Starting Piecemeal with the Wrong Piece
Instead of tackling the massive jobs crisis head-on, with large-scale legislation that combines needed solutions on multiple fronts, the Senate appears to be adopting a piecemeal approach.
The most urgent immediate priorities should be extending jobless benefits and other safety net programs, and providing major fiscal relief to state and local governments. Those two pieces could be legislated separately if need be. But the Senate’s current plan starts with the wrong piece. And a not-so-good piece at that. The proposed tax break for employers that is the core of the Senate bill would likely have little impact on job-creation.
Dean Baker calls it ‘Money for Nothing’:
It’s great that the Senate is prepared to do something to help create jobs. Unfortunately, its most likely course of action, the Schumer-Hatch tax credit will probably create almost no jobs.
The basic deal with Schumer-Hatch is provide a tax credit equal to the 6.2 percent employer side of the Social Security tax. This credit would last for the rest of 2010. If the employee is kept on the payroll for a year, then the employer gets an additional $1,000. Only workers who have been unemployed for at least 60 days are eligible for the credit.
There are two basic problems with the credit. First, there are more than 4 million workers hired every month already. A firm could get the credit for any hires among these 4 million who has been unemployed for 60 days, even if they would have hired the person anyhow. This is a lot of money for nothing.
The second problem is that the credit is far too small to provide any significant incentive to hiring.
The New York Times, which called the bill “puny” and “pathetic”, wrote:
Most of the $15 billion would cover the cost of a payroll tax holiday in 2010 for employers that hire unemployed workers. Since there are more than six unemployed workers for every job opening, a tax break for hiring is worth a try. But the proposed credit is too small to have a noticeable impact. At best, it would create about 250,000 additional jobs from April through the end of the year, according to an analysis by Moody’s Economy.com.
An even bigger problem is that the hiring credit is unlikely to work as intended unless it’s paired with other federal support to generate and maintain consumer demand — mainly extended unemployment benefits and more fiscal aid to states. No matter what Congress does to lower the cost of labor, employers won’t hire unless they believe demand will be sufficient to sell whatever the business produces.
A detailed analysis by Timothy J. Bartik, senior economist with the W.E. Upjohn Institute, published last week by the Economic Policy Institute (EPI) warned “Not all job creation tax credits are created equal”:
Well-designed employer tax credits can encourage significant job creation, and at an affordable cost per job. But the devil is in the details. The employer tax credit in the Senate’s “jobs bill” is likely to create few jobs, and at an excessively high cost.
The Senate’s employer tax credit is based on a design proposed by Senators Chuck Schumer and Orrin Hatch. The Schumer-Hatch proposal has several questionable design details: (1) credits are awarded for hires, not net job creation by employers; (2) the credits are limited to hires of persons unemployed at least 60 days; (3) the credit rate is only 6.2% for the rest of 2010; and (4) 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.
Are there alternative employer tax credits to the Schumer-Hatch approach that would be more effective in creating jobs? Yes, there are a number of good alternatives, including the proposal made by President Obama, proposals made by Senators Robert Casey and Russ Feingold, and Congressman Bob Etheridge, and finally the proposal that we developed for EPI. These better proposals have the following features:
They provide incentives that are tied to whether the employer expands employment and payroll, not simply on whether the employer is hiring. Net employment and payroll expansion is what we want to reward, not simply hiring and keeping the number of employees the same.
They focus simply on employment and payroll expansion, not who is hired, which is more complicated to administer and monitor and reduces employer interest in a tax credit.
They are large enough that it is more plausible that the credit will significantly change employer behavior, rather than simply being claimed for a hire that would have been undertaken anyway.
They provide sufficient immediate assistance that the credit can boost job creation with those employers concerned about cash-flow.
If we want to effectively encourage job growth through a tax credit, we need a program that tightly targets that goal with a large enough credit to significantly affect employer’s hiring decisions. And if we want to effectively target who gets hired, we need to run such efforts through the workforce system, which can perform the required matching, monitoring, and support.
The jobs-creation tax credit plan proposed by EPI would meet all those requirements, and would really help create jobs — lots of them.
According to our estimates, a tax credit for firms equal to 15% of expanded payroll costs would lead them to hire an additional 2.8 million employees next year. Such a credit would have to be:
1. Wide-ranging. The tax credit should be designed to stimulate a wide range of jobs across economic sectors and across all kinds of firms, regardless of size or current profitability.
2. Temporary. It should be of limited duration to encourage job creation when the labor market is weakest and to limit the cost to the treasury.
3. Large. It should be large enough so that it will lead firms to hire new employees and cause a significant number of jobs to be created economy-wide.
4. Efficient. The tax credit should target new job creation as much as possible and not simply be a handout to businesses.
In line with these principles, we suggest a broad-based refundable tax credit for employers that expand their workforce in 2010 and 2011. In the first year the credit would be equal to 15% of the net increase in that portion of a firm’s payroll subject to Social Security taxes. In the second year the credit would drop to 10%. The reduction in the second year would encourage firms to hire sooner rather than later and would provide a significant incentive for expanded employment.
By basing the credit on total Social Security payroll taxes, it would also reward expansion of work hours as well as employment. And basing it on that portion of wages subject to Social Security payroll taxes ensures that the credit does not apply to wages increases for very high wage earners.
EPI’s job-creation tax credit is the fifth component of their American Jobs Plan, the basis of the five-point plan supported by the AFL-CIO and its Jobs for America Now coalition partners. In the interest of saving the Senate a lot of extra work, perhaps it should simply adopt this entirely workable jobs plan — piecemeal if the Senate insists.
At least we’d get all the right pieces.
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