A hiring tax credit isn't likely to create jobs

NEW YORK (CNNMoney) -- Note to President Obama: Don't expect a hiring tax credit to spur much hiring.

So say many economists and businesses, who give a thumbs down to one of the job creation measures the Obama administration is expected to announce Thursday.

Details remain scarce on exactly what type of hiring tax credit proposal the president may roll out, if he even does so at all. It might target a wider audience than a temporary credit enacted last year aimed at helping the unemployed land jobs.

It's still unclear whether that measure, the 2010 HIRE Act, achieved its goals. The law temporarily exempted companies from their share of the payroll tax if they hired someone who had been unemployed for at least two months.

Since companies typically have to kick in 6.2% of a worker's wages up to $106,800 for Social Security, the break was meant to ease some of the cost of making a new hire. Businesses could also receive another credit of up to $1,000 if they retained the new hire for at least a year.

Companies brought on 10.6 million such hires between February and October, according to the latest Treasury Department report. The program ended Dec. 31. It is expected to cost $13 billion, according to an estimate by Congress' Joint Committee on Taxation.

Surprise six-figure salaries

Alan Krueger, nominated to chair the president's Council of Economic Advisers, was chief economist at the Treasury Department at the time and was a big supporter of the idea. "Many businesses are excited by the opportunity to hire workers they may not have been able to hire otherwise," he wrote in an opinion piece last September.

But even he has cast doubts on the initiative's impact. After the Treasury Department released a report on the measure in July 2010, he said he would be "cautious" about attributing an uptick in hiring of the unemployed to the tax credit.

Others, however, questioned the effectiveness of hiring tax credits in general.

A temporary tax credit of a few thousand bucks usually is not enough incentive to bring on a new worker, who costs tens of thousands of dollars in salary and benefits.

Also, in order to prevent companies from gaming the system, these credits often come with many restrictions and paperwork requirements, which further diminish their allure, said Patrick O'Keefe, director of economic research for J.H. Cohn, an accounting firm.

The concern is that businesses will get credits for hires they were going to make anyway, even without the government subsidy.

"The prospects for success are quite limited," O'Keefe said.

One of the main problems with the credit is that it doesn't address a key problem facing companies today: A lack of demand for their products and services, experts said. Without a boost in business, employers aren't likely to add to their payrolls.

Some 65% of respondents to a 2009 National Federation of Independent Business survey said a $3,000 tax credit would not spur them to hire. Their economic situation hasn't gotten much better since, said Bill Rys, the group's tax counsel.

"They just don't have as much work for employees to do," he said. "They don't have customers coming in the door. They don't have contracts to fill."

Not everyone, however, has a dour view on hiring tax credits. Temporarily lowering the cost to bring on new workers might spur companies to accelerate their plans to boost payroll, said Jesse Rothstein, an economics professor at the University of California at Berkeley who left the Council of Economic Advisers last year.

"A credit might give an employer an incentive to staff back up a little sooner," Rothstein said.

Michael Greenstone, a former chief economist for Obama's Council of Economic Advisers, agrees, saying a well-designed credit could spur the addition of hundreds of thousands of jobs.

For instance, he estimates that a $5,000 tax credit for each addition to the payroll, as well as a rebate for increasing wages, could result in the creation of 900,000 jobs at a cost of $30 billion.

Hiring tax credits can work because they reduce the cost of labor, which gives companies an incentive to expand their payrolls, he said.

"It directly targets the problem you are seeking to solve," Greenstone said.