A Tax Credit? No Thanks

Proposals to reward employers for creating jobs are winning few fans in Corporate America.

With more than 100,000 full- and part-time workers on his payroll, Costco Wholesale Corp. CFO Richard Galanti isn’t opposed to a jobs tax credit that would offset a portion of new employees’ salaries. But would he hire more people just to receive such a credit? Probably not.

“Why would we hire someone for a hundred dollars to get a couple of dollars back?” he says. “We hire based on need, which is driven by demand and other market factors. If we were planning to hire six months from now, a tax credit might encourage us to do it sooner, but we would have hired anyway.”

That seems to be the consensus among CFOs, but it hasn’t stopped politicians and think tanks from considering a variety of jobs-creation tax-credit schemes as unemployment rises above 10%.

During the recession of the late 1970s, a jobs tax credit was enacted and ultimately claimed by more than a million companies. They hired 2.1 million workers, of which 700,000 were directly attributable to the tax credit, according to a 1979 study by American Economic Review. Yet many economists argued, after the fact, that the credit was unnecessary. “The question is, Would the companies that received the credit have hired anyway?” says Peter Peyser, managing principal at lobbying firm Blank Rome Government Relations. “If that’s the case — and there was an honest debate about that — then they reaped a reward for no reason.”

No one disputes that job loss is an issue: in the past two years the U.S. economy has lost 8 million jobs, the unemployment rate has reached a 26-year high, and, according to the Economic Policy Institute (EPI), it will take at least 29 months of job creation above 500,000 jobs per month to regain pre-recession levels.

Several tax-credit proposals are currently under scrutiny by a bipartisan panel headed by former Federal Reserve chairman Paul Volcker. One, being floated by the Administration, is intended to complement a WPA-style program to rebuild the nation’s crumbling infrastructure. President Obama is hoping the tax break will nudge companies on the verge of hiring to take the plunge. “The government is saying that it will share the initial investment in more workers,” Peyser explains, “but it will leave the hiring up to employers. If it isn’t economical for a company to hire, one presumes they will not make a foolish decision.”

That means credit dollars may well flow to companies that would have hired anyway. “A government tax credit is not going to cause us or anybody else to hire if we’re not planning to hire,” says Roger Shannon, CFO and treasurer of privately held Steel Technologies Inc., a steel processor with 25 manufacturing facilities in the United States, Canada, and Mexico. “If we did get the credit, that would be nice — we’d take the money. But I don’t see this as good policy. We’d just be contributing further to the massive federal deficit.”

Senior executives, consultants, and academics may have serious doubts, but there is one constituency that is all for a jobs-creation tax credit: taxpayers. A September poll finds the public enthusiastically embracing the idea (see “Main Street Loves It” at the end of this article).

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