The summer heat brought much debate over the deficit, the debt limit and the issue of jobs. The August unemployment rate announced earlier this month indicated no new jobs were created. The news was disappointing, as expectations were that in this stage of a recovery, there should be modest to high job growth to sustain the economic recovery.
President Obama presented his much-awaited jobs proposal Sept. 8. Parts of the proposal were predicted well ahead of the speech. Many have been in other proposed legislation championed by different members of Congress on both sides of the aisle.
The package presented has something for most employees and employers. The proposals, if enacted, will put cash in the hands of employees and employers. On Sept. 12, the White House released the legislative text of the American Jobs Act, which included some proposed revenue offsets to assist in paying for the proposed payroll and other incentives.
The payroll tax reduction proposal for employees is the largest of the items and is an extension of the current payroll tax holiday. This proposal will increase the amount of the payroll tax holiday from the current 2 percent of employee wages to 3.1 percent (equivalent to half of the social security tax) for employees. For a worker making $50,000 a year, this change would increase the annual savings from $1,000 to $1,530 that will show up on a pro rata basis in paychecks.
Employers will also benefit from payroll tax incentives if the proposals are enacted into law. The proposal will completely eliminate employer payroll taxes for employers that add new employees or increase the wages of current employees. The payroll tax cut would apply to the first $50 million in new hire wages or increased wages for current employees. For an employer with an average wage of $50,000, this represents a cut on payroll taxes of $1,000 per new employee.
The president has proposed additional payroll tax savings for small employers, defined as having less than $5M in payroll costs. The proposal includes a 50 percent reduction in payroll taxes (from 6.2 to 3.1 percent) for the employer share of the payroll tax on existing employees. The fact sheet provided by the White House trumpets that the employer payroll tax holiday will impact 98 percent of all employers.
To help benefit the long-term unemployed, employers that hire long-term unemployed can also be eligible for a $4,000 tax credit. The proposals also provide tax credits for hiring returning veterans, ranging from $5,600 to $9,600 per employee to employers of unemployed veterans.
While most of the benefits come from reductions in social security payroll taxes, there has been very little discussion on how these proposed payroll tax reductions will impact stability and solvency of the Social Security Trust Fund. Some may ponder whether the proposed payroll tax cuts may have opened the lock box on the Trust Fund. Others may argue the lock box was compromised years ago.
The proposals continue some other incentives. The trend for most of the past 10 years has been for an accelerated depreciation deduction or expensing of equipment purchases in some form. The proposal extends the first year asset expensing at 100 percent of the cost of newly acquired qualified assets for an additional year to included 2012. Additionally, the proposal has various provisions covering infrastructure spending as well as help to states and local communities to save jobs of teachers, police and firefighters.
Details of the funding of these incentives was to be included in subsequent announcements and proposals. There has been some thought that some items may be part of a larger deficit reduction project that will include a broad overhaul of the tax code including changes in tax rates, deductions and tax credits. There have been comments that some of the tax reforms may include consideration of how offshore earnings of subsidiaries are taxed. Currently, U.S. parent companies (operating as C corporations) are taxed on foreign earnings when the earnings are repatriated to the U.S., and then the U.S. allows a foreign tax credit for the underlying foreign taxes paid on such income. Many U.S. companies have structured their foreign operations to minimize foreign taxes and thus have a low effective rate of foreign tax on such earnings. Many studies have estimated that there are more than $1 trillion of accumulated earnings of foreign subsidiaries of U.S. companies sitting offshore in lower tax jurisdictions.
Many have argued that a repatriation holiday similar to what occurred in 2004/2005 may help invigorate the U.S. economy and generate some tax revenue in the U.S. The tax rate in 2004/2005 was at a federal effective rate of slightly more than 5 percent on offshore repatriations to the U.S. The 2004/2005 program raised more than initial budget estimates as many companies in technology, software, pharmaceuticals and other industries repatriated large amounts of offshore earnings. There has been a suggestion that a broader tax reform could make a repatriation more common and at a reasonable rate of U.S. taxation on such earnings.
It will be interesting to watch what happens. We all recall the Bush stimulus plan in 2008, the Obama stimulus plan in 2009, tax legislation enacted in September 2010, and extension of the Bush tax cuts in December 2010, all in an effort to provide economic stimulus and to add jobs to the U.S. economy. Since January 2008, when the first stimulus plan was proposed by President George W. Bush, the unemployment rate has risen from 4.9 percent to its current 9-plus percent. The success of such stimulus programs is not a sure thing. Some pundits say the U.S. economy has built up a tolerance to stimulus programs much as a drug addict builds a tolerance to a drug. We need only look to cash-for-clunkers rebates and homebuyers’ credit programs to see the incentive brings short-term benefits with a return to a deeper slide after the program ends. Perhaps longer term, less impulsive programs may benefit the U.S. economy in the long run.
There is some legitimate debate on whether the focus of any proposal should be on longer-term solutions for the economy rather than short-term fixes. By pumping some short-term stimulus into the economy, we all feel good for a while, but it doesn’t address the longer-term structural issues. One may make the case that the economy and the continuing stimulus is like getting a sugar high from eating a sweet roll for breakfast only to find that at 10 a.m., one is in need of another shot of something else to create a boost of energy. The cure isn’t more sugar but rather something that is more filling and sustaining.
Some of the recent proposals may have a place in a longer-term program of tax code reforms and not a short-term fix that disappears almost as fast as it was created. Dependency on a continued stimulus may require an intervention for a sustainable plan rather than a quick fix.
Bill Roth is a partner with the local office of BDO LLP. The views expressed are those of the author and are not necessarily those of BDO. The comments are general in nature and not to be considered specific tax or accounting advice.