Jump-Starting Jobs: State Lawmakers Are Hoping Tax Credits Will Get Small Businesses Hiring

By Martel, Luke | State Legislatures, January 2011 | Go to article overview

Jump-Starting Jobs: State Lawmakers Are Hoping Tax Credits Will Get Small Businesses Hiring


Martel, Luke, State Legislatures


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"We weren't going to become the center of innovation by having an economic development strategy that focused on luring one big box store at a time. Instead, we focused on supporting the human talent that we already have and investing in entrepreneurs."

--CONNECTICUT MAJORITY LEADER DENISE MERRILL

The recession ended 18 months ago, but you wouldn't know it by looking at the jobless numbers. The national unemployment rate is nearly 10 percent, and a handful of states are facing jobless rates of 12 percent or higher.

"We're not Europe," says economist William Strauss of the Federal Reserve Bank of Chicago. "We're not comfortable being in this position."

Across the nation, economists agree that job creation is the key component to a sustained economic recovery. And there's the obvious benefit to state economies from more workers--but the stakes are even higher.

Job creation can be costly--either in direct expenditures to companies for creating jobs or foregone revenues from tax credits--so passing any legislation with a price tag is challenging in an era of scarce fiscal resources. And is it a good return on investment?

The hope that the return exceeds the investments has led to support for new programs, especially job creation tax credits for businesses. Employers receive these credits when they create and fill a new job, so the programs offer tangible benefits. States also expect that the return--in terms of the new employee's income taxes and renewed spending--will at least meet or exceed what the state loses in revenue directed to the credits.

The tax credit programs differ, but they all provide a tax benefit to an employer for hiring someone in a newly created position. Other features can include the following:

* The employer must hire someone who is, or has been, drawing unemployment benefits.

* The position is full time, pays a specified minimum amount, and lasts for a specified time, such as a year.

* The employer is a small business.

* The business is in a targeted industry.

These job creation tax credits are intended to help businesses regardless of how they are legally formed, so many of the credits apply to personal as well as corporate income taxes. Finally, some states have placed caps on the annual amount of credit available.

DO THEY WORK?

Some lawmakers are concerned employers might claim a tax credit for already planned hiring, rather than having the credits directly induce hiring. This can be difficult to assess.

It's important to remember that tax credits are preferences in the tax code aimed to spur some type of economic activity that would not have occurred--or would have occurred to a lesser degree--without them. That leads to the million dollar question: Do tax credits make a meaningful difference in creating new jobs?

"History suggests job creation tax credits don't work well," says David Wyss, chief economist at Standard & Poor's. "It's very hard to figure out what's a new job."

Job creation tax credits "tend to be passed at the beginning of the recovery, and many of these jobs would have been created anyway," he says.

Wyss says job creation tax credits that narrowly define the jobs they cover are more likely to work. "When trying to attract an industry into a region, when aiming at manufacturing jobs as opposed to service jobs, then these credits are a bit more successful. But unfortunately, it can take a long time to create the jobs."

Whether such tax credits are successful at generating new jobs--and whether they do so in a cost-effective manner--are important concerns.

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