Obama proposes tax incentive to hire workers

WASHINGTON — President Barack Obama on Tuesday proposed a tax incentive for small businesses that add workers, even as Congress struggles to figure out how such an idea would work.

Lawmakers have been working for several months to develop a tax credit for businesses that hire workers, but they have been unable to figure out how to do it in a way that won't be abused.

Neither Obama nor his top advisers offered details Tuesday. They didn't say how big the tax break would be nor how it would be administered. Obama pledged to work on the issue with Congress.

"I believe it's worthwhile to create a tax incentive to encourage small businesses to add and keep employees and I'm going to work with Congress to pass one," Obama said.

Congress is running out of time to pass a jobs package this year, and the process will be even more complicated if the administration doesn't come up with details. Moreover, the Senate is preoccupied with the health care debate, making any action less likely.

Obama's other tax proposals were more familiar to lawmakers. He proposed extensions and enhancements of several tax breaks that were part of the economic stimulus package passed in February, including enhanced tax write-offs for companies that buy new equipment.

Obama also proposed eliminating capital gains taxes on small business stock, if it is purchased in 2010 and held for at least five years, expanding a tax break enacted in the stimulus package.

Majority Democrats in Congress, wary of an unemployment rate that stands at 10 percent as they enter an election year, said they would work with Obama to pass a jobs bill.

Republicans said Democratic efforts to pass a new jobs bill shows the last stimulus package was ineffective.

"We need to give the private sector confidence with permanent, long-term tax relief and immediate steps to rein in our skyrocketing deficits," said Rep. Tom Price of Georgia, chairman of the Republican Study Committee. "Temporary tax relief won't overshadow the long-term concerns of anxious employers."

Said Rep. Dave Camp, R-Mich., "It makes a good phrase, 'Let's have a tax cut for job creation.' But how it's actually done is something they have not been able to define after almost a year of talking about it."

Some tax experts said it would be difficult to fashion a tax credit that efficiently provides an incentive to small businesses to add workers. Do you offer a tax break for simply increasing payroll, or do companies have to hire more workers? How long must companies keep the workers? How would the requirements be enforced?

"You're trying to subsidize people for doing things they wouldn't otherwise do, but we don't know what they would otherwise do," said Eugene Steuerle, a Treasury Department official in the Reagan administration who is now co-director of the Tax Policy Center, a Washington think tank.

John H. Bishop, an economist and a professor at Cornell University, has helped develop a proposal for a tax credit for companies that increase the amount of their payroll subject to Social Security taxes. Since only the first $108,600 of a worker's pay is subject to Social Security taxes, executives couldn't get the credit by giving themselves big bonuses, he said.

Some companies could get credits simply by raising the pay of existing workers, but that would help the economy, too, Bishop said. Bishop's proposal, modeled after a similar tax credit enacted in the 1970s, has been circulating on Capitol Hill for several months.

"It does exactly what we want," Bishop said. "It focuses on hiring Americans to work now."