Big hurdles to Obama's $33 billion in tax cuts for businesses

President Obama proposed a new tax credit to spur job creation Friday, and reached out for Republican congressional support to approve it.

The $5,000-incentive-for-each-new-employee-hired plan faces big hurdles, however.

The first challenge will be to win support in an election year, with Republican opposition emboldened by the recent win of a Massachusetts seat in the US Senate. The GOP takeover of that seat has made it harder for Obama-backed proposals to pass.

Second, if the plan becomes law it may give only a modest lift to job creation at a time when the economy desperately needs to boost employment.

Under the president's plan, employers would get a $5,000 tax credit for each employee they hire in 2010 (on a net basis, so businesses can't fire one person and reap a credit by hiring another).

Also, small businesses that increase wages or hours for their existing employees will be reimbursed for the resulting rise in their Social Security payroll taxes. This could help boost the economy by raising incomes – and it could prevent employers from "gaming the system" by hiring more people but having them work shorter hours.

It's a tax cut. What's not to like?

Mr. Obama, making his pitch Friday at a meeting of House Republicans in Baltimore, touted the idea as a policy on which the two major political parties can work together to lift the economy.

"Join me," he said, arguing that tax cuts for business should appeal to Republicans. But the plan would expand the federal deficit, even as spending discipline is rising as a Republican priority.

Economists, meanwhile, are divided over whether the tax credits will do much for job creation.

"How can you hire a permanent employee based on a temp tax credit?" asks John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C.

Supporters of the plan argue that it will encourage on-the-fence employers to hire this year rather than waiting, and that the nation’s jobs deficit is so large that policies need not be perfect in order to be tried. Echoing Republican views, Mr. Silvia says a better way to create jobs would be for Obama to remove uncertainty among employers about the policy environment ahead. Areas of uncertainty for firms currently include tax policy, regulation, possible healthcare mandates, and a boost to energy costs if a "cap and trade" system is imposed to curb US carbon-dioxide emissions.

Other proposed breaks for business

Obama has pledged to hold personal-income taxes at current levels, except for those with incomes above $250,000 (for households filing joint returns). That upper bracket includes many self-employed people who work under contract and small-business owners.

In his State of the Union address Wednesday, where Obama first mentioned the jobs tax credit, the president sought to reassure Americans that he is focused squarely on jobs and is not unfriendly to business.

"While we're at it, let's also eliminate all capital gains taxes on small business investment, and provide a tax incentive for all ... businesses to invest in new plants and equipment," he said.

The push by Obama and congressional Democrats to pass a jobs bill comes at the dawn of an election year, and also as the economy is showing some signs of picking up. A government report Friday showed solid economic growth in the fourth quarter of 2009. And in a recent USA Today survey of 50 economists, 47 percent said they are now more optimistic about the outlook than they were three months ago. Still, 61 percent in the survey said the federal government should do more to boost job growth.

Conditions for people seeking jobs are unusually tough. The official 10 percent unemployment rate is the highest since the early 1980s, and that doesn't include 6 million people who want jobs but have dropped out of the labor force due to discouragement.

“Today’s numbers showing GDP growth at 5.7 percent in the previous quarter is encouraging, but real economic recovery will only come when those who are unemployed are able to find good jobs once again," said Sen. Byron Dorgan (D) of North Dakota, in a statement supporting the tax credit.

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