Lester Salamon's Op-Ed, "Solving the Jobs Conundrum: Let’s Borrow an Idea From the Environmentalists," appeared in the February 7 issue of the Chronicle of Philanthropy.
The White House’s new proposal to enact a payroll tax credit to encourage hiring is a useful step toward spurring job growth in the American economy. Especially important is the fact that this is the one tax credit that can help not just for-profit companies but also nonprofit organizations, which have been one of the few real engines of job growth during past recessions.
However, with evidence mounting that nonprofit job growth, too, has stalled and in some crucial fields, such as social services, declined last year, it seems likely that something more robust than forgoing up to $5,000 in payroll taxes for each new employee will be needed.
But the two other most prominent ideas for job creation in Washington these days—providing grants and other aid to states and offering income-tax credits to small businesses and the “green economy”—both have significant shortcomings.
Grants can be more focused but have proved to be cumbersome and difficult to translate quickly into “jobs on the ground.” Besides, in the political climate created by the Democratic loss in the Massachusetts Senate last month, a large new spending program will face tough sledding in a deficit-conscious Congress.
Tax credits like those advanced by the Obama administration typically go down easier politically (they sound like tax cuts to Republicans) but often miss important targets. It is important to note that, except for the payroll tax credits President Obama just proposed last month—which amount to about 6 percent of payroll costs—such credits offer no relief to nonprofit groups because they do not pay taxes. Similarly, such credits are of minimal value to many green industries, which are years away from earning profits and thus owing taxes.
Fortunately, there is a way to solve this conundrum, but it requires some imagination. In particular, policy makers could usefully take a page from the cap-and-trade exchanges their colleagues in the environmental field have developed. These exchanges essentially use a market mechanism to transfer pollution credits from firms that can generate them most efficiently to those that do not, thus reducing pollution at the lowest possible cost.
A similar mechanism could be used to promote job creation where it is most needed and possible. Here is how this might work: Instead of trying to muster support for a big-ticket grant program, the administration and Congress would take the easier route of passing a Work for Americans Tax Credit establishing an equivalent amount of tax relief distributed by formula among states. This credit would provide eligible nonprofit and for-profit employers $30,000 in tax relief for each long-term unemployed person they employ, up to whatever number of employees Congress wanted to cover. Employees would have to remain on the job for a set period for the credit to be collectible.
Unlike existing tax credits, however, this one would be tradeable. Eligible establishments would receive Social Responsibility Certificates worth $30,000 in federal income-tax credits for each eligible person they hire. If the employer is a for-profit business that earns profits and faces tax liabilities, it could cash in its certificates when it files its taxes (or through estimated tax filings in advance of this).
But if the establishment is a nonprofit organization or a start-up green enterprise with no net profits, it could sell the credits, presumably at a price below $30,000, to a business that has no plans to hire credit-eligible workers but can make good use of the credits. In this way, the market, rather than some government agency, would allocate the available job-creation benefits among businesses and other organizations based entirely on their ability to create jobs.
For this system to work, of course, some kind of exchange mechanism would be needed to handle the certificate transactions. But such mechanisms already exist in the environmental arena, and these could either be copied or adapted to handle the new social-responsibility certificates. For example, the Chicago Climate Exchange handles billions of dollars of carbon-offset contracts each year and has mechanisms in place that could easily do the job. Similarly, some system will be needed to allocate the authorized quantity of tax credits. But here, too, a model already exists in the system for allocating low-income housing tax credits among states and projects.
At a minimum, Congress and the administration could usefully consider a $5-billion pilot project to test this approach by focusing on small businesses, nonprofit organizations, and green enterprises in states with especially high unemployment.
If it works, this tradeable tax-credit mechanism could be used to create market incentives to encourage other worthwhile objectives, such as training and hiring former drug addicts, fostering social innovation, or promoting development in lagging areas. In this way it could help finance a robust surge of social enterprises. Businesses that pay more than the face value for the certificates could even receive charitable-contribution deductions on the extra resources they are channeling into social purposes.
In short, here is a way to harness Adam Smith’s “hidden hand” to foster social good. And it may be the only way to get a serious jobs program off the ground.