Tax break for jobs must be done right

The stubbornly high unemployment rate has many lawmakers on Capitol Hill fearing that they too will find themselves without a job after the November elections -- particularly if they’re Democrats. But in their eagerness to create private-sector jobs (and score political points), lawmakers may end up wasting money on ineffective tax breaks whose sole virtue is a semblance of bipartisan support.

The concern in Washington about unemployment is only natural considering the grim data released this month by the Bureau of Labor Statistics. Even after two consecutive quarters of economic growth, about 23 million Americans remain unemployed or stuck in part-time jobs because they can’t find full-time work. Making matters worse, there are 6 million more job-seekers than in 2004 but fewer openings to fill. Employers aren’t rushing to expand their payrolls, in part because consumers are trimming their spending and in part because credit remains unusually tight.

The federal government could try to prod employers to hire more people sooner by pumping extra money into the economy, under the theory that the damage caused by protracted high unemployment is greater than the long-term cost of increasing the already outsized federal deficit. We’re not entirely comfortable with that argument, but the bleak jobless figures seem to have enough political force to overcome lawmakers’ misgivings about the growing national debt. All the same, if Congress is going to do something about jobs, it should at least do something that has a chance of making a difference.

The House’s $174-billion proposal -- a “Jobs for Main Street” bill that narrowly passed in December -- is a scaled-back follow-up to the broad economic stimulus package enacted in February 2009. Many of the spending provisions, such as the extension of unemployment benefits, would have at best an indirect effect on employment. The exceptions are the $27 billion proposed to help states and cities avoid layoffs to government workers, the $48 billion for infrastructure projects and the $20 billion for highways. The Senate Finance Committee countered this month with its own proposal, a bipartisan, $85-billion package of tax cuts and spending increases, including a tax credit for employers for each person hired in 2010 who had been unemployed for at least two months. But Senate Majority Leader Harry Reid (D-Nev.) brought to the Senate floor a much more modest bill based primarily on the tax credit for new hires.

Reid was right to strip out provisions that had little or no bearing on the economy. And the pared-down bill includes three proposals -- a tax break for small businesses, support for municipal bonds and a one-year reauthorization of federal highway programs -- that make sense. But the tax credit proposal, written by Sens. Charles E. Schumer (D-N.Y.) and Orrin G. Hatch (R-Utah), is a bad version of a job-creation tool that’s only marginally effective to begin with. The basic problem with giving tax incentives to employers is that you end up rewarding companies for moves they were going to make anyway. The best one can hope for is that the tax break will prod them to expand their operations sooner. But the Schumer-Hatch proposal, in an effort to simplify the credit, wouldn’t limit the credit to companies that expand. Instead, it would be available for any hires -- even those made after a massive round of layoffs.

Economists who support the idea of a jobs tax credit say that even if most of the money goes for employees who would have been hired anyway, it can still be a far more cost-effective way to combat unemployment than a broad economic stimulus effort. All the same, it’s crucial that the tax break go only to employers who expand their workforces. It also should be structured in a way that urges them to move quickly -- for example, by making a limited amount of credit dollars available on a first-come, first-served basis. Finally, it should include some incentive for employers not just to hire people but to retain them. The Schumer-Hatch proposal gets that part right, at least, but little else.