By Lori Montgomery
Washington Post Staff Writer
Saturday, February 17, 2007; D01

The House yesterday overwhelmingly approved a modest package of tax breaks for restaurants and small businesses, moving Congress one step closer to approving the first increase in the federal minimum wage in nearly a decade.

On a vote of 360 to 45, the House agreed to extend and expand credits and deductions to save taxpayers $1.3 billion over 10 years. It would adjust the tax code to increase collections by a similar amount. The measure would also guarantee that restaurant owners could keep a tax credit worth an estimated $500 million over 10 years.

The measure now moves to the Senate, which passed a far more generous $8.3 billion tax package this month under pressure from Republicans who refused to support a higher minimum wage unless it included tax relief for small businesses. Leaders in both chambers were optimistic yesterday that their differences could be resolved after Congress returns at the end of the month from its first break of the session.

"The House tax relief package aimed at the small businesses most affected by the increase in the minimum wage is a good first step, but we can do much better," Senate Minority Leader Mitch McConnell (R-Ky.) said in a written statement. "While I support the more robust Senate package, I know we can create a stronger bipartisan package that provides meaningful benefits to both those who earn the minimum wage and those who pay it."

Both chambers have agreed to raise the minimum wage to $7.25 an hour, from $5.15, over two years. The minimum wage now is the lowest in 50 years when adjusted for inflation, and a raise for the nation's lowest-paid workers is among the top priorities of the new Democratic congressional majority.

At first, House leaders insisted that the Senate approve the minimum-wage increase without adding small-business tax breaks. But that push failed in the Senate, and House leaders quickly reconsidered their position. Leadership aides were uncertain yesterday whether negotiations over the tax packages would take place in a conference committee or by some other method.

The two packages offer similar forms of tax relief, though the Senate bill is far more generous. For example, both packages would extend tax credits for employers who hire former welfare recipients, at-risk youth and other targeted groups, as well as a law that allows small businesses to quickly deduct $112,000 for equipment purchases. However, the House bill would raise the deduction amount to $125,000. And both packages contain specific breaks for restaurants, which employ a large number of the nation's minimum-wage workers.

The bigger difference is in how the each chamber would pay for the tax breaks. The House would close a loophole that permits wealthy taxpayers to shelter income by shifting it to their children. It would also create an accounting gimmick that would get more money from businesses with assets of more than $1 billion in 2012 and then reduce their taxes by the same amount in 2013.

The Senate package, in contrast, squarely targets corporations, executives and other highly paid workers by closing tax shelters, eliminating the deduction for fines and penalties paid in connection with lawsuits and barring executives from placing more than $1 million a year in deferred compensation plans.

Business lobbyists have already chosen sides, with the National Federation of Independent Business and small-business groups supporting the Senate package. The U.S. Chamber of Commerce, meanwhile, is lobbying for the House bill in hopes of killing Senate provisions that it finds objectionable, including the limit on deferred compensation, one of the most popular perks in corporate America.