A bipartisan employer tax credit proposed in the Senate is likely to create few jobs, and at an excessively high cost, according to a new economic analysis.
The tax credit at issue has been introduced by Sens. Chuck Schumer (D-N.Y.) and Orrin Hatch (R-Utah) that would offer a tax cut to businesses that hire a worker that had been without work for at least 60 days prior to employment. The businesses would avoid paying the employer’s share of Social Security taxes on that worker for the duration of 2010, according to Schumer’s summary of the proposal, which is called the “Hire Now Tax Cut.”
The Schumer-Hatch tax credit is part of the overall Senate jobs bill Senate Majority Leader Harry Reid (D-Nev.) unveiled last week.
“Congress must focus like a laser on job creation, and that’s what this proposal does,” says Schumer. “The plan is targeted, cost efficient for the taxpayer and highly effective for workers seeking employment. This bipartisan proposal will put people back to work right away and help create the only thing that will finally bring us out of this recession: Job growth.”
President Obama and congressional Democrats have vowed to focus much more intently on job creation in recent weeks, to attack the perniciously high unemployment rate that has bedeviled the U.S. economy despite last year’s massive $787 billion economic stimulus program. Polls indicate that jobs and the economy are the foremost issues for most Americans.
Well-designed employer tax credits can encourage significant job creation, and at an affordable cost per job. But the devil is in the details, according to an analysis of the Schumer-Hatch plan released by the Economic Policy Institute (EPI), a Washington think tank that focuses on the needs of low- and moderate-income Americans.
The Schumer-Hatch proposal has several questionable design details, according to the EPI analysis, authored by Timothy Bartik, a senior economist with W.E. Upjohn Institute. The problem with the proposal, Bartik says, is that its credits are awarded for hires, not net job creation by employers; the credits are limited to hires of persons unemployed at least 60 days; the credit rate is only 6.2 percent for the rest of 2010; and there is a modest retention bonus of $1,000 per new hire retained for a year, but little up-front cash to encourage job creation.
Awarding credits for hires can be very expensive. Over a one-year period, the number of hires, as a percentage of total private employment, is more than 40 percent even during a recession, Bartik says.
“To pay for hires that would have occurred anyway will be expensive and won’t necessarily increase total private-sector employment,” his analysis says. “The Schumer-Hatch design tries to avoid some of these large costs in several ways. First, credits are limited to hiring the unemployed, apply only to the rest of 2010, and are only worth 6.2% of the new hire’s payroll costs. The retention bonus is of modest size and is delayed. While these limits control costs, they also hamper the credit’s benefits.”
Limiting the credit to hiring someone unemployed at least 60 days makes the credit less attractive to employers, Bartik’s analysis says. Not only does the credit become more complicated to claim (which reduces its effectiveness), but it restricts the employer’s hiring to a more limited pool of workers, it adds.
Past experiences — for example, with the Targeted Jobs Tax Credit, the Work Opportunities Tax Credit, and the Welfare-to-Work Tax Credit — suggest that tax credits to encourage employers to hire disadvantaged workers usually elicit little employer interest, and have little effect upon employer behavior, Bartik’s analysis finds. Employers are happy to claim such credits if they happen to meet the credit’s rules, but they are reluctant to change their behavior in response to such targeted tax credits, it says.
Targeting particular groups of the unemployed is more effectively done through the workforce training system, Bartik says.
“This research comes from on-the-job training subsidies in federal workforce programs and welfare programs, and various local experiments, such as the MEED program in Minnesota,” his analysis says. “Local offices can recruit employer interest in such programs, match employers with disadvantaged workers who are suitable, and provide supports to increase job retention. Local offices can also monitor such programs to make sure that the subsidies do affect hiring decisions, and are being used to create permanent jobs for the unemployed.”
“MEED created thousands of jobs in Minnesota,” says Franken. “It has enormous potential to do the same on a national level. I urge the inclusion of this program into the Senate jobs creation package.”
Publisher of the news site On The Hill, Scott Nance has covered Congress and the federal government for more than a decade.