Besides debating his Republican foes at their party retreat, President Obama had other business to conduct in Baltimore last Friday. Two days after his State of the Union address, the President popped in on the Chesapeake Machine Company in East Baltimore to announce details of the small business tax credit that he proposed in his State of the Union address.
What's in this proposal for nonprofits? Fortunately, unlike the White House's first enunciation of its national health insurance reform, this proposal included nonprofits as potential targets. The message from the National Council of Nonprofits and other groups obviously got through to the White House and the Council of Economic Advisors: nonprofits are employers too.
For nonprofits, this isn't a bad deal.
The plan is to give small businesses a $5,000 tax credit for each new worker hired in 2010. Employers would also get a credit for raising their payroll either through wage increases or increased hours, equivalent to offsetting the increase in their required Social Security tax contributions. Nonprofits would be able to participate by taking the tax credit against their quarterly withholding payments.
If nonprofits find the money to hire new workers, the credit will work for them. The White House is motivated partly by the news of a 5.7 percent increase in the nation's GDP in the fourth quarter of 2009, without a corresponding increase in hiring. Employers may be investing in equipment and inventory (or not cutting inventory as quickly as before), but they are still skittish about hiring. A tax credit might incentivize employers to start employing. Maybe it might be the reverse for nonprofits: the availability of a credit for their grantees might stimulate foundations to up their grantmaking.
Times and missions are different; the Carter and Clinton jobs tax credit programs were aimed at hiring people from the welfare rolls, the Obama program is meant to boost a fragile economic recovery.
For nonprofits, this isn't a bad deal. They not only get a useful subsidy, but they even get to take the credit quarterly, if they pay withholding on an estimated basis, easing ever-present cashflow problems that will only be tougher with increased personnel costs.
[Note: Reminder, 501(c)(3) nonprofits pay the employer's match of an employee's Social Security taxes, called FICA, just like for-profit employers do. Employers file Form 941 with the Internal Revenue Service quarterly identifying the number of workers they employ and their "taxable Social Security wages"—and their taxable Medicare wages too. The Form requires employers to send the IRS 6.2 percent of the employee's wages as the employee's contribution to Social Security and to match that with 6.2 percent contributed by the employer. That is a real cost to nonprofits that the proposed credit would help defray. Unlike other employers, 501(c)(3)s are exempt from withholding and paying federal unemployment taxes, the so-called FUTA contribution, but other 501(c)s are required to pay FUTA.]
But as national policy to stimulate hiring, the policy has some of the earmarks of the Carter Administration's New Jobs Tax Credit followed after a year by the Targeted Jobs Tax Credit program, the subject of much debate regarding its effectiveness and efficiency as an employment booster. The Administration has suggested structural improvements over the TJTC and its Clinton-era successor the Work Opportunity Tax Credit (WOTC). Times and missions are different; the Carter and Clinton jobs tax credit programs were aimed at hiring people from the welfare rolls, the Obama program is meant to boost a fragile economic recovery.
Nonetheless, there are areas of concern:
Defining small business: Any corporation can apply to the program, but their maximum tax benefit will be capped at $500,000—or, if the firm takes credits of $5,000 per worker, 100 workers. That low threshold, the Administration reasons, would make the credit attractive to small businesses and relatively useless to larger ones. We suspect that isn't true. The TJTC, which had a much lower cap, still ended up being sucked up by larger businesses. Of course, even the SBA definition of "small" isn't all that small--the typical size limit for Small Business Administration 7(a) loan eligibility is 500 employees, though for some industries it is 750 or 1,000 or even higher. If the bigger applicants hit the cap quickly, as they might, they could suck up much of the money that might otherwise go to small firms whose new hiring might be slower.
Tax credits for typical hires: The TJTC was reviled by some as the "Burger King tax credit," giving employers an economic benefit for hiring employees whom they would have hired anyhow. The Obama Administration acknowledges that there's no foolproof way to prevent this. If the credit for new hires (or increased payroll or increased hours) is based simply in comparison to a firm's fourth quarter 2009 numbers, all 2010 hires would qualify for the tax credit. In his speech at Chesapeake Machine, the President acknowledged the problem and presented his rationale: "Now, it's true that in some instances this tax credit will go to businesses that were going to hire folks anyway. But then, it simply becomes a tax cut for small businesses that will spur investment and expansion. And that's a good thing, too." (). The Carter-era tax credit, which at one point subsidized 2.1 million workers, but according to the New York Times, studies at the time suggested only "a tiny fraction of employers that knew about the credit at the time said it had prompted them to hire more workers."
Targeting: Unlike the WOTC and TJTC, this tax credit is not specifically targeted to very low-income, welfare-eligible, or unemployed workers. The maximum eligible employee's salary eligible for the tax credit is $106,800, not because the White House was trying to target the credit, but because that is the maximum wage subject to Social Security taxes, the baseline measure for the government and employers to determine increases in hiring or wages. There's a reason for the limited income-targeting: the objective is jobs, not jobs for certain income classes of people. Also how will firms in declining industries or businesses in particularly hard-hit states would be able to benefit? The White House hopes that recent inventory investments increases indicate pent-up hiring, even in hard-hit areas, likely to be spurred by the credit, but there is no industry or geographic targeting in the program.
Gaming the system: There are ways that employers might try to "game" the system. For example, what about firing and then rehiring employees? That won't work, because the benchmark hiring or wage level is the firm's fourth quarter 2009 numbers. But what about firing one $50,000 employee, then rehiring two $30,000 employees? With the $10,000 increase in salaries, the firm has a measurable wage increase that might be eligible for a tax credit. What about closing down and then reopening under a new name as a new business, with all "new" hires eligible for a start-up business $2,500 per-hire credit? Not allowed. It may be possible for a (for-profit) firm to combine this tax credit with others geared to new hires (WOTC, empowerment zone credits, etc.), potentially getting more credit than the new wages are worth, something the White House doesn't want to see happen. The Administration believes that the program is reasonably designed to root out program malefactors, but it isn't clear what the Administration will do with wrongdoers—or with firms (including nonprofits) that may hire someone new in 2010, take the quarterly credit, but then lay the person off at the end of the year due to other circumstances. Will the firm have to pay back the credit and pay a penalty? Tax credits for job creation are considered reasonably efficient, according to a Congressional Budget Office study, but the CBO warned that administration would be difficult.
Finding money If approved by Congress, the jobs tax credit program would cost $33 billion, which the White House hopes would be paid for from repaid Troubled Assets Relief Program funds, But there may be other claimants for those dollars, and the White House might actually face some difficulty in simply reprogramming TARP dollars without Congressional approval. The President was publicly effusive about the Senate's passage of PAYGO ("pay-as-you-go") budget rules, meaning that new federal spending has to be offset by commensurate cost-savings cuts in other programs or new tax revenues. Unless the Administration is going to ditch its prioritization of the costly national health insurance reform, securing funding for the jobs tax credit might be very difficult due to the combination of PAYGO and competing national priorities.
Congressional approval: The President cannot enact a change in corporate taxation rules by fiat. He needs Congress to weigh in and support his proposal. But there are other competing proposals in Congress, including a bipartisan plan co-sponsored by Charles Schumer (D-NY) and Orrin Hatch (R-UT) that would provide jobs tax credits based on a different formula in 2010 and a lower level of credits in 2011, undoubtedly a more expensive plan. Senator Tom Harkin (D-IA) thinks the necessary budget commitment to this ought to be in the $80 billion range. The President proposes, but Congress modifies and ultimately approves and appropriates the funding. What Congress will do with the jobs tax credit in the President's budget is hard to predict.
"The best and fastest way for government to prime the pump is to help states and locales, which are now doing the opposite. They're laying off teachers, police officers, social workers, health-care workers, and many more who provide vital public services."--Former Labor Secretary, Robert Reich
What will be the impact of the small business jobs tax credit? The White House estimates one million firms will participate, and the Assistant Treasury Secretary Allen Krueger cited sources estimating the credit will catalyze the creation of six million new jobs. A Cornell economist thinks that the credit could knock 2 percent off the nation's 10 percent unemployment rate. Dependent on defense contracting for about two-thirds of its business, Chesapeake Machine laid off four employees last year, but is looking to hire a machinist and hopes to add four or five workers this year. But the credit will only work if businesses—and nonprofits—see an economic uptick warranting the new hires, as the Chesapeake Machine owner himself noted: "That tax credit…is not going to be the deciding factor, but it'll help."
If the program makes it through Congress, or if proposals from members of Congress take hold, one hopes that the tax credit will work and spark a jobs recovery. But the downside of this program, and many of the Great Recession initiatives proposed by this White House, the past White House, and Congress, is the continuing pattern of responding to economic crisis with corporate subsidies . Former Labor Secretary Robert Reich worries that this tax credit and the proposed exemption of small businesses from capital gains taxes "give(s) ammunition to supply-siders who think the way out of this awful economy is simply to cut taxes on businesses."
Reich suggests that the best job-creating program would be for the federal government to support state and local government budgets: "The best and fastest way for government to prime the pump is to help states and locales, which are now doing the opposite. They're laying off teachers, police officers, social workers, health-care workers, and many more who provide vital public services. And they're increasing taxes and fees. They have no choice. State constitutions require them to balance their budgets. But the result is to negate much of what the federal government has tried to do with its stimulus to date."
Reich’s plan would be a job-saving and job-creating program that would have huge benefit to nonprofits, increasing their "business" (through government contracts) and supporting needed new hires and wage increases. There's some real benefit for nonprofits in the President's jobs tax credit, but bolstering the vitality of nonprofits as employers as well as service-providers will take much more.
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As a republican, I was struck by the Q&A session that House Republicans hosted. I mean almost every point was talked about, every issue from debt to health was debated. I appreciated this form of open government and the opportunity to see republicans and the president without the aide of their media commentary allies in the same room. It was no spin no lies all in the same room. I saw this article that went into more detail than this that addressed some of the questions posed by House republicans, all conservatives should read:
http://keironjackman.wordpress.com/2010/02/01/house-republicans-guess-who’s-coming-to-dinner/
