Tax Analysts Blog

Sorry, Payroll Tax Break Proposal is a Loser

Posted on Jan 26, 2010

In this morning's New York Times Senators Chuck Schumer, D-NY, and Orrin Hatch, R-Utah, put aside their partisan differences and propose a targeted payroll tax cut to spur job creation. At first glance it looks very good: businesses that hire workers who have been unemployed for 60 days are exempt from 6.2 percent Social Security tax for the remainder of 2010. Estimated cost: "only $7.6 billion."

The senators offer their proposal as an alternative to the oft-discussed jobs tax credit which they, correctly, criticize as unduly complex and of questionable effectiveness. As they are usually proposed, jobs credits are awarded to employers for the amount by which their payroll increases over some prior period.

Unfortunately, the simplicity of the Schumer-Hatch plan leaves it wide open to unacceptable abuses. Fixing these problems will pretty much put us back into the same can of worms we get into with jobs credits.

What's the problem? In brief, under the Schumer-Hatch plan employers could get tax credits for firing current employees and hiring the unemployed. This would most likely occur in low-wage jobs where employers do not highly value the job skills of existing employees. Another separate problem is that under the plan, employers would receive generous tax credits for normal turnover of their workforce even when they are not increasing or even reducing the size of their workforce. Yet another problem is that the officially unemployed would be favored over other prospective hires--like youths entering the workforce and parents returning to the workforce.

The way to fix these problems with the Schumer-Hatch plan is to add a requirement that we only give the tax relief to employers that are expanding employment. But then we go full circle and are back to the basic structure of the jobs credit they do not like.

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