Just a quick update on the status of the $8 billion small business tax package that may accompany the proposed minimum wage increase. The bill is currently the pending business in the Senate. On Monday, Majority Leader Harry Reid filed a petition to close off the debate and pass just the minimum wage increase, without any offsetting small business tax relief. This vote is scheduled to take place momentarily.

The consensus is that Senator Reid doesn’t have the 60 votes necessary to move the minimum wage package without the offsetting business tax relief, and the vote is being characterized as part of the ongoing tug-of-war between the House and Senate over whether the minimum wage should be paired with any small business tax relief at all. As BNA noted, the vote “is expected to demonstrate that a bill without the tax relief cannot succeed in the Senate.”

Once the clean bill fails in the Senate, debate will begin in earnest on the tax title. As S-CORP readers know, there is an entire title of S corp reforms in the Finance Committee bill, so we’ll be actively engaged in the debate.

Another Tax Gap Hearing

Another page was added in the ongoing search for a plan to close the so-called “Tax Gap” yesterday. The issue previously has been raised in the Senate Finance Committee, where Treasury officials and others have been questioned in hopes of discovering the best means of closing the gap between what taxpayers owe and what they pay.

Yesterday the Senate Budget Committee took its turn on the issue. The Committee held a hearing yesterday morning entitled, “The Growing Tax Gap and Strategies for Reducing It” and invited three experts, Robert McIntyre with the “tax happy” Citizens for Tax Justice, Michael Brostek with the Government Accounting Office, and S- CORP ally John Satagaj with the Small Business Legislative Counsel. Perhaps the most revealing moment of the hearing occurred when Mr. McIntyre observed that compliance would increase if the IRS engaged in “terrorizing people, ah, that’s the wrong word I suppose. Scaring people out of entering shelters is even better than catching them after they do it.”

Such an approach is a far cry from the dominant view just a few years ago that a more communicative, interactive, and technically nimble tax collection policy would be best. As former Vice President Al Gore and Treasury Secretary Robert Rubin penned in 1998, “For the past five years, this Administration has been committed not just to a fairer tax code, including cutting taxes for middle-class families, but also to fairer tax collection. Our philosophy is simple: the taxpayers don’t work for us, we work for them.”

The hearing itself was a sobering discussion of just how difficult it is to accurately collect taxes under our convoluted and arbitrary tax code. Mr. Satagaj neatly condensed S-CORP concerns about the Tax Gap effort into two sentences “ “Honest small business taxpayers are especially at risk of being subjected to needless and unwarranted regulatory burdens in an attempt to capture the few “bad actors” that do not fulfill their tax obligations. Small businesses already bear a disproportionate share of the cost of regulation.”

Beyond new regulatory burdens, John also reiterated our concerns about proposals to increase taxes - like the S corporation payroll tax - being promoted under the guise of reducing the tax gap. As John pointed out, “It is important that we reserve the label “Tax Gap” for only those proposals which are truly related to addressing the “Tax Gap.” We fear we will see various revenue offsets labeled as “Tax Gap” closers. In many cases, the revenue offsets alter long time policies upon which compliant taxpayers have fairly and honestly relied.”