This Friday, the February jobs report will be released by the U.S. Department of Labor, against the backdrop of Congressional attempts to jump-start job creation. To assess whether the legislative Cavalry is really on the way, at least in terms of what the federal government can do to incentivize hiring, IB spoke to local accounting executive Peter Oettinger, partner in charge of Wegner CPAs’ Baraboo office.
His comments come as the U.S. economy expanded impressively, by 5.9%, in the fourth quarter of 2009, but one would be hard-pressed to find economists who expect that level of robustness to continue.
They also come as job market watchers expect businesses to gradually dip their toes in the water, perhaps starting with temp-to-hire arrangements before deciding to proceed with long-term commitments.
Oettinger believes there are some things in proposed national legislation that can spur job creation. However, they are not necessarily contained in a much publicized Senate “jobs bill,” but in the much-maligned health care bill.
Last week, the United States Senate advanced a bill $35 billion jobs bill that would:
- Allow employers to avoid paying Social Security taxes for the remainder of 2010 on new hires who have been employed for at least 60 days.
- Give businesses a $1,000 tax credit for each new worker who stays on the job for at least one year.
Critics Charge That It’s Too Little Too Late
Too little, too late — especially when the economy has shed seven million jobs since 2007 and since Senate Majority Leader Harry Reid shelved a broader, $85 billion bill put forth by Democrat Max Baucus of Montana and Republican Charles Grassley of Iowa. That measure featured the extension of unemployment insurance and COBRA benefits, and would have extended expiring tax breaks like the federal tax credit for research and development.
With the larger package apparently scuttled, one Washington watcher, the alliantgroup’s Dean Zerbe, referred to the remaining Senate legislation as “this mouse of a jobs bill.”
Conspicuously absent from the bill is an Obama administration proposal to eliminate capital gains taxes on certain business start ups. According to Oettinger, anyone that starts a new C Corporation and operates it for five years would then be able to sell the company and pay no capital gains taxes on the sale.
The measure attempts to address the lack of C Corp start ups. “Very few businesses right now, if they are starting up, will organize as C Corporations, and the reason is that when I start a new company, I generally have losses and start-up costs, and I can’t use them against my other taxable income if I’m a C Corp,” he explained. “So people use limited liability companies because they can deduct the losses in the start-up years.”
In addition, he said C Corps are more expensive to operate administratively than other business entities. Generally, they have to have a board of directors, they must have annual meetings, and “they have to do a lot of non value-added, overhead items that other entities simply don’t have to do.”
Under existing law, a C Corp can exclude half of a capital gain, but based on Oettinger’s experience, it has done little to incentivize business formation. Of the firm’s 2,500 business clients, he said none have taken advantage of the existing rule.
“With the economy the way it is right now, I don’t think it’s much of an incentive at all,” he opined. “It’s very difficult to get financing for existing businesses. I’m not aware of any banks that will even talk to you if you haven’t been in business for at least two years.”
Senate Jobs Bill
On the track record of using tax credits to promote hiring, Oettinger cited a timing issue. He believes the concept of a tax credit that makes the creation of a job less expensive for employers is sound, but there is an administrative problem. “It’s based on your payroll tax reporting forms that you file every quarter, and it’s also based on your annual federal unemployment tax return that you file once a year, which is due at the end of January,” he said. “I wouldn’t know if I’m eligible for the credit, if I hire new people this year, until 2011, so I don’t get the money until 2011.”
To address the timing issue, policy makers are talking about allowing businesses to take advance credits, which would be claimed on quarterly payroll reports called 941s.
The amount of the credit also would have to be addressed, Oettinger indicated. “The $1,000 that I might get next year doesn’t even pay for my hiring costs, let alone any training costs,” he stated. “That doesn’t help me.”
The Social Security provision could be helpful, but not necessarily for small employers. The provision would save companies that hire 7.65% per new hire on their payroll. That’s certainly helpful, Oettinger noted, but probably will not be enough to convince businesses to hire “many more people.” He thinks it would help larger employers — “Hire 16 and get one for free” — and he said employers that are looking to hire anyway will use this measure. However, it’s not enough to get others to “take a risk and hire.”
That’s the Ticket
There are some ideas floating around Washington that would be helpful, and one of them comes from an unexpected source: the proposed health care reform package, which is now being billed in part as a job-creation measure. Oettinger cited a provision that would allow cooperatives to offer health insurance to their members, and to cross state lines to find the best coverage. If you belong to a credit union, and the credit union is a cooperative that has branches in other states, “you could actually bid your health insurance with health companies that are headquartered in other states.”
This would help such organizations get better health insurance premium rates, even reduce their premiums, and tap into a large plan that offers economies of scale and covers pre-existing conditions.
The co-op measure is separate from a provision that would allow employers to buy health insurance across state lines, but it’s a similar concept.
(Full disclosure: Oettinger is involved with one of the national lobbying groups working with the co-ops. Among the groups pushing for this legislation is the National Cooperative Business Association.)
Another helpful provision requires more transparency, or public reporting, among primary benefit managers that administer prescription drugs plans and pay claims. The health care bill would require them to be transparent so that people could actually see what they are paying the ultimate providers, aiding health care consumers when they shop for prescription drugs.
At the moment, PBMs are not required to report anything, and Oettinger had personal experience with that when a family member needed a certain treatment. The HMO insisted that he had to get it through them and initially would not provide a copy of the invoice. When Oettinger finally got his hands on it, he found they were charging him triple what the local pharmacist would have charged for the same product.
“Their comment to me was, ‘Well, you’re not really paying for it. You just pay your co-pay and you’re done,’” he recalled. “Well, I know that’s not true. I am going to pay for it. I pay for it through my insurance rate. I knew enough to go chase it and get it, but that sort of transparency would be required under the pending legislation.”
Give Me Some Credit
Legislation aside, the number one job-creation tactic Washington should employ is getting bank regulators and the Obama administration on the same page, Oettinger indicated. At the moment, the President is encouraging banks to lend more, but the federal government’s bank regulators are clamping down even though steps taken by the Federal Reserve have increased the monetary base by $1 trillion. If the government could simply get some capital moving again, “it would take care of a lot of the problem,” he said.
Oettinger believes that bank regulators are over reacting to the bad loans in the housing market that brought the economy to its knees. “They [bank regulators] report to the president. He doesn’t need Congress to do anything, and that’s what’s so frustrating in trying to get companies some capital. The capital is there. There are banks that have money to lend. They are just not being allowed to do it.”
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