The lead provision in the Senate jobs bill now being debated is temporary payroll tax relief for employers who hire the unemployed. This proposal (S. 2983) originated with Senate Finance Committee members Chuck Schumer (D-New York) and Orrin Hatch (R-Utah). I criticized this proposal in a prior post. And so has at least one other blogger. A Hill staffer knowledgeable about the proposal has responded. We debate the the all-important details below.
What follows is an excerpt of the staffer's comments (slightly edited to preserve anonymity). My comments to the staffer's comment are in italics. Readers, please add your comments as well.
"[I] First, you are concerned that “employers could get tax credits [well, it’s not a credit, but a tax benefit] for firing current employees and hiring the unemployed.” It is true that this COULD happen, although overall payroll would have to increase (see point #2 below). But I think this concern is overblown for three reasons.
- "[A] First, even for low-wage employees, there is some expense involved in finding, interviewing, and training new workers. Would a business really fire 20 people and then hire 21 new people to do the same jobs? Would that really happen in practice, mass firings and rehirings for a modest tax break? That’s not the way business owners see it. Again, conceivable but not likely to happen very often. < At a minimumt here will be a TENDENCY to churn at least. So if you have let’s say five marginal employees—and isn’t that always the case—you will be more likely to lay them off for five hires with tax benefit.>
"[B] Second, think of the disincentive created by bad press and PR – a company fires a bunch of workers and then rehires other workers. Great negative story for local news – big disincentive. <Small and medium size firms could do it and nobody would know.>
"[C] Third, a lot of these low-wage, low-skill workers are ALREADY churned because these workers are eligible for WOTC, so this is a concern NOW, not after this passes. <I believe this argument helps refute the points above. If employers are churning under a similarly-structured WOTC (not sure about that) then won’t they also churn with this new proposal> The proposal also says you can’t get this benefit and WOTC at the same time for the same worker – you have to choose. So conceivably (and particularly if the $1,000 bonus is increased), you could REDUCE churning with this proposal if people pick it over WOTC for a subset of their workers.
<If the requirement is still in the proposal I am afraid it only moves the problem sideways. The no-decline-in-employment backstop rule has several issues:
(i.) A detailed calculation will still be required. Multiyear comparisons are administratively difficult: Complexities arise for new businesses, partial year returns, mergers, etc. A definition of “payroll” must be adopted and consistency between 2009 and 2010 is essential.
(ii.) Many firms will be clearly above or below the backstop so no big deal. But for those close there will be tremendous pressure on the calculation because it is all or nothing. There is a highly undesirable “cliff effect.” And won’t there be uncertainty because the employer will not know until year end if the no-declining-payroll requirement is satisfied?
(iii.) Employers clearly below the threshold get nothing. This appeals to common sense as these employers are somehow “bad” and should not be rewarded. But economists reject this. Employers who have shrunk their workforce because of the recession should also get incentive on the margin.
(iv.) Employers clearly above the threshold have good incentive (no uncertainty) and less compliance cost (because they do not have to micro-analyze every detail of the backstop calculation). But out of the frying pan and into the fire. For these employers the backstop has no effect as anti-churning rule.
(v) I am still worried about companies with normally high turnover. They may have no increase in employment and still get a generous tax benefit. >
"[III] Third, you wrote that “the officially unemployed would be favored over other prospective hires--like youths entering the workforce and parents returning to the workforce.” This is also factually wrong. The proposal as it stands right now just says you have to not have worked in the past 60 days – nothing in the proposal says that you have to actually be receiving UI benefits. It may be that in the end, to make administration easier, the proposal would focus on UI recipients, but that’s not in the bill now. "<Whatever is done it seems to me compliance costs are not trivial or, alternatively, revenue leakage could become an issue. But probably no significant difference from WOTC.>
Again, readers, please give us your thoughts.