Hire Now Tax Cut Act of 2010

Friday, February 12, 2010

Senators Charles Schumer (D) and Orrin Hatch (R) have recently co-authored the "Hire Now Tax Cut Act of 2010, bill." The bill would permit private employers who hire employees who have been out of work for a minimum of 60 days to forego the payment of the employer's 6.2% portion of the Social Security payroll tax for the remaining period of 2010. An additional inducement to hire, the bill provides employers with a $1,000 tax credit that may be taken in 2011 provided the employer keeps the employee on the payroll for a full 52 weeks.

Will employers take advantage of such temporary incentives? Are such incentives enough of an inducement to overcome the recordkeeping burdens associated with tracking a subset of new hires? How effective is an incentive if as a business, sales are still down? How much of a return is 6.2%? As a business, will I know how long a person has been out of work? At what point does the recordkeeping overhead outweigh the 6.2% incentive?

If an employer hires a $10 per hour employee and the employee works a standard 40-hour workweek beginning March 1, 2010, the employee will earn approximately $15,600 and the employer will forego $967 in Social Security payroll taxes. The employer is still out $15,600 in wages, plus other taxes, and any benefit costs, the cost of recruiting, hiring, training, … etc. Will this be enough of an incentive to hire that extra employee?

The employer is going to hire only when there is sufficient additional business to justify a hire and only then. The incentive, any incentive, does not, in and of itself create the demand for that additional hire; the demand is created by the additional business needs. More customers, more orders, more services being demanded which cannot be satisfied with the employer’s current labor pool is the force behind expansion of the employer's workforce. The incentive will not influence the employer's decision making until the demand for the additional employee is present.

Historically, employers increase the hours of their current labor pool prior to taking on additional employees. Even if the employer has to pay overtime, overtime is often a more effective means of meeting increased demand rather than additional employees. Only when the cost of overtime exceeds the cost of that additional employee will the employer consider a new hire. Even then, many employers turn to temporary workers to fill the gap until it is clearly established that a long-term need is present.

Is an incentive to hire additional workers counterproductive? Maybe. Businesses, especially small businesses often lack the capability to manage any program that requires additional administrative support or recordkeeping. This is true when such programs are short term temporary attempts at resolving a long-term problem.