Job Creation Tax Credit Causes and Effect

Whether the job creation tax credit signed in law last March is having any effect, Treasury Department officials reported. Though it took some time for a clear picture to develop, we're pleased to learn that the tax incentives the state grants companies to create jobs.

The Treasury study compared responses from the Labor Department's Current Population Survey the basis for the government's labor force data and the unemployment rate for three consecutive months to May. This tax program, part of the Hire Act of 2010, is intended to encourage businesses to add workers who have been out of a job for at least 60 days by making it cheaper to employ them.

Usually, the federal government collects Social Security payroll taxes on salaries, amounting to 12.4 percent of every employee’s wages (up to $106,800; any wages over that amount are not subject to Social Security taxes). Half of this payroll tax, or 6.2 percent, comes from the employee, and the other half, or another 6.2 percent, is collected from the employer. For the average wage of the 4.5 million workers cited by Treasury, employers could see up to $3,500 in tax savings for each, however that smaller firms may not be as aware of the credit as larger firms with larger human resources departments.

Under the Hire Act, businesses that hire the long-term unemployed do not have to pay this 6.2 percent tax on each worker for the remainder of 2010. Additionally, if these new employees stay on for a year, the employer gets another tax credit of $1,000. The challenge, of course, is making sure that the tax credit actually induces hiring, rather than just being claimed for people who would have gotten jobs anyway.

The Treasury Department is now trying to assess how well the program is working, and is finding it a challenging task. The Obama administration is trying to extend the act, which expires at the end of the year, in the hopes that it will still be around by the time word actually spreads.