general estate tax exemption (the exemption scheduled to rise to $1 million in 2006), a change that tends to favor larger estates.

Table 1 shows the effect of the proposed changes in the estate tax on illustrative examples of estates of different sizes. As shown in that table, an estate worth $1.5 million would receive an estate tax reduction of approximately $64,000, while an estate worth $20 million would get an estate tax cut in excess of $1.7 million. Even in percentage terms, the estate tax reduction would favor large estates over smaller ones. As Table 1 indicates, the estate tax on the $1.5 million estate would be reduced by an amount equal to 4.3 percent of the value of the estate, while the tax on the $20 million estate would be sliced by an amount equal to 8.8 percent of the estate's value, more than twice as much.

Table 1
Illustrative Estate Tax Reductions Included in
Lazio-Condit Minimum Wage Bill
Estate Size

Proposed Tax Cut

Tax Cut as a Percent of Estate Value


$ 0

















Calculations by Center on Budget and Policy Priorities. Assumes fully phased-in provisions.

Under current law, estate taxes are paid only by the estates of the wealthiest two percent of all decedents; those of lesser wealth have no estate tax liability. A recent Treasury Department analysis finds that 91 percent of all estate taxes are paid by the five percent of taxpayers with the highest incomes, a group with incomes in excess of $190,000 a year.(3) The evidence suggests that most of the benefits of the proposed estate tax reduction would be enjoyed by the estates of individuals who were wealthy investors with extensive holdings in stocks or other financial instruments and real estate and who were not owners of small businesses.

In short, a general estate tax reduction of this type cannot be justified as offsetting the effects of a higher minimum wage. To the extent that an argument can be made that problems remain regarding the taxation of small family-owned businesses under the estate tax, such problems could be specifically identified and addressed at a much smaller cost than the Lazio-Condit provisions entail.


Pension Provisions Also Are Poorly Targeted

The Lazio-Condit minimum wage legislation also includes the pension tax provisions of the vetoed tax bill. These, too, have at most a tenuous connection to any problems that small businesses are said to experience as a result of a minimum wage hike.

The proposed pension changes would relax various provisions of current law that limit the contributions that highly paid individuals may make to pension plans, as well as the amount of the pension payments that such high-income individuals may receive when they retire. For example, the bill would increase the maximum tax-favored contribution that an employed individual is permitted to make to a 401(k) plan from $10,000 to $15,000. This change would primarily benefit the fewer-than-five-percent of individuals covered by a 401(k) plan who make the maximum $10,000 contribution today; this is a group that receives average pay of $130,000. The bill also would increase the maximum benefit that a retiree can receive under a defined benefit pension plan from $130,000 a year to $160,000. This change would benefit only those at the very top of the income distribution whose salaries are so large that they would be able to qualify for annual pension payments of more than $130,000 when they retire.

These and the other pension-related tax breaks in this bill have little to do with assisting small businesses. Most small businesses, in fact, do not even offer pension plans. In 1993, only 13 percent of full-time workers in firms with fewer than 10 employees — and 25 percent of workers in firms with between 10 and 24 employees — enjoyed pension coverage. It is unlikely that many small businesses with large minimum-wage workforces would be affected by these expansions in pension tax breaks.

By contrast, 73 percent of workers in firms with 1,000 or more employees have pension coverage.(4) Most of the benefit of the pension provisions in the Lazio-Condit package would accrue to highly-salaried executives of large corporations that already offer generous pension coverage.

An analysis by the Institute on Taxation and Economic Policy finds that 91 percent of the tax benefits from the pension provisions in the Lazio-Condit bill would go to the 10 percent of Americans with the highest incomes. By contrast, the bottom 60 percent of Americans would receive less than one percent of these tax benefits. The effect of these provisions would be a significant increase in the tax-preferred benefits of high-income individuals, with little expansion for the moderate- and low-income workers — many of whom work for small businesses — who most need to build savings for retirement.

In fact, some of the pension provisions could lead to reduced coverage for some low- and middle-income workers. For example, the bill would raise the amount of salary on which pension contributions may be made from $160,000 to $200,000. This would enable small business owners and highly-paid executives to maintain contributions for their own pension plans while reducing the firm's contributions for other employees. Consider, for instance, the case of a small business owner with compensation of $250,000 who wants to have the business contribute $10,000 a year to his pension. Under current law, the owner would have to set the firm's pension contribution rate at 6.25 percent of pay (6.25 percent of the $160,000 limit is $10,000). Both the owner and the employees would receive contributions equal to 6.25 percent of their compensation. Under the higher $200,000 limit the Lazio-Condit bill would set, however, the business owner could reduce the firm's contribution rate for its employees to five percent and still have the firm contribute $10,000 to his own pension. The employer contribution for an employee earning $40,000 would drop from $2,500 (6.25 percent of $40,000) to $2,000 (5 percent of $40,000).(5)


Other Proposals

The Lazio-Condit bill also includes various other tax provisions from the vetoed bill. Most of these provisions, as well, tend to have tenuous connections to the alleged effects of a minimum wage hike on small businesses. For example, under provisions enacted in 1997, the proportion of health insurance premiums that self-employed persons may deduct is scheduled to rise from 60 percent in 1999 to 100 percent in 2003; the Lazio-Condit bill accelerates this phase-in schedule. Self-employed persons are excluded from minimum wage requirements, however, so a provision that solely affects the self-employed cannot be an offset to the claimed effects of the minimum wage.

Another such provision is an increase in the proportion of business meals that may be deducted. Currently, businesses may deduct 50 percent of business meals and drinks. This limitation on the "three-martini lunch" is intended to prevent excessively luxurious dining and drinking at taxpayer expense. The Lazio-Condit bill includes a provision of the vetoed tax bill that would raise to 60 percent the proportion of business meals and drinks that can be deducted, at a cost to the Treasury of about $1.3 billion a year.

In considering any tax proposal that may be attached to the minimum wage bill, it is important to consider whether the proposed tax change is reasonably targeted to offset some demonstrable adverse effect from a minimum wage hike. These tax provisions of the Lazio-Condit bill do not meet that test.


1. Jerold Waltman, Allan McBridge, and Nicole Camhout, "Minimum Wage Increases and the Business Failure Rate," Journal of Economic Issues, March 1998.

2. Internal Revenue Service, SOI Bulletin, Winter 1996-97.

3. Julie-Ann Cronin, U.S. Treasury Distributional Analysis Methodology, OTA Paper 85, September 1999.

4. U.S. Department of Labor, Social Security Administration, Small Business Administration, and Pension Benefit Guarantee Corporation, Pension and Health Benefits for American Workers, 1994.

5. The pension provisions in the vetoed tax bill, all of which are included in the Lazio-Condit minimum wage legislation, are explained more fully in the Center report, Exacerbating Inequities in Pension Benefits: An Analysis of the Pension Provisions in the Tax Bill, by Peter Orszag, Iris Lav, and Robert Greenstein, October 8, 1999. The vetoed tax bill also included provisions that would make Individual Retirement Account tax breaks more generous; these IRA changes are not included in the Lazio-Condit minimum wage bill. The distribution data cited above on the tax benefits that the Lazio-Condit pension provisions would provide thus do not cover the IRA expansions of the vetoed bill. Data on the distributional effects of the full package of retirement tax benefits contained in the vetoed bill, including the IRA expansions, are provided in Exacerbating Inequities in Pension Benefits.