Obama seeks tax credits for companies that hire new workers

Reporting from Washington —  Acting quickly on a pledge in his State of the Union address, President Obama today will unveil a proposal to give a tax credit of up to $5,000 to companies for every new employee they add to their payrolls this year.

A separate measure would offset the additional Social Security taxes that employers pay for boosting wages or hours of existing workers.

Both programs, which combined would cost an estimated $33 billion and require congressional action, are aimed at spurring small businesses to move swiftly to hire new employees and bolster an economy that is technically growing but reeling from double-digit unemployment.

Separately, the government is expected to report today that the American economy, benefiting from a one-time jump in inventory adjustments, expanded at an annualized rate of 5% or more in the fourth quarter. But most economists think growth will weaken to about half that pace this year, not enough to stimulate much job creation.

A senior Obama administration official wouldn’t predict how many jobs might be created by the proposed new tax credits, saying only that the number would be “very substantial.”

Some analysts said it would probably be in the hundreds of thousands, but other economists doubted that this tax-relief plan, considered modest in size, would have much of an effect. That’s because many other factors -- tight credit, sluggish sales and concerns about government policies such as healthcare and energy -- are restraining small businesses from hiring.

Republican lawmakers are likely to be receptive to a tax-relief proposal that focuses on a politically popular constituency.

“We want to make sure it’s properly targeted,” a Republican aide in the Senate said, “but our side has been saying this is the kind of thing we should have been spending stimulus money on from the get-go.”

Though the tax credit is a good incentive, Simi Valley business owner Janine Montoya said it wouldn’t be enough for her to start hiring.

“Until consumers start spending, we can’t,” said Montoya, 43. She said sales at her family’s two air-conditioning servicing companies fell by half last year. “People are afraid, and our business is disappearing. And I know we’re not alone.”

Spending is soft largely because many people are worried about their jobs, and confidence isn’t likely to improve much until hiring picks up, posing a political conundrum for the president.

But Mike Zaya, owner of PrintRunner.com, a printing company in Chatsworth, thinks the plan might be just the incentive that small businesses need.

“There are so many businesses out there that are on the fence on whether or not they should hire,” said Zaya, 30. “This could be the catalyst that pushes them over.”

He is considering adding about 12 to 14 people. If the credit goes into effect, he said, it will make his decision a lot easier.

“It’s essential that the government does something like this,” Zaya said. “Small businesses power our country’s economy. We need every break we can get.”

Obama’s proposal is part of a renewed focus on job creation to shore up his battered standing with voters and instill new confidence in his economic strategy, especially after the Democrats’ bruising defeat in the Senate race in Massachusetts last week.

A centerpiece of Obama’s job-creation effort is to do more for small businesses, addressing criticisms that his administration has attended to such corporate giants as General Motors Co., American International Group Inc. and Citigroup Inc. while paying little attention to small employers that have long been the engine of job growth, especially coming out of recessions.

Obama said in his State of the Union address on Wednesday that he also would take steps to help small businesses get financing and boost their exports. “We should start where most new jobs do -- in small businesses,” the president told the joint session of Congress.

Liberals in the Democratic Party and others have been advocating much bigger tax incentives for job creation. Obama settled on a smaller amount that was probably seen as easier to sell to a Congress that is under increasing public criticism about deficit spending.

“I’m glad they’re getting out in front on this,” said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank in Washington. He said offering tax credits was one of the most effective methods to stimulate hiring. His group had proposed an $80-billion plan.

“I think the Congress and the administration need to think bigger,” he said.

Mark Zandi, chief economist at Moody’s Economy.com, also supported tax breaks to energize the job market, but he noted that by themselves, “they are not enough to get the job machine going quickly.”

Small businesses with fewer than 250 employees account for about half of all U.S. jobs, but they continue to struggle even as many big firms show improving profits.

A fuller extent of their troubles will be seen next week when the Labor Department releases revised payroll data, which are expected to show that the nation lost many more than the 7.2 million jobs reported lost in the last two years. The revised data are expected to take into account more fully the closures of small firms, which have been hard to measure.

More nimble and quicker to make decisions, small businesses have tended to lead the nation in creating jobs coming out of recessions. But that may not happen this time around.

Many large companies are growing again, in part because the weak dollar has bolstered sales overseas, but small businesses are less likely to be involved in exports. What’s more, past economic recoveries often were led by the construction sector, which is dominated by small operators. That industry remains stuck in the doldrums after the housing bust.

“We’re seeing a bifurcated economy now,” said Denny Dennis, a senior research fellow at a research foundation affiliated with the National Federation of Independent Business, a small-business lobbying group.

Tax credits for hiring were considered in the $787-billion stimulus plan, but the idea was dropped, in part because of concerns that employers would game such a program.

Administration officials said the latest proposals would seek to curb such attempts by offering the maximum $5,000-per-hire tax credit only to employers that add employees on a net basis, with more new hires than layoffs and departures combined. Start-up companies would be eligible for up to $2,500 per new hire.

Businesses would receive tax reimbursement on pay raises that exceeded inflation, but that would not apply for increases that take a worker’s salary above $106,800.

The total amount of tax credits under both programs would be capped at $500,000 per firm, a move aimed at ensuring that the majority of the tax benefit would go to small businesses.

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Times staff writer W.J. Hennigan in Los Angeles contributed to this report.