PRESS RELEASE: Statement by Tim Bartik, Senior Economist, Upjohn Institute, on President Obama’s Proposed “Small Business Jobs and Wages Tax Cut”

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PRESS RELEASE: For Immediate Release

CONTACT: Timothy J Bartik at bartik@upjohn.org or 269-343-5541.

January 29, 2010

President's Proposed Jobs Tax Cut a Cost-Effective Way to Spur Job Creation, Upjohn Economist Says

Proposal Will Spawn 1 Million Jobs at a Cost of $30,000 per, According to Jobs Expert Timothy J. Bartik

KALAMAZOO, Mich.—Today, President Obama is announcing a proposal for a Small Business Jobs and Wages Tax Cut. The details of this proposal were outlined last night on the White House Web site. (See http://www.whitehouse.gov/the-press-office/president-obama-propose-new-small-business-jobs-and-wages-tax-cut.)

For many years, Upjohn Institute economist Tim Bartik's research has examined the history, effects, and potential of tax credits to encourage employer job creation. This includes his 2001 book, Jobs for the Poor: Can Labor Demand Policies Help? This book argued that during a national recession, a revival of the New Jobs Tax Credit, used during 1977-78 to encourage employers to expand, could create 1 to 2 million jobs. More recently, Bartik, with John Bishop of Cornell, developed a proposal for a Job Creation Tax Credit, which was published by the Economic Policy Institute in October 2009. (See http://www.epi.org/publications/entry/bp248/.) He has also recently conducted a survey of Kalamazoo businesses, in conjunction with the Kalamazoo Regional Chamber of Commerce, that indicates such tax credits can make a significant difference in employment. (See http://www.upjohn.org/jctcqanda.html.)

"Based on this research," Bartik says, "I believe that President Obama's proposal is a well-thought-out plan that will significantly spur job creation at an affordable price. If Congress quickly adopts this proposal, it will not solve the United States' current employment crisis, but it will make a significant dent in our employment problems.

"I estimate conservatively that President Obama's proposal will create at least 1 million jobs, and could create many more. The cost per job created is likely to be less than $30,000, which is less than one-third of most conventional fiscal stimulus measures."

Some of the important points about this proposal that are likely to make it effective, Bartik believes, include the following:

The program rewards employers that expand employment, rather than just make new hires. After all, the aim is to provide incentives for expanding employment, not for employers to replace current workers with new hires.

The program is of sufficient size that it will motivate employers to expand employment. If an employer adds an employee who is paid $50,000, the employer will receive a tax credit in 2010 of $8,100.

The program is simple, so employers are more likely to claim the credit and incorporate it into their planning. This tax cut is claimed as part of the normal business process of paying various business taxes.

The tax cut is paid out quarterly, so it helps improve the cash flow of businesses. Improved cash flow makes it easier for small businesses to respond to this targeted business tax cut.

The tax cut includes employers that are unprofitable, or that are nonprofit employers. Having the credit claimed by employers as they pay their regular quarterly withholding taxes means it will include a broad range of employers and increase the job creation potential.

The program is designed so that it is targeted at small businesses. While this limits the potential of the program to encourage employment expansion in large businesses, small businesses are likely to be particularly responsive to such targeted tax cuts. The cash flow advantages of such tax credits are particularly important for small businesses.

Although this tax cut encourages the creation of jobs in all income brackets, the incentives for job creation are greater for jobs that will be accessible to middle-income and working-class groups. This is done by capping the wages that receive a payroll tax credit, and by providing an additional $5,000 tax cut for all created jobs.

Limiting the tax-cut proposal to jobs created in 2010 may encourage employers to move some employment creation from 2011 into 2010. The employer survey Bartik conducted in late 2009 suggested that it is the employers planning to expand later that are most likely to be responsive to such job creation measures.

The Job Creation Tax Credit that Bishop and Bartik proposed was a two-year proposal, and was estimated to have a gross cost per job created of about $28,000 in 2010 and $30,000 in 2011. These estimated costs per job created are consistent with the New Jobs Tax Credit of 1977-78, which is estimated to have created over 700,000 jobs.

The Small Business Jobs and Wages Tax Cut President Obama is proposing is likely to be at least as cost-effective as the JCTC, Bartik believes. Arguing in favor of its cost-effectiveness are the targeting of small business, the greater percentage tax cut for creation of average-wage jobs, and the limiting of the program to the year 2010, which will encourage employers to expand now.

At a cost of less than $30,000 per job created, the Small Business Jobs and Wages Tax Cut is likely to be considerably more cost-effective than conventional fiscal stimulus programs, which indirectly boost job creation by boosting demand for goods and services. For example, the $787 billion fiscal stimulus passed in early 2009 is estimated to have a gross cost per job created of $112,000. (See the May 2009 Report from the Council of Economic Advisers, at http://www.whitehouse.gov/administration/eop/cea/Estimate-of-Job-Creation/.)

It should be noted that tax cuts for job creation do not need to be relevant to most employers, or even liked by most employers, to be effective. Many employers in 2010 may not yet be in a position to expand, and therefore a tax cut to expand employment will not work for them. However, even if only a minority of employers respond, such tax cuts can significantly expand overall employment. The survey of Kalamazoo-area employers found that there was a significant overall employment expansion from a job creation tax credit, even though fewer than one in four employers expanded employment because of the credit.

Employer tax cuts to boost job creation also can work even if many employers that receive tax cuts would have expanded anyway. In the Bartik-Bishop report, the authors found the JCTC to be highly cost-effective even though most tax credits employers received were used for employment expansion that would have occurred anyway, and only a minority of tax credits went toward jobs that would not have been created but for the credit. .

As pointed out in the JCTC analysis, the gross cost of these programs will be to some degree offset by the fiscal benefits of job creation. As jobs are created, tax revenues increase, and the needed spending on such social programs as unemployment benefits is reduced. Bishop and Bartik estimate that these fiscal benefits might offset as much as 80 percent of the gross costs of such tax cuts. The implication for the proposed Small Business Jobs and Wages Tax Cut is that its estimated gross cost of $33 billion considerably overstates the likely consequences of this program for the federal budget deficit. In Bartik's view, it seems plausible that the net cost of this program will be less than $10 billion.

This program will have a greater impact in 2010 if it is enacted relatively quickly. Delay and uncertainty reduce its job creation potential, and these costs of delay should be weighed against the benefits of prolonged debate and amendments. Furthermore, amendments to make the credit more “efficient” may backfire if they make the credit more complicated for employers to understand and claim. Complexity is likely to reduce the job creation potential of such targeted tax cuts.

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Founded in 1945, the W.E. Upjohn Institute for Employment Research is a non-partisan, not-for-profit research organization dedicated to finding, evaluating, and promoting solutions to employment-related problems. For more information about the Institute visit us at http://www.upjohninstitute.org.