Tax Breaks: Incentives or Rewards?

Tax legislation is not exclusively about raising revenue; it’s about incentivizing certain actions that Congress deems worthy. Last year there was a deduction for sales tax on new car purchases as a way to stimulate car sales. For the past two years, there has been a tax credit for certain homebuyers as a way to stimulate the housing market. And there are various business-related tax incentives.

Business incentives

Under the Hiring Incentives to Restore Employment Act, there currently is a payroll tax holiday for employers who hire workers who have been unemployed for at least 60 days. The payroll tax holiday is 6.2% of wages (the Social Security portion of FICA paid by employers); employees still owe their full share of FICA.

The question is: does the payroll tax holiday stimulate employers to hire new workers or is it merely a reward for action that would have been taken in any event?

Under the Patient Protection and Affordable Care Act there is a tax credit for certain small employers (no more than the equivalent of 25 full-time employees) who pay at least half of the cost of health insurance premiums for their staff. The credit is up to 35% of these premiums (find details here).

Again, the question is: will this tax credit cause small employers to pay for premiums if they are not already doing so in order to claim the credit?

Evidence that tax breaks work as incentives

The Treasury released a report on August 2 showing that between February and June, 5.6 million workers have been hired who entitle employers to the payroll tax holiday. If these 5.6 million newly-hired employees remain on the payroll for the rest of the year, their employers are eligible for an estimated $6.2 billion in payroll tax savings (employers can claim the exemption from Social Security taxes for all wages paid to qualifying employees through the remainder of 2010).

A report by FamiliesUSA and Small Business Majority claim that more than 4 million businesses will qualify for the small employer health credit in 2010; of these, 1,198,700 will qualify for the maximum credit.

No conclusion yet

The government report would seem to imply how well the tax break is working to stimulate employment. The numbers, however, don’t bear this out.

How many of these employers would have hired the new workers even if there were no tax incentive? There are no numbers on this information.

The report by the Small Business Majority merely reveals eligibility based on company payroll size; it doesn’t indicate how many employers who previously did not pay premiums now will do so because of the credit.

Business owners I’ve spoken with indicate that the payroll holiday is nice but not enough to get them to add to their payroll. The tax credit for health insurance is nice, also, but those who do not currently pay for coverage are still put off by the high cost of premiums.

It would be nice to poll small business owners to discover whether their actions are tax-motivated in any way.

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