Job tax credits can work

This evening President Obama submits his American Jobs Act to Congress.  According to a story in The Hill most economists from Moody’s Analytics to the Economic Policy Institute think that the plan, if passed, would add about 2 percent to the GDP growth next year.

The big concern Wall Street is voicing is that the plan is not big enough to really move the economy.  Even worse, the fear is that Congressional Republicans won’t even allow this much job-creating effort to pass. 

But let’s assume that the GOP at least agrees to the tax credits for small businesses that hire the unemployed.  (Click here to see my interview with a local TV station on the subject.)

But passing the tax credits is only the first step necessary for this part of the plan to actually result in jobs.

Small businesses must also know the tax credits exist.  Most small business owners don't have the luxury of following tax law so it will be very important for the media and advocacy organizations for small business to make a solid effort to educate the public.

But the education effort shouldn’t just be about this new federal tax credit for hiring the unemployed.  States might have their own job tax credits to add to the job-creation incentive mix.

In South Carolina we were successful in changing our job tax credit law in 2006 to (for the
first time) include small business hires.  As an example, a small business of any kind in a rural area can get a $4000 tax credit if they hire at least 2 net new jobs.  Add the American Jobs Act and the state tax credits and you have a combined $8000 per employee and even higher if other state conditions are met.  That is a pretty big incentive for many small businesses that are paying around $12 an hour.

One final ingredient is necessary for these tax credits to do their job-creating work. 

Tax credits are taken when tax returns are prepared, not at the time of hiring.  If a business doesn’t have the capital to do the initial hiring, the tax credit months later won’t do them any good.

Therefore, small business must have access to lines of credit and loans for the job-creating tax credits to succeed.  We must step up our efforts to prod financial institutions to provide access to capital for small businesses qualifying for these tax credits.

If all these conditions are met, will every small business increase hiring?  Of course not.  But those businesses that are trying to make a hiring decision based on a slight increase in demand vs. new employee costs will be more inclined to hire.

Providing financial incentive to encourage job growth on Main Street will help start the economic turnaround.  Continued stalemate in Congress definitely won’t do it.