How to cut unemployment: tax credit for employers who hire?

The last time the US gave business a tax credit to hire workers was 1977 when Congress became frustrated over the stubbornly high 6.4 percent unemployment rate.

Now, with the nation’s unemployment rate nearing 10 percent, there are reports that Congress might try a revamped version of what was then called the New Jobs Tax Credit (NJTC).

One version of such a tax credit is being prepared by economists at the Economic Policy Institute (EPI), a labor-friendly think tank in Washington, where Jared Bernstein, Vice President Biden’s economic advisor, sat for many years.

This version would give a two-year tax credit that is refundable against payroll taxes so that non-profits, corporations, and even public employers would get the credit, says Ross Eisenbrey, a vice president at EPI. He says the authors of the EPI proposal calculate that the tax credit would create 2 million to 3 million jobs.

“Obviously, the goal is to create as many jobs as possible,” says Mr. Eisenbrey. “We are still working on the cost per job.”

New Jersey has enacted a version of this tax credit, giving employers a $3,000 grant for each new full-time job created and maintained in the state.

“They set aside $50 million and it was used up very quickly,” says Eisenbrey.

Better than stimulus spending?

Translating the concept into a national program could be more difficult. According to a Congressional Budget Office (CBO) analysis, such a program would certainly help workers learn skills that are readily transferable to unsubsidized jobs. Also, there would be no need for a new government administrative agency.

But unless business believes there is demand for its products, it is not likely to use the credit, says the CBO. And since the credit is only temporary, business might decide not to add permanent overheads.

Ted Gayer, a fellow at the Brookings Institution, favors a tax credit because he is skeptical about the government’s ability to push stimulus spending in the right places. “The employment tax credit just goes into the labor market,” he says, adding that it lowers company’s wage structure to make them more competitive.

But if the tax break is given only to companies that hire new workers, it could create distortions in the competitive marketplace, he says. New firms might have an advantage over older companies, or companies may trade workers to get the tax credit.

And as Congress begins to discuss the issue, some firms might hold off on hiring.

“Timing matters,” says Mr. Gayer. “The more you dither, then people will wait on the sidelines and not hire now. You want it to be immediate and you want it to go a set length.”

Gayer worries the program might get extended like the “Cash for Clunkers” scheme, quoting Milton Friedman: ‘There is nothing as permanent as a temporary government program.’”

How the 1977 program fared

It's unclear what the program would cost in revenue losses to the government. According to a Congressional Research Service report in January, the government's revenue loss for the 1977 program was about $5.7 billion.

The program “was faulted for its complexity among other things,” wrote report author Linda Levine.

That complexity resulted from an effort to prevent companies that were going to hire workers anyway from getting the tax credit, recalls Jeffrey Perloff, a professor at the University of California, Berkeley and co-author of a study on the NJTC.

His study concluded that firms that knew about the program hired 3 percent more workers than those who didn’t know about it. But most firms either didn’t know about the program or didn’t use it, the study said.

Looking back, it’s hard to say what the cost per job was, says Mr. Perloff. “If you subsidize jobs you are more likely to get more jobs, but the question is how many more will you get?”

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