A Tax Credit? No Thanks

Proposals to reward employers for creating jobs are winning few fans in Corporate America.
Russ BanhamDecember 1, 2009

With more than 100,000 full- and part-time workers on his payroll, Costco Wholesale Corp. CFO Richard Galanti isn’t opposed to a jobs tax credit that would offset a portion of new employees’ salaries. But would he hire more people just to receive such a credit? Probably not.

“Why would we hire someone for a hundred dollars to get a couple of dollars back?” he says. “We hire based on need, which is driven by demand and other market factors. If we were planning to hire six months from now, a tax credit might encourage us to do it sooner, but we would have hired anyway.”

That seems to be the consensus among CFOs, but it hasn’t stopped politicians and think tanks from considering a variety of jobs-creation tax-credit schemes as unemployment rises above 10%.

During the recession of the late 1970s, a jobs tax credit was enacted and ultimately claimed by more than a million companies. They hired 2.1 million workers, of which 700,000 were directly attributable to the tax credit, according to a 1979 study by American Economic Review. Yet many economists argued, after the fact, that the credit was unnecessary. “The question is, Would the companies that received the credit have hired anyway?” says Peter Peyser, managing principal at lobbying firm Blank Rome Government Relations. “If that’s the case — and there was an honest debate about that — then they reaped a reward for no reason.”

No one disputes that job loss is an issue: in the past two years the U.S. economy has lost 8 million jobs, the unemployment rate has reached a 26-year high, and, according to the Economic Policy Institute (EPI), it will take at least 29 months of job creation above 500,000 jobs per month to regain pre-recession levels.

Several tax-credit proposals are currently under scrutiny by a bipartisan panel headed by former Federal Reserve chairman Paul Volcker. One, being floated by the Administration, is intended to complement a WPA-style program to rebuild the nation’s crumbling infrastructure. President Obama is hoping the tax break will nudge companies on the verge of hiring to take the plunge. “The government is saying that it will share the initial investment in more workers,” Peyser explains, “but it will leave the hiring up to employers. If it isn’t economical for a company to hire, one presumes they will not make a foolish decision.”

That means credit dollars may well flow to companies that would have hired anyway. “A government tax credit is not going to cause us or anybody else to hire if we’re not planning to hire,” says Roger Shannon, CFO and treasurer of privately held Steel Technologies Inc., a steel processor with 25 manufacturing facilities in the United States, Canada, and Mexico. “If we did get the credit, that would be nice — we’d take the money. But I don’t see this as good policy. We’d just be contributing further to the massive federal deficit.”

Senior executives, consultants, and academics may have serious doubts, but there is one constituency that is all for a jobs-creation tax credit: taxpayers. A September poll finds the public enthusiastically embracing the idea (see “Main Street Loves It” at the end of this article).

Prepare for Demand, or Wait for It?

EPI, which unveiled its version of a jobs tax credit in October, claims the credit will result in the creation of 2.8 million jobs in 2010 alone. Under the two-year plan, companies would receive a 2010 tax credit per new hire equal to 15% of the net increase in the portion of their payroll subject to Social Security taxes. In 2011, this credit would fall to 10%. The proposal’s authors stated that the plan “would encourage firms to hire sooner rather than later, and would provide a significant incentive for expanded employment.”

EPI estimates that the program would have a net revenue cost of $28 billion in the first year and $26 billion in the second. Offsetting that would be reductions in spending on unemployment benefits and other safety-net programs, totaling $15 billion in the first year and $12 billion in the second.

That leaves a sizable gap at a time when the federal deficit is a staggering $1.42 trillion. More problematic is whether or not a tax credit will succeed in its intent, spurring job creation. “Organizations whose financial results have improved and are now poised to increase hiring are going to do it irrespective of a federal stimulus bill,” contends Laura Sejen, global practice director at consultancy Watson Wyatt Worldwide. “And those whose results haven’t improved won’t see the tax credit as sufficient enough to begin hiring.”

Tim Bartik, a senior economist at the Upjohn Institute for Employment Research and a co-author of the EPI proposal, counters that “there is an in-between category of companies that may be uncertain whether they can sell more goods and services if it requires them to hire someone at $50,000, but may decide it makes sense if they can lower the cost of the hire to $42,500.”

Bartik also points to the cash-flow boost a tax credit could provide. “We’ve designed it to pay quarterly,” he says, “which can obviate cash-flow concerns. And since employees are typically less productive at the time of hire than they are six months on, this can allow companies to hire them sooner and have them be more productive when demand picks up.”

But even as Bartik argues for the benefits of hiring now to meet demand later, others say that the reverse is more sensible. “There needs to be an underlying trigger — an increase in demand,” says Jason Jeffay, principal and global talent management leader at consultancy Mercer, “to compel the decision to hire. Unless the broader economy rebounds faster than it currently is, I wouldn’t expect [a tax credit] to have a big effect on employment.”

“Many companies are beating Wall Street’s expectations by holding their costs in line,” adds Jeff Burchill, CFO of insurer FM Global. “Building the top line remains the problem. Without an increase in demand for products and services, I find it hard to see companies creating jobs.”

Even if the credit encouraged a spike in employment, some argue it would be temporary at best. “Once it runs out after two years, will there be enough incentive to keep new hires on?” questions Peter Zaleski, an economics professor at Villanova University. “It’s ‘Cash for Clunkers’ all over again.”

Rather than a tax credit to create jobs, Zaleski says the federal government should seek to give U.S. companies relief from regulatory and tax burdens that impede employment. “If you look at payroll taxes, Medicare and Social Security alone account for a 15% differential between what a company pays and what a worker takes home,” he says. “Add to that federal and state unemployment taxes and administrative costs. Then throw in income taxes. If we want to see a real lasting bump in employment, the differential between the employer’s costs and the employee’s pay needs to shrink. We need real tax policy, not a jobs tax credit that is temporary at best.”

On November 6, President Obama said he had asked his economic advisers for additional ideas on how to create jobs quickly.

Russ Banham is a contributing editor of CFO.

Main Street Loves It

The public overwhelmingly supports a jobs-creation tax credit.*

87% — Major jobs-creation tax credit for companies
81% — Extend unemployment-insurance benefits
71% — Put unemployed people to work at government-funded public-service jobs
63% — Tax rebates for lower- and middle-income households
46% — Federal funds to prevent state/local government layoffs

*Percent equals number of respondents that strongly or somewhat favor various stimulus proposals.

Source: Hart Research/EPI (September 2009)