Why Gov. Perdue’s “Back to Work” Incentive Fund Will Not Work

Included in Gov. Perdue’s Recommended Adjustments for the 2010-11 state budget was a line item for $15 million for a “Back to Work” incentive fund.

The fund was included as part of Perdue’s “JobsNow” proposal to bolster job growth in the state.   In her budget, she describes the purpose of the new fund as to “provide a direct rebate to small businesses that hire long-term unemployed workers.”

The rebates would go to businesses with 25 or fewer employees who hire someone who has been unemployed for several months. The rebate will be in the amount of $1,000 per eligible employee who is hired and stays at the company for at least 3 months. Perdue’s proposed new program would be in effect from July 1, 2010 to Dec. 31, 2010.

This part of Perdue’s proposal is similar to one included in the federal “jobs bill.” There is ample evidence, however, that suggests a temporary tax break, or rebate, for new hires will be ineffective.

The Congressional Budget Office earlier this year produced a report analyzing options for the federal “jobs bill” proposal. The report suggests that results for temporary tax credits for businesses to hire new workers are modest at best. In other words, they produce very little, if any, bang for the buck.¹

TAX CREDITS FOR HIRING WORKERS

• The CBO report estimates that the federal proposal of reducing payroll taxes for firms that hire new workers would add between 8 to 18 full-time-equivalent jobs over two years per million dollars of tax credits.
  • The Governor’s plan for North Carolina can’t target payroll taxes, but the concept remains the same: tax credits for new hires cost a lot of money with hardly any measurable results.
• The CBO report goes on to say that such tax credits are less effective than a broad-based approach would be. In other words, limiting the tax credit only to “small businesses” (however defined) would have less job impact than a tax cut that applied to businesses of all sizes.
  • “… employment at small firms is especially volatile: Those firms exhibit high rates of job creation and job loss as well as high rates of entering and leaving the markets in which they sell their products. As a result, the average duration of jobs subsidized under such a targeted tax cut would probably be shorter than the average duration under a broad-based policy.”
  • “Moreover, small firms that do expand have proportionally higher average payroll growth than large firms that expand, so a larger fraction of the tax cut would fund payroll growth that would have occurred anyway. Consequently, CBO concludes, restricting eligibility to small firms would decrease the employment effect per dollar of budgetary cost.”

• Other organizations have similar doubts:
  • The National Federation of Independent Businesses is “skeptical” about these types of tax credits to create many jobs.
    • “If this proposal turns out to be a tax credit based on new hires, we’re doubtful this type of credit will produce many new jobs.”²
    •  “We’re skeptical that it’s going to be a big job creator,” said Bill Rys, tax counsel for the National Federation of Independent Business. “There’s certainly nothing wrong with giving a tax break to a business that’s hired a new worker, especially in these tough times. But in terms of being an incentive to hire a lot of workers, we’re skeptical.”³
  • Moody’s was also skeptical, saying:
    • "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."⁴
      • To reinforce this point, consider the case of North Carolina company BSH Appliances, which could have received JDIG awards up to $1.56 million if it met a threshold of new hires. BSH walked away from the JDIG arrangement because it didn’t have a need for new workers.⁵
  • Employers look to hire the most qualified candidate who will create the most value for their firm; regardless of how long they have been unemployed. A small rebate is unlikely to change hiring decisions.
  • Such a rebate also creates a perverse incentive where an employer may wait for an extra few weeks to hire a currently-unemployed candidate so that the employer can receive the rebate for hiring someone they would have hired anyway. In these cases, the average length of unemployment is extended beyond what it otherwise would be – costing the state more in unemployment benefits and lost productivity.

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