By Lori Montgomery
Washington Post Staff Writer
Friday, February 2, 2007; D01

The Senate voted overwhelmingly yesterday to increase the federal minimum wage for the first time in nearly a decade, but added small-business tax breaks that are unacceptable to House leaders, preventing Democrats from claiming a quick victory on one of their top legislative priorities.

The Senate voted 94 to 3 in favor of the measure, which would raise the minimum wage to $7.25 an hour from $5.15 over two years.

To attract Republican support, Senate leaders agreed to extend tax credits and expand deductions for businesses that would be hit hardest by the minimum-wage increase. Those tax breaks, worth $8.3 billion over 10 years, are coupled with a proposal to raise taxes by a similar amount on corporations, their chief executives and other highly paid workers.

Senate Republicans praised the measure as a responsible package that would help workers who earn the minimum wage and the businesses that employ them. They implored House leaders to accept the compromise and send it to President Bush, who put out a statement yesterday praising the Senate bill.

"I want to reiterate our hope that the House will not derail this bipartisan approach," said Sen. Mike Enzi (R-Wyo.) "Middle-class relief is in their hands."

Democrats were less effusive. After the vote, presidential candidates Hillary Rodham Clinton (D-N.Y.) and Barack Obama (D-Ill.) lined up at a news conference with the bill's sponsor, Sen. Edward M. Kennedy (D-Mass.), and bemoaned the complications. Earlier, Majority Leader Harry Reid (D-Nev.) said he would prefer to pass a minimum-wage increase without "all these business pieces of sugar."

The Senate action sets the stage for potentially lengthy negotiations between the two chambers, as the new Democratic majority works through one of its first significant tests. After winning control of Congress in a campaign that emphasized middle-class anxiety and corporate greed, Democrats pushed the minimum wage to the top of their agenda, noting that it had fallen to its lowest value, when adjusted for inflation, in more than 50 years.

The House quickly approved the measure after just a few hours of debate. But the Senate took days, tacking on an amendment to ban companies that hire illegal immigrants from receiving government contracts for 10 years in addition to the tax package.

As approved by the Senate, the bill would extend several business tax deductions and credits, including one that allows small businesses to accelerate deductions for new purchases. It would extend for five years a tax credit for employers who hire welfare recipients and "high-risk youth" and expand the provision to include disabled military veterans.

To cover the costs of those provisions, the bill would close loopholes used by corporations that do business overseas and increase penalties for tax evasion. It would also place new restrictions on one of the most popular perquisites in corporate America by forbidding executives from deferring more than $1 million in pay every year and placing the money in tax-deferred accounts. Anyone who exceeded the allowable amount would be forced to pay taxes on all income deferred since Dec. 31, 2006, plus a 20 percent penalty.

House leaders have demanded that the tax measures be stripped from the bill. They argue that business needs no additional help after six years of breaks from the Bush administration and that, in any case, procedural rules require revenue bills to originate in the House.

That power is particularly important this year, because House Democrats have vowed to offset tax cuts and some spending increases with spending cuts or tax increases of equal value. Rep. Charles B. Rangel (D-N.Y.), chairman of the tax-writing House Ways and Means Committee, said he may have other plans for the $8.3 billion that the Senate would use for business tax breaks.

Yesterday, it was unclear how Democrats would proceed. Reid predicted that the differences would be worked out by a conference committee. "The minimum wage will be increased," he said.