By Jay Heflin - 02/16/10 11:14 PM EST
A shortage in customer demand has business leaders and economists questioning the payroll tax credit Democrats are promoting in jobs legislation.
“We’re skeptical that the tax credit is going to be a huge boost to incentify additional hiring,” said Bill Rys, tax counsel for the National Federation of Independent Business.
Rys argues that increases in demand for goods and services, not a tax credit, are the key to boosting employment. His organization also predicts negative job growth for the next quarter, which will likely deter many businesses from hiring.
“At the end of the day, if you don’t have work for the employee to do, there is really no reason to bring an employee in,” he said. “It’s a heavy cost to carry around if you’re not generating any income.”
A return in consumer demand is not expected anytime soon. The White House’s Council of Economic Advisers predicted lackluster growth in demand for 2010.
Congressional Budget Office (CBO) Director Doug Elmendorf has also predicted slow growth in customer demand. In prepared testimony for a Joint Economic Committee hearing scheduled for Feb. 12, Elmendorf said economic recovery would be “dampened by a number of factors,” including “limited increases in households’ spending.” The hearing was canceled on account of inclement weather.
The CBO predicts unemployment to be below 10 percent in the second half of 2010, but not to drop below 8 percent until 2012. The current jobless rate is 9.7 percent. Unemployment levels of roughly 5 percent that are normally associated with a robust economy are not expected to return until 2014.
Last week, Reid scrapped an $85 billion jobs bill created by Senate Finance Committee Chairman Max Baucus (D-Mont.) and ranking Republican Chuck Grassley (Iowa) to move a more targeted jobs bill that would cost an estimated $15 billion. At the center of the package is a $13 billion tax credit employers can claim for bringing on new hires in 2010 who have been without work for more than 60 days.
Reid and the other senators who support the provision contend it will stimulate job growth immediately, but offer only hazy estimates on how many openings it will be responsible for creating.
“It will be very significant,” said Baucus when pressed for a concrete number of jobs the tax credit would create.
Reid predicted “several” jobs would be created by his measure. But stalwart supporters of the Democratic agenda waver on the tax credit being the impetus for job creation. Chad Stone, chief economist with the liberal-leaning Center on Budget and Policy Priorities, said the measure could merely reward companies that add workers to their payroll, irrespective of the tax credit.
Stone prefers extending unemployment insurance beyond its Feb. 28 deadline and argues it will “create the demand that creates the demand.”
Not all Democratic senators are sold on the hiring tax credit. Sen. Ben Nelson (D-Neb.) echoed some of the concerns raised by the business community over the lack of demand.
“There’s a question of whether that puts the cart before the horse,” said Nelson. “If I don’t have enough customers for my product, hiring more people is not going to help and tax credits are not going to be to my advantage.”
Sen. Tom Harkin (D-Iowa), chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, noted the CBO estimates the impact of extending unemployment insurance would create more jobs than would providing tax credits to employers who hire new workers.
A Reid staffer said the majority leader will extend unemployment insurance before the end of the month, but it will not be part of the first jobs bill.
Aside from the payroll tax credit, Reid’s jobs bill contains a one-year extension of the highway trust fund, bonds to help states better afford construction projects, greater expensing for small businesses and a tax break for retaining workers beyond 52 weeks.