NEW YORK (CNNMoney.com) — When President Obama called last month for a new tax break to spur job creation, critics blasted him for offering no specifics. On Friday, Obama plans to fill in the details: He wants to give businesses a $5,000 tax credit for each net new employee they hire this year.
Job creation “must be our No. 1 focus in 2010,” Obama said Wednesday night in his State of the Union address. “We should start where most new jobs do — in small businesses.”
Obama will travel Friday to Baltimore, where the local unemployment rate is nearly 11%, to unveil his tax-cut road map. The $5,000 per-worker tax credit he’s calling for would be available to businesses of any size, and would be retroactive to the start of the year. Startups launched in 2010 would be eligible for half of the tax credit.
Obama is also proposing a reimbursement of the Social Security taxes businesses pay on increases in their payrolls this year. Firms could earn the credit by raising wages or increasing the hours of their current workers, as well as by hiring new employees. The tax credit would be adjusted for inflation, and would not apply to wage increases above the current taxable maximum of $106,800.
The proposal will cost $33 billion, according to estimates released by the White House, which expects 1 million businesses to benefit from it.
While any business would be eligible for the tax breaks, the refund would be capped at a total of $500,000 per firm, a move the White House hopes will steer the biggest benefits to the smallest companies. Firms eager for cash could claim the credits on a quarterly basis, sparing them the wait before they file their annual taxes.
Hiring tax credits have been proposed before, and shot down in part because of their vulnerability to abuse. Senior White House officials say Obama’s plan includes a slew of safeguards to prevent companies from gaming the system.
For example, companies would have to show net increases in their staffing and payroll to qualify. Businesses that cut 20 workers and hire five wouldn’t be eligible, nor would those that lay off a $50,000 worker and hire two $20,000 staffers.
Main Street’s cash crunch: Several in Congress are already on board with the idea of tax credits for hiring. Senators Charles Schumer, D-N.Y., and Orrin Hatch, R-Utah, unveiled their plan, which has some similarities to Obama’s, in an op-ed on Wednesday.
But some business owners say the idea puts the cart before the horse.
“I need money before I hire people, not after I hire them,” said Jimmie Hughes, the owner of Grand America in Richardson, Texas. Hughes’ 15-person company sells supplies for a range of businesses, including funeral homes and police departments.
The company’s sales are growing, and Hughes would like to hire more people. But while his receivables ledger is at a record high, his cash flow is suffering. Hit by the recession, his customers are taking longer than ever to pay their bills. Hughes, who started the company at home as a sole proprietor in 2003, has maxed out half a dozen credit cards trying to keep pace with the growth.
“It all comes down to cash — how much cash do I have to apply to what I owe my vendors?” Hughes said. His staffing decisions will be based on “my cash-flow situation, not a tax credit.”
Jeff Moss, the owner of Pancho’s Border Grill in Great Neck on Long Island, N.Y., had a similar reaction.
“In my line of work, the restaurant business, jobs are going to be created or deleted as a direct result of customer traffic,” Moss said. “It is not like we are a Fortune 500 company, where we are going to be adding hundreds of jobs and those credits are going to be adding up. We are a small business. If we are adding one employee, the effect on the bottom line is going to be negligible.”
What Moss really needs is for the economy to pick up so his customers will increase their discretionary spending. Two weeks ago, he shut down his second restaurant in another, less affluent area of Long Island.
“When the economy tanked, traffic dropped,” Moss said. “That was 30 people who lost their jobs, and that was a bitter pill to swallow.”
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