Do Hiring Tax Credits Work?

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There’s no evidence that state tax hiring credits that are based on a company adding jobs, adding to payroll, or investing in buildings work, according to a new working paper from the National Bureau of Economic Research.

But the paper, which was authored by David Neumark, an economics professor at University of California at Irvine, and an economics graduate student at that university, found there is one way for state governments to move the needle on hiring at private businesses.

“The estimates show that hiring credits targeting the unemployed have significant and positive effects on employment, boosting employment by about 0.6 percentage points after four months, with the effect growing to 0.9 percentage points,” the authors write.

Neumark, in an interview with Courant Tuesday, said hiring credits that target the unemployed also help reduce the problem of rewarding businesses with tax dollars for hiring they would have done anyway.

Generally, he said, economic research suggests that nine out of 10 jobs that receive subsidies would have happened without the government push.

But since most people are not unemployed, and since there is some preference by employers for people who have jobs, tax credits that apply only to the unemployed are likely to reduce those wasted incentives, he said.

“It’s conceivable you knock it down a lot,” he said.

He also said that even if nine out of 10 times, companies are rewarded for what they would have done anyway, if the tax credit is only costing the state $3,000 to $4,000 a job, it could still be a reasonable cost.

Jobs created by stimulus spending cost far more, he noted, since much of the money paid for materials or other costs not directly going into payrolls.

“These things can look like a relative bargain,” he said.

Connecticut has multiple job creation tax credits.

They include  the JET program, which provides companies with $900 a month in credits for hiring people receiving unemployment benefits or who are veterans,  but is also applicable to any hires at a $500 monthly level. The study suggests that the larger credit would make a difference, but the smaller credit would not, because it is only linked to overall employment growth at the business.

The paper did not analyze the effectiveness of forgivable loans, a large portion of the First Five incentives for job growth of 200 or more at large employers, or of grants like those used in STEP UP, which targets the unemployed.

Grants are more expensive than tax credits, because credits are limited by the company’s state tax liability. So, for instance, the tax hiring credit in 2011 cost $1,330 per job. Step Up costs about $9,400 for hires at places other than factories, and $12,500 at factories, which have been responsible for the majority of the hires.

The amount that the typical Step Up hire would pay in state income taxes the first year would be $496, if that new job holder were single, with no dependents.

Of course, having fewer people collecting unemployment helps lower costs to both businesses, who pay the cost of those checks, and government, who may be helping with food stamps or other benefits.

Step Up is largely limited to small businesses based in Connecticut, though employers of any size can qualify if they’re hiring unemployed veterans.


Neumark said, “If I were advising a policy maker, I’d say, don’t restrict the scope, why do you care if the jobs created are at a small company vs. a big company? You’re always better working off for big companies, they pay more wages, the jobs are more stable, the benefits are better.”

Neumark said politicians have confused the fact that the birth of new businesses helps the job market with the idea that small businesses create jobs.

“There’s tons of small businesses that ain’t growing,” he said.

He said it’s smarter to spending government funds on encouraging entrepreneurship, rather than what he called a blanket favoritism toward small business.  “Not that we know how to do it,” he admitted.

The Malloy administration has an all-of-the-above approach, spending tax dollars on big businesses, small businesses and entrepreneurs.

Neumark said, “It’s probably better than none of the above, as long as they’re following up with what works, what doesn’t work.”


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3 thoughts on “Do Hiring Tax Credits Work?

  1. Renee

    This tax credit is helping many companies commit fraud on the government.
    Companies are intentionally looking to hire people that will help them receive the tax credit, keeping the employee the minimal time and then firing them, leaving them back where they started. After the ordeal of being fired keep in mind most people have lost the unemployment benefits they were receiving and now they are back to square one.
    What’s even better, I live in Florida where we have a “Right to Work” law. There’s nothing we can do about these companies. Don’t bother calling the Reemployment Office or Labor Board. The “Right to Work” has these companies covered.

  2. TomP

    Bravo Mara Lee! This is the first time I have seen objective evidence of what is common knowledge of those that make the decisions to hire employees. As a CEO, I know from experience, and from countless other CEO’s, that businesses don’t hire new workers based upon a nominal tax credit. The actual cost to hire, train and then evaluate an employee is substantial and is measured in years and 10’s of thousands of dollars. Making a hiring mistake has an even greater deleterious effect on a business. Therefore, the decision to hire a new worker is a risk-based undertaking and is employed ONLY when current business conditions warrant. Tax credits or other new-hire incentives only reward those businesses that planned to hire regardless of the incentive. They are a waste of state funds and result in higher taxes that retard real business growth. An educated pool of citizens, a tax scheme that rewards risk taking, and a low (tax) cost of doing business is what matters. Those in Hartford who really care about state-wide employment should take note.

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