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House Passes Stimulus Bill; Minimum Wage Tax Penalty Debated

Posted on Mar. 1, 2021

The House passed a $1.9 trillion stimulus package with several changes to the tax code as lawmakers explore potential ways to levy tax penalties on companies that don't pay workers a minimum of $15 per hour.

The House approved the American Rescue Plan (H.R. 1319) early February 27 along party lines with a couple of Democrats voting against the measure. Republican lawmakers slammed the bill for its non-COVID spending. 

The bill now moves to the Senate, where further amendments will be made after the Senate parliamentarian ruled that the plan to raise the federal minimum wage in the bill didn't abide by budget reconciliation rules. Democrats kept the minimum wage language struck down by the parliamentarian that will now either have to be removed or altered in the Senate.

Senate Finance Committee Chair Ron Wyden, D-Ore., said in a statement that he is working on an alternative that would use the tax code to push employers into raising wages. Wyden's proposal would impose a 5 percent penalty on the payroll of big corporations that pay workers less than a certain amount. Democrats hope that rewriting the language in the bill to impose tax penalties on lower-paying companies will appease the Senate parliamentarian. 

Wyden noted that penalties would also be imposed on corporations that try to skirt the rules by hiring contractors. 

“For example, if a profitable mega corporation like Walmart fires a store’s security guard and replaces him with a contractor who makes far less, my proposal would still require that Walmart pays a penalty,” Wyden said. 

Wyden’s proposal would also help smaller companies by providing them with incentives to increase wages from the current minimum wage of $7.25 per hour. “My plan would provide an income tax credit equal to 25 percent of wages, up to $10,000 per year per employer, to small businesses that pay their workers higher wages,” Wyden said. 

Senate Budget Committee Chair Bernie Sanders, I-Vt., said he would work on a proposal that would take deductions away from corporations that don't raise their wages. The proposal would also provide an incentive to small businesses to increase their wages to $15 per hour. But lawmakers face a race against time to include these proposals and get the bill to President Biden’s desk by March 14, when extended unemployment benefits expire.

Republicans have already come out to slam tax penalties against corporations that don’t raise wages, with House Minority Leader Kevin McCarthy, R-Calif., calling the idea “stupid.” However, progressives in the Democratic caucus refuse to go home to their constituents empty-handed.

Congressional Progressive Caucus Chair Pramila Jayapal, D-Wash., was undeterred and urged Congress to “use every tool in our toolbox to raise the wage because not delivering is not an option.” Her group is the second largest Democratic caucus in Congress and has fully backed a wage increase. 

Other Tax Changes

There was also concern among Democrats that a provision in the stimulus bill sending monthly advance child tax credit payments to families wouldn't withstand the Senate parliamentarian’s ruling. The House Rules Committee amended the language in the section, changing “monthly” to “periodic” in the hope that the additional flexibility provided to Treasury would be approved by the parliamentarian. 

Improving and increasing refundable credits is a high priority for Democrats, and the stimulus package would temporarily increase the earned income tax credit and expand it to U.S. territories. It would also increase the child tax credit and make it fully refundable for 2021. The manager’s amendment in the Rules Committee also fine-tuned language to improve the employee retention credit.

Another provision in the manager's amendment dramatically reduced the threshold for when third-party payment processors must report information to the IRS. Under current law companies like Ebay and AirBnb must report when people are paid more than $20,000 over at least 200 transactions. The new language in the bill would drop that threshold to $600 to capture more of the money earned by independent contractors in so-called gig economy jobs.

The Joint Committee on Taxation estimated that the change to third-party reporting would raise $8.4 billion in new revenue over 10 years.

The bill also includes language to kill a long-awaited and long-deferred worldwide interest expense allocation election provision that would have proven advantageous for many multinational taxpayers.

The bill repeals a the provision allowing U.S. affiliated groups to elect to allocate interest on a worldwide basis. Section 864(f) was enacted as part of the American Jobs Creation Act of 2004, but it has been deferred several times. Section 864(f) is relevant in computing the section 904 foreign tax credit limitation, which is based on the amount of taxable income from foreign sources and the allocation and apportionment of deductions between U.S.- and foreign-source gross income from different limitation categories.

Repealing the provision would raise $22 billion over 10 years, according to JCT.

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