Background

In 1977, the Carter Administration signed the New Jobs Tax Credit (NJTC), one of four programs of the 1977 economic stimulus package, into law.  The NJCT provided federal wage subsidies for two years, from 1977-1978, to companies that hired new workers.  During the two years of the program, one-in-three new jobs received the tax credit at an estimated cost of $4 billion annually.  Despite the high number of credit recipients, the actual impact of the NJCT has been the topic of contentious debate.  During that period the unemployment rate dropped by 1.5 percent.  However, the decline in unemployment was short-lived and the NJTC ultimately failed to curb unemployment in the long run.  Two years later, in 1979, the unemployment rate began to increase rapidly (perhaps as a result of the loss of federally subsidized jobs).  Emil Sunley, the Deputy Assistant Secretary for Tax Analysis at the Carter Administration's Treasury Department said in 1980 that, "The impact of the credit on jobs was slight."  Likewise, Howard Gleckman of the Urban-Brookings Tax Policy Center said of a similar subsidy proposed last year, "tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs."

The Carter Credit Revisited 

According to one estimate from the Upjohn Institute for Employment Research, creating an equivalent program to the 1977 NJTC in today's dollars would create a subsidy of a little over $7,000 per job and cost $26 billion.  On Thursday, January 28, the President announced a new Small Business Jobs and Wages Tax Cut which would give small businesses a $5,000 tax credit for every new employee that they hire in 2010.  In addition, small businesses that increase wages or hours for their existing employees would be reimbursed for the Social Security payroll taxes they pay on real increases in their payrolls in 2010, though it is not clear how the reimbursement would be distributed.  During the debate on the Democrat "stimulus" bill last year, the President proposed a $3,000-per-job tax credit.  However, it was reported that Congressional Democrats persuaded Obama to shelve the idea because they feared that companies would abuse the tax credit to receive the benefit without increasing employment.

Issues of Concern

A number of concerns have been raised with the proposal, including:

Market Distortion:  The program may only move up the timeline for demand for labor.  The subsidy could have the effect of compelling companies to hire massive amounts of employees during the program, and either fire those employees after the program expires or freeze hiring, which could make the long-term economic outlook much worse.

Who Qualifies?:  There are administrative questions as to how to measure who receives the tax credit (i.e., what constitutes new or incremental employment) and how it is distributed.  Some have suggested that businesses could easily game the system to receive a benefit without actually increasing employment.  For instance, without proper guidelines and oversight, an employer could fire and hire the small employee as a new worker or split one position into two.  And the program would be administered by the same Administration that has had abandoned its confusing and misleading stimulus methodology of jobs "saved or created."

Not Long-Term, Pro-Growth:  Unlike many of the proposals in the Republican "stimulus" alternative, this sort of jobs tax credit is a temporary wage subsidy and not a true drop in the federal tax burden.  Many Members may believe that long-term tax relief (such as lowering tax rates) is a more effective way to spur long-term economic growth and employment.