Senate Job Creation Tax Credit Could Generate 8,000 to 18,000 Nonprofit Jobs

The Senate is currently working to complete a jobs bill that may come before the full Senate later this month. Among the provisions is a tax credit for job creation that, if enacted, could provide $1 billion in assistance to the nonprofit sector and generate 8,000-18,000 new nonprofit jobs.

This is a revised estimate (updated February 26) based on new budgetary numbers released February 23.

Summary of the Senate Proposal

The proposed Senate jobs creation tax credit would exempt private employers from paying the employer-paid half of Social Security taxes for new employees who are hired after February 3 through the end of 2010 and were unemployed for the previous 60 days or more. It would apply to wages paid to these employees beginning the day after the bill becomes law. Because it affects payroll taxes, nonprofit organizations would benefit.

The employer share of Social Security payroll taxes is 6.2 percent up to a maximum wage of $106,800. The proposal could provide tax assistance worth over $6,000 for highly-paid workers who are eligible for the credit and hired immediately. In most cases, however, the credit would would be significantly less, more typically in the $1,000-$2,000 range for lower-paid workers hired later in the year. The proposal provides employers an additional $1,000 tax credit for covered employees who are kept on payroll for a full 52 weeks, but this bonus applies to business taxes and will not benefit nonprofit employers.

The Social Security trust fund would be reimbursed from general tax revenue to make up for tax losses. Unlike a similar Obama administration proposal, the Senate proposal does not appear to be limited to organizations with an overall net increase in hiring. A more detailed explanation of the proposal can be found here. The bill text can be found here.

Impact on Nonprofit Hiring

According to a Congressional Budget Office analysis that reviewed job creation tax credits more generally, reducing payroll taxes for firms that increase their payrolls would add the equivalent of 8 to 18 full-time jobs from 2010-2011 for every million dollars of total budgetary cost (see also p. 21 of this CBO report). While this estimate does not exactly parallel the Senate proposal, it is close enough for the employment effects to be similar. According to estimates from the Joint Committee on Taxation released February 23, the core Social Security tax credit has been scored as costing $10 billion from 2010-2011 (this excludes the cost of the $1,000 retainment bonus, which has been scored as costing $3 billion through 2016 but does not affect nonprofits). Combined with the CBO analysis, this suggests that the Social Security portion of the tax credit would generate 80,000-180,000 new jobs in the economy overall.

Because nonprofits currently employ about 10 percent of the workforce, this further suggests that if the Social Security credit affects nonprofit employment proportionately it would create about 8,000-18,000 nonprofit jobs during this period. This number represents about 0.1-0.2 percent of all nonprofit employment in the United States, a small but positive increase. More generally, the proposal could provide slightly more than $1 billion in benefits to the nonprofit sector.

Some factors that suggest that employment generated may be higher than this estimate include:

• Nonprofit Employment Has Countercyclical Tendencies: Whereas demand in other sectors of the economy is typically pro-cyclical, meaning that it drops when the economy is doing worse, demand for services in much of the nonprofit sector is counter-cyclical, meaning that it increases when the economy is doing worse. As a result, given the same tax credit in a slow economy, nonprofit employers may be more likely to hire than for-profit employers. Note, however, that this countercyclical tendency may not be acted upon if resources to hire are not available (see below).
• Nonprofit Employment Is Labor Intensive: Nonprofits tend to be more labor-intensive than the rest of the economy. Labor costs tend to be a higher percentage of overall costs and thus have a greater impact on hiring and layoff decisions.
• Nonprofit Employers Can Not Siphon Off Tax Credits as ’Profits’: Perhaps most important of all, tax benefits received by nonprofits for hiring people they would have hired anyway would not be siphoned off in the form of profits or dividends. While they can be used to build endowments (for those nonprofits that have them), in a slow economy such “profits” are more likely to be used to expand or retain employment in other parts of the organization. As a result, a tax credit for nonprofit employers is more efficient, creating (and saving) more jobs at lower cost.

These positive factors may be offset by the following factors:

• Nonprofit Employment Is Highly Dependent Upon Private Giving and Public Funding: Despite increased need, nonprofits often suffer reduced charitable giving and reduced public funding (federal, state and local) during a slow economy, which limits their hiring capability and forces many to cut back on services when demand is highest. However, unlike a similar Obama administration proposal, the Senate proposal does not appear to be limited to organizations that expand their overall payrolls. Assuming this remains unchanged, the Senate proposal could potentially benefit any nonprofit, including those experiencing no net hiring or even net job losses overall.