Are job tax credits the best way to tackle DC’s unemployment crisis?
With DC’s unemployment rate at a record 12 percent – meaning 40,000 residents are out of work despite looking actively – efforts to increase employment in the city are desperately needed. The DC Fiscal Policy Institute testified last week on proposed legislation intended to do just that – the Job Growth Incentive Act of 2010. DCFPI’s director Ed Lazere praised the intent of the bill but raised concerns that it may not be the most effective way to increase employment opportunities, especially among those residents facing the greatest employment challenges.
The legislation would give a tax credit to businesses that increase their employment of DC residents by 10 or more workers before 2015. The credit would equal roughly $1,500 per year for a new employee earning $50,000, and the business would receive the credit annually for five years.
DCFPI raised the following points in its testimony:
- Research suggests that business hiring decisions are driven largely by market factors and that tax incentives in most cases do not make the difference between not expanding and expanding a business’ employment base. This means that the proposed DC tax credit largely would go to businesses that would have hired new workers, anyway.
- The Job Growth Incentive Act only provides a tax incentive for hiring DC residents, but it doesn’t necessarily require businesses to change their hiring practices to favor DC residents. Currently, about one-third of jobs in the city are held by DC residents. This means that on average, a business expanding by 30 workers or more would hire at least 10 DC residents — and would qualify for the proposed tax credit without altering their behavior.
- Employers would receive the credit only for creating jobs with above-average wages. While the intent of this provision is reasonable— to incentivize creation of good jobs — the DC residents facing the highest rates of unemployment tend to have lower skills and limited educations and thus would not quality for jobs at these wage levels.
If the District wishes to pursue job growth tax incentives, such incentives would be most effective if they were tied to jobs with family-supporting wages that are available to residents with limited job skills. The credit could be tied to businesses that hire workers from DC’s unemployment rolls — potentially those that hire long-term unemployed residents — or to businesses that offer training to help prepare workers for jobs.
In the end, though, tax incentives often are a blunt instrument, particularly for a goal as complex as increasing employment opportunities for residents that may lack the skills needed for DC’s jobs. As we have and others have pointed out, there is a large mismatch between the skills of DC residents and the skill demands of jobs being created here, and this is the greatest obstacle to increasing employment among DC residents. This suggests that job creation efforts should focus on literacy, training and education, job counseling, and other efforts to help prepare residents for jobs.