Obama Announces $33B Hiring Tax Credit

President's proposal estimated to benefit 1 million businesses.

ByAlice Gomstyn <br/> Abc News Business Unit
January 28, 2010, 9:58 AM

Jan. 29, 2010 &#151; -- President Obama announced today a proposal to establish a $33 billion tax credit to encourage small businesses to hire more workers and increase wages. The plan is one of several the president is pushing to help bolster employment in a country where one in 10 Americans no longer receives a paycheck.

The announcement comes two days after the president's first State of the Union address, when he said that jobs must be the U.S.'s top priority this year.

The tax credit, the president said, "is a simple, easy-to-understand mechanism that will cut taxes for more than 1 million small businesses."

Obama, who spoke today at the Chesapeake Machine Company's manufacturing plant -- a Baltimore firm employing 40 people -- said the credit will give small businesses "an incentive to hire more people and a little bit of extra money to pay higher wages, to expand work hours or invest in their company."

The president also reiterated his call for the Senate to pass a jobs bill. The House last month approved a $150 billion bill that included some of the job creation efforts touted by the president. Some Republicans, meanwhile, have also introduced proposals for business tax breaks and Obama said that he looked forward to working with them.

"I'm open to any good ideas from Democrats or Republicans," he said.

Critics argue that among Obama's proposals, some are more realistic than others. Below, ABCNews.com takes a look at the president's plans and where, some say, they fall short.

Small Business Tax Credits for Hiring, Raising Wages; Eliminating Capital Gains Taxes

Under the president's proposed tax credit, businesses would receive a $5,000 tax credit for every net new employee that they employ in 2010. The total amount of credit will be capped at $500,000 per firm to ensure that the majority of the benefit goes to small businesses.

Though increasing payrolls would typically lead to an increase in Social Security taxes, under Obama's plan, small businesses would be reimbursed for the Social Security payroll taxes they would pay on real increases in their payrolls, including wage increases. The reimbursements would not apply to pay raise that bump compensation above $106,800, the Social Security taxable maximum.

The White House estimates that 1 million small businesses would benefit from the credit.

The idea of a tax credit to promote hiring is an idea that's been making the rounds for some time.

But critics say small businesses might hesitate to take advantage of the tax credit if lagging demand means they don't actually have the need for more workers.

"A lot of it is just confidence,"said Gus Faucher, the director of macroeconomics at Moody's Economy.com. The tax credit, he said, " may help a bit around the margins, but small businesses need to be convinced that the expansion is going to keep going. I'm not sure the tax credit is going to be that useful into getting them to hire unless they're convinced that the demand is going to be there."

John Schmitt, an economist at the progressive Center for Economic and Policy Research, said there's no reason not to extend the credit to large businesses too. According to the SBA, firms with fewer than 500 workers employ just over half the U.S. private sector labor force, leaving the rest, Schmitt said, to large businesses.

"Small businesses create a lot of jobs, but large businesses create a lot of jobs too," he said.

Schmitt questioned whether the credit might prove inefficient -- small businesses that planned on hiring anyway could still reap the benefits of the credit.

"In any kind of context like this, you want to spend money on changing people's behavior. You don't want to give money to people for things that they were going to do anyway."

The same is true, he said, for ending capital gains taxes for small businesses, which is meant to increase their investment in equipment and other capital expenditures.

Even without the elimination of capital gain taxes, "how many of these people would have made those investments anyway?" he asked.

Obama today responded to concerns that the credit would benefit businesses that had already planned on increasing hiring.

"It's true that in some instances this tax credit will go to businesses that were going to hire folks anyway. But then, it simply becomes a tax cut for small businesses that will spur investment and expansion. And that's a good thing, too," he said. " And that's why this type of tax cut is considered by economists -- who rarely agree on anything -- to be one of the most cost-effective ways of accelerating job growth."

The president said that his proposal would also include provisions to prevent businesses from "gaming the system."

He said, for instance, that an employer would not be eligible for the tax credit if he doubled his workforce but cut each worker's hours in half.

"We're not going to let you game the system to take advantage of the tax credit, unless you're doing right by your workers," Obama said.

Whether they're for businesses large or small, incentives to get businesses to buy more equipment and the like benefits the economy because it may encourage suppliers to increase their payrolls to keep up with rising demand, supporters say.

While "it's not directly impacting the labor market, stronger demand for investment leads to strong hiring down the road," Faucher said.

But, once again, it may not be the most efficient way to encourage hiring -- at least not in the U.S. That's because so much of the manufactured products purchased by U.S. companies are made abroad.

"A lot of that money will not go to job creation here in the U.S.," said Schmitt. "A lot of it may go overseas."

$30 Billion From Repaid Troubled Asset Relief Program Funds to Community Banks for Small Business Lending

With the credit market still tight for small businesses, expanding lending to them would allow for more hiring, supporters say.

The money could be spent, specifically, for loan guarantees that the Small Business Administration provide to banks to ensure that they don't lose money when they lend to small businesses, said Gus Faucher, the director of macroeconomics at Moody's Economy.com. (The House jobs bill includes $354 million for SBA loan guarantees.)

"It's an area that would be helpful in getting job growth again," Faucher said.

But Schmitt said that extending more loans to small businesses may not have as big an impact as some might hope. As with the hiring tax credit, there are concerns about whether a lack of demand might render the proposal largely ineffective -- ie., why would businesses borrow to produce more goods when not enough people are buying those goods?

"Without demand in the economy for the goods and services of small business, the availability of credit is just not sufficient," he said.

Former Treasury Secretary Paul O'Neill says many questions also remain about how the government could actually measure an increase in credit availability to small businesses.

"How will we be able to see and measure incremental credit availability to small businesses? How much credit availability currently exists for small businesses? Are there credit worthy businesses that are being turned down?" he asked in an e-mail to ABCNews.com. "Credit worthy means there is a high probability the borrower will pay back the loan in the agreed time with the agreed interest payment. How will the community banks be selected to receive the incremental money? How long will it take to get this money into the system?"

O'Neill took issue with Obama's contention that the money used for the $30 billion program will be that which "Wall Street banks have repaid" through the Troubled Asset Relief Program, also known as the bank bailout.

"Since we are in a deep deficit hole this is more borrowed money. The President implied this was available money because the banks had paid it back … this is an accounting fiction … I hope the President knows better than what he inferred," he said. (For more on what O'Neill had to say, click here.)

Government Investment in Infrastructure, Clean Energy Projects

The House's jobs bill includes $48.3 billion for infrastructure investments, including $2 billion for renewable energy and electricity projects.

In his speech yesterday, Obama touted a new high-speed railroad system -- funded by the administration's $787 billion stimulus program last year -- that is breaking ground today in Tampa, Fla.

"There are projects like that all across this country that will create jobs and help our nation move goods, services and information," he said.

The usual critique of infrastructure investments -- both those funded by last year's stimulus and those proposed in Washington now -- is that they take a while to come to fruition.

Faucher said that, given the state of today's economy, that's not necessarily a bad thing. Some have predicted, after all, that the U.S. unemployment rate will hover around 10 percent for the next two years.

"Even if it takes a while for these projects to get going, they're still going to have a positive impact on labor market once they do start up," he said.

He's less optimistic, however, about job creation by the clean energy sector.

"It's such a small part of the economy," he said. "Maybe they think it polls well, but in terms of actual substantive job growth it's a drop in the bucket."

The advent of foreign outsourcing has long been a thorn in the side of U.S. labor advocates, particularly those who've watched the U.S. manufacturing sector shrink to a shell of its former self.

Business advocates, meanwhile, argue that cheaper labor costs overseas allow them to be more competitive in a global market.

So would tax incentives to level the playing field between U.S.'s more expensive labor costs and those of, say, China?

University of Maryland economist Peter Morici says no.

"The Chinese give these companies a 50 percent cost advantages with currency and subsidies," he said. "Do you think a marginal tax rate cut is going to change that?"

Schmitt takes a similar perspective: Whatever U.S. companies might gain in tax savings by keeping more jobs at home might be lost through the lower profits that result from such a move, which in turn would lead to less hiring.

"I think on net, it's probably like to be a wash," he said. "I'm skeptical that there is big job gains to be gained from this."

Increasing Foreign Exports

Perhaps Obama's boldest assertion was that the U.S. could double its exports in five years and create 2 million jobs in the process. The president cited the Doha trade agreement and strengthening trade relations with "key partners like South Korea, Panama and Colombia" in explaining this goal.

"I was glad that he mentioned exports," Morici said. "...It's a real problem and if he doesn't fix it we're broke."

But Morici argues that the only real way to significantly increase exports is to improve trade with one of the biggest players on the global trade scene: China.

The president, he said, needs to challenge China's protectionist policies.

Schmitt said that the trading partners Obama cited -- South Korea, Panama and Colombia -- "are not remotely capable absorbing the volume of exports we need."

He also argued that the Doha trade agreement won't prove to be a huge help. The agreement, Schmitt said, largely focuses on trade by developing countries, not rich countries like the U.S.

"It's wishful thinking just to get up and say we're going to double exports and create 2 million jobs for next five years without having a plan to allow us to get there," he said.

Convincing the world to spend more on American exports, he said, may come down to somehow lowering the value of the U.S. dollar -- an idea that would likely draw fire from those worried about inflation.

It's not a popular solution, Schmitt conceded.

"Nobody wants to have weaker dollar," he said, "because that sounds bad."

With reports from ABC News' Sunlen Miller.

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