Surprises may hide in tax break details

The New York Times presented Democratic gubernatorial candidate Creigh Deeds with a good news/bad news situation last week.

The good news: Nobel laureate economist Edmund Phelps and U.S. Rep. Eric Cantor, the Republican whip in the House of Representatives, both think a payroll tax credit for businesses that create new jobs is a great idea. Deeds has proposed a similar tax break at the state level.

The bad news: If Congress creates the federal tax break, it would probably negate Deeds' state version.

The lesson here is that tax credits are tremendously popular in an economic downturn, but they also can bring unpredictable results.

Deeds isn't the only state candidate rolling out a tax credit plan this year.

Republican Bob McDonnell favors expansion of an existing state credit that encourages businesses to locate in economically depressed areas.

Often tax credits are touted as a means for states to remain competitive with their neighbors when trying to attract economic development prospects. The veracity of those claims is hard to prove.

Credits are used more sparingly at the federal level, where the goal is directly tied to job creation rather than a vague sense that "everybody else is doing it." That allows for clearer performance measures.

A federal payroll tax credit was last used in 1977 and 1978, and an American Economic Review study concluded that it was responsible for adding about 700,000 of the 2.1 million jobs that received the tax break.

Businesses were already hiring before the credit was adopted in the 1970s, so many of the jobs would have been created without the credit.

Those pushing to revive the idea contend it would be even more successful now. Many economists believe the nation is entering a jobless recovery, which could delay a return to economic health for months or even years.

A payroll credit would make it cheaper for businesses to add new workers and hasten the recovery.

The federal credit under consideration would equal 15 percent of the total expense of adding an employee in the first year and would cost about $20,000 per job.

A new analysis by The Commonwealth Institute for Fiscal Analysis, a research group that focuses on poverty issues, raises concerns that should be considered before any tax credits are created or expanded.

Executive director Michael Cassidy notes that it becomes harder to police programs when qualifications are lowered to reach more companies. The payroll tax credit would be available to any business creating even one job, for example. Even credits that require the creation of 25 or 50 jobs, as McDonnell suggests, could be abused. A company might shut down and re-open under a new name to get the tax break without actually hiring any new workers.

The key questions for both state and federal tax credits are: Will they create real, permanent jobs, and will they be good jobs? Deeds proposes, for example, to award his tax credit only for jobs that are "good-paying with benefits" but doesn't explain what that means.

The truth is no one has discovered an easy cure for today's economic woes, and any true solution will require a national effort. Deeds and McDonnell are right to search for ways to help unemployed Virginians get back on their feet, but they should be careful about promising too much from proposals that offer too few details.