Congress should move swiftly on the proposal to offer a tax credit for companies that create new jobs.
The idea is gaining steam on Capitol Hill, according to the New York Times. It would not be the first time a federal tax credit tied to job creation was instituted. In the 1970s, a federal tax credit was responsible for about 700,000 new jobs, a study by the American Economic Review concluded.
A federal credit could be even more effective now, since hiring was already on the upswing when the last credit was instituted.
Proponents say there are ways to improve on the last tax-credit program. Those include better publicizing the program; making it available even to concerns that are not making money in the form of a direct payout to nonprofits or companies in the red; and distributing the credit quarterly so companies can receive it sooner.
In the first year, the credit would equal 15.3 percent of the cost of adding an employee. In the second year, it would fall to about 10.2 percent.
For example, according to the New York Times, hiring a worker might cost a small business $50,000 annually. But with the tax credit, the cost would fall to $42,350 in the first year, and then be $44,900 the next year. After that, the cost would return to $50,000.
The credit would apply only to the portion of an employee’s salary under $106,800.
Lowering the cap further, however, could provide an even greater benefit to low-wage, unskilled workers. The authors, Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research and John H. Bishop of Cornell, estimate their proposal could create more than two million jobs in the first year.
A proposal from the Obama administration, considered as part of the stimulus package, was killed because of concerns that employers would exploit the tax credit. For example, companies might close and reopen, claiming credit for all their “new” employees.
The possibility of employers and their lawyers taking advantage of loopholes shouldn’t deter proponents from moving the idea through Congress.
Stringent rules, including the possibility of reducing the credit for “new” companies, or requiring a company’s overall wage bill to rise along with its work force, could minimize abuse.
There are legitimate drawbacks that need to be addressed, including an analysis of how the tax credit would affect the federal deficit and whether it would be politically feasible for Congress to phase it out once businesses have grown used to it.
Interestingly enough, according to the Times, the biggest fear among some is that the proposal might unintentionally reduce job opportunities if it sits in Washington too long without passing.
“Particularly for big employers, if they think a job creation tax credit is in the offing, it could certainly be an incentive to delay hiring,” said Lee E. Ohanian, an economics professor at the University of California, Los Angeles told the Times. “That means it could have the perverse effect of actually prolonging the recession.”
With that in mind, Congress could make the credit retroactive, allowing companies that create jobs a certain time before the final passage eligible for the benefit.
In any event, developing a workable federal tax credit for job creation should be a priority in Washington.
