Job creation tax credit
The fifth and final component of the American Jobs Plan is a tax credit for new job creation deployed over the next two years. 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.
To ensure that the credit is most effective at stimulating new hiring and to ease implementation, the credit would be calculated as a percentage of the increment to firms’ Social Security payroll tax expenses over a base amount. We suggest using firms’ payrolls in the four quarters prior to enactment (adjusted for inflation) and calculating the tax credit based on the incremental increase in the expenses for payroll taxes paid. Employers already report Social Security and Medicare payroll taxes each quarter on IRS Form 941; adding a few lines to the form would allow a wage credit to be implemented relatively simply. The credit would be refundable, so even firms that are not profitable (and thus have no tax liability) would benefit. It would also be provided quarterly so it would help firms’ cash flow immediately after hiring.
The credit should be broad-based, extended to all private firms, nonprofit organizations, and state and local governments.
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.
The job creation tax credit as outlined above would have a significant impact on job creation. Using estimates of how wage costs influence employer hiring, we find that the credit would lead to the creation of 1.4 to 2.8 million new jobs in the first year and slightly less in the following year as the tax credit is reduced.
The cost of the program is relatively modest. The initial revenue loss would immediately be limited due to offsetting increases in revenue from corporate tax receipts and individual tax payments. We estimate the gross revenue cost to be between $71 billion and $80 billion in the first year and between $62 billion and $67 billion in the second. However, the total cost to the government would be significantly less, since greater employment also means less spending on social safety net programs like unemployment insurance, health care, and nutrition assistance, and because some revenue would be recouped through higher corporate receipts. When these savings are included, we estimate a total cost of between $13 billion and $37 billion in the first year and between $14 billion and $36 billion in the second.
All told, the job creation tax credit would be a cost-effective way to create jobs. Factoring in the revenue loss from jobs that would have been created anyway, the cost would be between $4,700 and $26,300 per net new job created in the first year. This compares favorably to other means of generating jobs and is certainly more favorable than other business tax breaks, which typically have a low “bang-for-the buck” in terms of job creation.
To encourage employers to expand their workforces, we recommend a refundable tax credit, worth 15% of expanded payroll in the first year and 10% in the second, for businesses, nonprofits, and state and local governments that enlarge their payrolls through hiring, adding hours, or increasing wages.
Further Reading: The Job Creation Tax Credit
The Job Creation Tax Credit–Dismal projections for employment call for a quick, efficient, and effective response by Timothy Bartik and John Bishop (Oct. 20, 2009 / Briefing Paper #248)
Complementing Recovery Policies With a Jobs Creation Tax Credit (by Timothy Bartik and John Bishop (Oct. 20, 2009 / Policy Memo #250)