WASHINGTON — In proposing a one-year, $33 billion tax credit for small businesses, the Obama administration is simultaneously seeking to stimulate hiring by reducing payroll taxes and to turn its attention to a constituency that has historically been associated with Republicans.
Hours after the Commerce Department announced that economic growth had picked up at the end of last year, President Obama visited a machine plant in Baltimore on Friday to promote the plan, which would give companies a tax credit of up to $5,000 for each new hire and reimburse them for Social Security taxes if they expand their payrolls. The credit is capped at $500,000 for each employer.
“Now is the perfect time for this kind of incentive because the economy is growing, but businesses are still hesitant to start hiring again,” Mr. Obama said at the Chesapeake Machine Company, which makes custom industrial equipment.
Earlier this month, the nonpartisan Congressional Budget Office concluded that reducing the payroll taxes of employers would be the most cost-effective approach — after extending unemployment benefits — to stimulating economic output and job growth.
Even so, the proposal, which would be the first federal wage subsidy since the New Jobs Tax Credit in 1977-78, met with a wary response from Republicans.
Representative Dave Camp of Michigan, the top Republican on the House Ways and Means Committee, which oversees tax matters, said, “A sprinkling here and there of a few poll-tested proposals won’t provide enough help or get small businesses hiring again.”
He said that business owners were alarmed about how Mr. Obama’s proposals on health care and energy would affect their bottom line.
Charles E. Grassley of Iowa, who is the top Republican on the Senate Finance Committee, said in a statement that “tax incentives that encourage job creation can help if they’re done right.” He added, however, that “Congress will be swimming upstream with tax relief if it doesn’t also do something about the bad environment for small-business growth.”
The National Federation of Independent Business, a small-business lobby group that has traditionally been close with Republicans, also expressed skepticism. It said the $5,000 tax credit for new hires would only benefit “a limited number of small employers” but said the payroll-tax credit had potential.
Administration officials said the proposal was intended to offer the maximum incentives for employers to add workers, as well as to increase wages and working hours for current employees.
With the unemployment rate at 10 percent, the administration also wants a policy that can have an immediate effect.
“The president’s plan is to make the credit retroactive to Jan. 1 of this year, so employers can go out and start hiring right now,” said Alan B. Krueger, assistant Treasury secretary for economic policy. Employers would have the option of receiving the tax credit on a quarterly estimated basis, which would get the money into their hands earlier in the year and provide an added incentive to hire.
Mr. Krueger said the plan contained provisions to prevent abuse by employers seeking to get the tax credit and wage bonus by, for example, replacing a full-time worker with two part-time ones making the same total salary. The rules would also prevent companies from renaming themselves or merging to claim the credit.
“We’re not going to let you game the system to take advantage of the tax credit, unless you’re doing right by your workers,” Mr. Obama said in Baltimore.
One criticism of wage subsidies like the one in the 1970s, which Mr. Krueger said served in some ways as a model for the Obama administration’s proposal, is that they benefit employers that would have hired new workers anyway.
At its peak, the 1977-78 program, established during the Carter administration, directly subsidized some 2.1 million new workers, the Congressional Budget Office found. But it is impossible to know what hiring would have been without the credit. Only a tiny fraction of employers that knew about the credit at the time said it had prompted them to hire more workers, one study found.
Jason Furman, deputy director of the National Economic Council, said the new proposal addressed that problem by encouraging all forms of payroll expansion, not just hiring. “We have very much been emphasizing that you get a tax cut not only for hiring additional workers but also for raising wages, increasing work hours and creating better-paid jobs,” he said. “We view this as having all the benefits of a normal tax cut, plus the extra benefit of job and wage incentives.”
In combining a tax credit for new workers with a wage bonus for payroll expansion, the administration’s proposal resembles elements from other recent proposals.
Under a plan announced this week by Senators Orrin G. Hatch, Republican of Utah, and Charles E. Schumer, Democrat of New York, companies that hire an unemployed worker would not have to pay the Social Security payroll tax on that worker for the duration of 2010. Another plan, put forward last October by the Economic Policy Institute, a liberal research group, emphasizes expanding payrolls. It would refund 15 percent of new payroll costs in 2010 and 10 percent in 2011.
Timothy J. Bartik, an author of the institute’s plan, estimated on Friday that the president’s proposal would create at least one million jobs at a cost of $30,000 a job. “It will not solve the United States’ current employment crisis, but it will make a significant dent in our employment problems,” said Mr. Bartik, an economist at the W. E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
The National Federation of Independent Business said it would prefer to see a payroll tax holiday extended to “all small employers, not just to employers that can afford to increase wages,” but the Obama administration believes such a plan would not do enough to stimulate hiring or wage increases. Such a plan would also provide a bigger benefit for higher-paid workers, while under the Obama plan, companies would not get credit for increasing wages on employees making more than $106,000, the maximum annual wage subject to Social Security taxes.
Even so, Mr. Obama himself left room for negotiation. “I’m open to any good ideas from Democrats or Republicans,” he said in Baltimore. “The key thing is it’s time to put America back to work.”