Throw tax cuts and job creation together, and you are likely to get a bevy of supporters in Washington on both sides of the political divide. Yet President Obama's proposal to give companies an Uncle Sam rebate for hiring workers has been anything but a slam dunk. The idea, which Obama proposed last year, was dropped from a House of Representatives jobs bill. A similar measure has been proposed but not yet passed in the Senate.
But Obama is not giving up on the idea. On Friday, Jan. 29, at an event in Baltimore, he fleshed out his idea for a job-creation tax credit, saying it would induce companies to hire workers. Under the Obama plan, businesses would reportedly get a $5,000 tax credit to offset payroll taxes for each new employee. Companies would be eligible for a tax break if they raised salaries for current workers or increased employee hours. While the tax credit is open to companies of any size, the maximum tax benefit an individual firm can receive is $500,000. Obama believes limiting the credit means that more of the benefit will go to smaller businesses. Administration officials said the Obama plan would cost $33 billion. The hiring rebate was one of a number of tax cuts the President proposed in his State of the Union address earlier in the week. In that speech, Obama predicted the tax credit would be tapped by more than "1 million small businesses who hire new workers or raise wages."
At issue, though, is how many companies would actually deserve the tax credit. Nearly 12 months after Congress passed the $787 billion stimulus bill, and in the wake of a homebuyer tax credit and Cash for Clunkers, economists and others are paying more attention to the collateral cost of stimulus. The question with this proposal is how many of the million companies that Obama predicts would be awarded a job-creation tax credit would have hired workers anyway.
"It sounds good because it's for small businesses and job creation," says economist Dean Baker of the liberal-leaning Center for Economic and Policy Research. "But basically, you are paying companies to hire workers that would have been hired even if you hadn't handed out tax breaks."
Just how many companies would get the tax credit undeservedly is up for debate. If the Cash for Clunkers program or the homebuyers' tax credit is any guide, the number would be relatively high. Car-research firm Edmunds estimates that just 18% of the nearly 700,000 automobiles that were bought through the Cash for Clunkers program were a result of the stimulus. The rest, 82%, went to people who would have gotten new wheels anyway. The $8,000 homebuyer tax credit did a little better. In that instance, economists estimate that 33% of the 1.4 million people who collected the credit bought a home because of the government assistance.
Even those who support the tax credit say that, as with those earlier programs, the percentage of companies collecting the tax break who are hiring because of the job stimulus will be very low. John Bishop, who teaches about human resources at Cornell University and has proposed a job-creation tax-credit plan, says about 80% of any tax credit for new hires would go to companies that would have added workers anyway.
Even so, Bishop says, the plan makes sense. According to estimates from the Economic Policy Institute, which Bishop worked with to produce his own job-creation tax-credit program, a 15% tax break for new hires, which is more generous than what Obama is proposing, would lead companies to add 2.8 million more workers this year than they would have without the tax break. The EPI says that plan could cost as much as $37 billion, or about $26,000 per stimulated hire.
Bishop says this means a job-creation tax credit, judged in the context of billion-dollar stimulus plans, is pretty cheap for its results. He says other stimulus ideas can cost as much as $200,000 per job created. A recent study from the Congressional Budget Office found that a job-creation tax credit could be a more efficient way of stimulating the economy than either individual tax credits or infrastructure spending.
"By the standards of the stimulus spent in the past year, this has a distinct advantage of being targeted to exactly what we want to do," says Vincent Reinhart, a senior fellow at the conservative American Enterprise Institute who has opposed many of the stimulus programs of the past year. "A job-creation tax credit is relatively efficient and can be spent quicker. You don't have to plan a bridge in order to get the stimulus dollars out there."