Continued response to Question 3

With the gracious cooperation of the Kalamazoo Regional Chamber of Commerce, the Upjohn Institute ran an e-mail survey of Kalamazoo Chamber members from November 4, 2009 to November 13, 2009. The questions asked each employer to state their current employment, and the employment they expected in each of the years 2010, 2011, and 2012. The survey then described the proposed Job Creation Tax Credit (15 percent tax credit for additions to payroll in 2010, 10 percent in 2011), and asked how many employees (if any) this would induce the employer to ADD to their planned employment levels in each of the years 2010 and 2011. Finally, employers were asked for any comments they might have on this proposal.

Although every local area is unique, Kalamazoo may not be a bad microcosm of the national economy. Kalamazoo is out-performing Michigan as a whole and showing some sign of recovery. For example, in October of 2009, MSNBC classified the Kalamazoo metro area as one of 79 metro areas (out of 384) that is in economic recovery.

The survey received a 14.2 percent response (113 responses) among the 794 valid email addresses surveyed. This survey response is a decent response considering the short time frame allowed for receiving responses, the fact that there are multiple Chamber members for some employers (the survey asked that a response only be made by the person at the employer who could best answer questions about future employment plans), and given that not all Chamber members are employers.

Based on the 113 survey responses, a Job Creation Tax Credit would increase employment among the surveyed employers by 1.30 percent in 2010, and by 1.77 percent in 2011. This sums the reported additions to employment due to the JCTC among all employers, and divides this sum by the sum of employment levels in 2009 among all 113 employers.

For comparison, the Bartik–Bishop briefing report predicted an employment effect of 2.28 percent in 2010 and 1.81 percent in 2011. Thus, the survey responses are somewhat lower than the Bartik–Bishop predictions in 2010, but very close in 2011. If we apply the survey response to the national level, the Job Creation Tax Credit would be predicted to create 1.6 million jobs in 2010, rather than the 2.8 million predicted in the Bartik–Bishop report.

The survey responses also allow a calculation of the ratio of jobs subsidized by the tax credit to jobs actually induced by the credit. This ratio is a key determinant of the cost per job induced by the credit. Intuitively, if the credit is $z per job, and the ratio of subsidized jobs to induced jobs is r, the gross credit costs per induced job will be r times $z, before various adjustments for increased profit tax revenues and changes in other taxes and spending.

Based on the survey responses on planned employment levels in 2010 and 2011, compared to 2009, and the responses on additions in jobs due to the credit, the ratio of subsidized jobs to induced jobs is 3.29 in 2010 and 4.61 in 2011. These ratios are below those predicted in the Bartik–Bishop briefing report of 5.64 in 2010 and 9.17 in 2011. If this Kalamazoo convenience sample predicts the national response to a Job Creation Tax Credit, the cost per induced job will be somewhat below those predicted by Bartik and Bishop.

Given the small size of the sample, it seems prudent to consider the effects of excluding various outliers. One employer in the sample is more than 10 times bigger than all other employers, and comprises over 60 percent of total employment in the sample in 2009. (All other employers have less than 500 employees, with a median 2009 employment level of 9.) This single large employer does not expect the Job Creation Tax Credit to affect its employment. If we exclude this single large employer from the sample, the percentage employment effects jump to 3.38 percent in 2010 and 4.57 percent in 2011.

On the other hand, 53 percent of the total reported effect of the JCTC in 2010 and 56 percent of its reported effect in 2011 are due to the survey results from 2 of the 113 employers. If we exclude the single big employer, and exclude these 2 employers with unusually large responses, the percentage employment effects of a Job Creation Tax Credit are 1.73 percent in 2010 and 2.16 percent in 2011.

As might be expected, the effects of a Job Creation Tax Credit are due to a minority of employers. The reported employment responses in 2010 are due to 23 percent of the surveyed employers. The other 77 percent report that the Job Creation Tax Credit will not affect their employment levels in 2010. The reported employment responses in 2011 are due to 29 percent of the surveyed employers.

We would expect a Job Creation Tax Credit to only be relevant to a minority of employers. The credit only is likely to increase employment levels if the employer expects to have a potential for increased sales or revenue, and if the credit is perceived as large enough to tip the balance for an employment expansion.

The survey results are consistent with the notion that a Job Creation Tax Credit would have greater effects among smaller businesses and among businesses with expansion plans. Among employers whose 2009 employment level was less than 10 employees, the survey results suggest that the credit will increase 2010 employment levels by 9.71 percent, and 2011 employment by 12.66 percent. Among employers with a 2009 employment level of 10 or more employees (but excluding the single employer with more than 500 employees), the survey results suggest a tax credit effect on employment of 2.66 percent in 2010 and 3.65 percent in 2011.

Among the 9 employers that anticipate that without the credit employment will contract between 2009 and 2012, the credit’s effects on employment are 0.59 percent in 2010 and 0.81 percent in 2011. Among the 32 employers that anticipate that without the credit, their employment will be unchanged between 2009 and 2012, the credit’s effects in the survey are 1.49 percent in 2010 and 1.24 percent in 2011. Among the 71 employers that anticipate that, without the credit, their employment will expand between 2009 and 2012, the credit’s effects in the survey are 5.23 percent in 2010 and 7.29 percent in 2011. (These calculations all exclude the single largest employer in the sample, which anticipates employment expansions without the credit, but does not think that the credit will have any effect.)

These survey results suggest that a Job Creation Tax Credit may have greater effects if it can somehow be targeted towards small businesses or rapidly growing businesses. Targeting the credit towards small business may be relatively straightforward. The credit may be targeted towards more rapidly growing businesses by targeting what industries are covered.

The survey responses are also consistent with the notion that economic context matters. The employment response is somewhat greater in 2011 than in 2010, even though the tax credit is lower in 2011 (10 percent) than it is in 2010 (15 percent). This may be because many employers anticipate that demand for their goods and services will be stronger in 2011 than in 2010, which leads them to be more responsive to the incentive provided by the tax credit. If a Job Creation Tax Credit is adopted, its effects may depend in part upon the strength of the overall economy. Therefore, a Job Creation Tax Credit may be more effective if complemented by other policies that will encourage growth in demand for goods and services.

Because a Job Creation Tax Credit is only relevant to a minority of employers, we might expect that such a policy would not be particularly popular among businesses. This is consistent with the open-ended responses to this survey. 48 of the 113 employers surveyed provided some response. Of those 48 responses, 13 were at least somewhat positive about the proposal, 7 were neutral, and 28 were negative in tone.

Some representative negative comments include the following:

“This will only put more money in a business owner’s pocket. I don't think this will create jobs. It is too short sighted.”

“Just reduce overall tax climate.”

“A tax credit is only helpful when a company needs to pay taxes. When we are losing money, it's of no benefit.” (This comment reflects some misunderstanding of the proposal, as the JCTC is payable even if the employer has no profits.)

“Businesses spend money on people and equipment because they are ‘needed’ to improve profitability. Why would any business go out and spend $100,000 plus over 2 years just to receive a $12,500 refundable credit if it is not ‘needed’?”

“A tax credit is not going to stimulate my business. The bottom line is more customers equals more employees.”

“Just cut taxes for every business. An across the board tax cut will grow the economy. This is a no brainer!”

“Government just needs to get out of the way and let the private sector create jobs.”

“Watch the check book Sammy.”

“Sounds like good idea. Small business needs help.”

“Yes: Make it happen! Michigan is a very tax-unfriendly state to do business in. How about something positive for a change to offset some of that negative reality?”

“I think it would be a good idea to stimulate business growth plans. I know I put 0 for questions 5 and 6. But who knows we may add more employees than planned with this credit.”

“Any tax credits or tax reductions would make it easier to conduct profitable business and keep staff employed or growing.”

“A tax credit that gives me an incentive to hire labor is a more sound approach to stimulating the economy. Teaching the masses to fish (employment) has proven to be much more successful than just feeding a fish to the masses (Stimulus check) approach.”

These survey responses suggest considerable hostility towards the idea of a Job Creation Tax Credit. Obviously many businesses do not think that this tax credit is relevant to their decision-making. Any reporter surveying various businesses is likely to find a considerable number of business owners and managers who do not think this credit will work and who are opposed to the proposal.

On the other hand, some businesses think the proposal would make some difference to their employment plans. When this minority of positive responses is added up, it seems sufficient to allow the proposal to have job creation effects similar to what were estimated in the Bartik–Bishop briefing report.

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