Chairman Evans and members of the Committee, thank you for the opportunity to testify today. My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute. DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low- and moderate-income residents.
I support the intent of this bill to create more job opportunities for DC residents, and I especially appreciate the tremendous focus on job creation by this bill’s chief sponsor, Councilmember Kwame Brown, as well as the full Council.
At the same time, I am concerned that this bill will not efficiently achieve the goal of increasing employment among DC residents, especially among those residents facing the greatest employment challenges. And because this bill could have a significant cost, it would consume resources that could be spent on other, more effective job creation efforts.
Generally, research on job creation tax incentives has raised serious questions as to their effectiveness.[1] Business hiring decisions are driven largely by market factors, which means that tax incentives are unlikely in most cases to make the difference between not expanding and expanding a business’ employment base. The fact that bill 18-658 provides an annual tax credit equal to just 3 percent of wages further suggests that it is unlikely to affect many hiring decisions.
Given that, it is likely that the tax credit propose under bill 18-658 largely would go to businesses that would have hired new workers anyway, which is what the research on jobs tax credits generally shows.[2]
- The tax credit would be eligible to businesses that expand over the next five years. It is highly likely that the District economy will be in recovery from the recession during this period, which means that many businesses are likely to be expanding. These companies could claim a tax benefit for hiring they planned to do anyway. (It is worth noting that the just-passed federal jobs tax credit is in effect for just one year.)
- The Job Growth Incentive Act only provides a tax incentive for hiring DC residents, but it doesn’t necessarily require businesses to change their hiring practices to favor DC residents. Currently, about one-third of jobs in the city are held by DC residents. This means that on average, a business expanding by 30 workers or more would hire at least 10 DC residents ‘ and would qualify for the proposed tax credit without altering their behavior at all.
- The hope of this bill is that tax incentives will encourage employers to focus more on hiring DC residents than they currently do. But it is not clear whether a credit that equals roughly $1,500 a year for a $50,000 employee would be sufficient to encourage employers to alter their hiring practices or delay needed hiring decisions to identify qualified DC residents.
- The bill requires employers to show that the credit is essential to their hiring decision, but given the size of the credit, it is hard to see how this case will be made.
A further concern with this bill is that employers can only receive the credit for creating jobs with above-average wages. While the intent of this provision is good ‘ to incentivize creation of good jobs ‘ the DC residents facing the highest rates of unemployment tend to have lower skills and limited educations and thus would not quality for jobs at these wage levels. The highest unemployment rates in DC are in Wards 5, 7, and 8.
In the end, this bill could have a significant cost in terms of lost tax revenue without doing much to help DC residents who need work. Because DC must balance its budget each year, every dollar devoted to this tax credit would take resources that might be spent on other workforce development efforts.
Many researchers and policymakers have pointed out that unemployment has risen in the District in the recession even though the number of jobs in the city has continued to grow. The large mismatch between the skills of DC residents and the skill demands of jobs being created here is the greatest obstacle to increasing employment among DC residents. This suggests that job creation efforts should focus on literacy, training and education, job counseling, and other efforts to help prepare residents for jobs.
If the District wishes to pursue job growth tax incentives, such incentives would be most effective if they were tied to jobs with family-supporting wages that are available to residents with limited job skills. The credit should be tied to businesses that hire workers from DC’s unemployment rolls ‘ potentially those that hire long-term unemployed residents ‘ or to businesses that offer training to help prepare workers for jobs.
Thank you for the opportunity to testify. I am happy to answer any questions you may have.
[1] See, for example, Robert Tannenwald, “Are Wage and Training Subsidies Effective’ Some Evidence from the New Jobs Tax Credit,”New England Economic Review, September/October 1982, pp. 25-34.
[2] See Iris Lav and Robert Tannenwald, The Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes, Center on Budget and Policy Priorities, 2010.