Weekly Legislative Update - April 1, 2019
Call for WOTC
Many have commented on the uncertainty and administrative burden imposed on taxpayers when a tax code provision expires and is restored retroactively months later. This is small inconvenience compared to the harm inflicted upon our country's veterans, public assistance recipients, and people with disabilities when the work opportunity tax credit stalls: 300,000 jobs were lost by people desperate for work during the hiatus of 2014, according to Department of Labor data.
But that's not all. Between FY 2013 and FY 2014, thousands of small businesses entered WOTC hiring. Stimulated by an earlier four-year extension, they propelled a hiring leap of 700,000 workers between FY 2012 and FY 2013-a 78 percent increase. Thus, 900,000 jobs in 2012 became 1.6 million in 2013-this was the biggest spurt in WOTC's history, and it kept climbing year after year and didn't level off till total jobs hit 2 million. Small businesses account for 53 percent of total employment and their hiring sites are far more in number, many are at a worker's doorstep. But the interest of small employers drops sharply when WOTC enters "halt and revive." DOL can show this with assurance because the WOTC processing units of State Workforce Agencies know every employer using WOTC. In sum, many small business owners lose interest when WOTC has short legs, they won't bother to fish out an IRS Form 8850 when a WOTC-eligible job-seeker appears. This is one more reason for WOTC to be made permanent.
Since 1997, Congress has used the work opportunity tax credit as an incentive to employers to hire workers from narrowly targeted groups of the disadvantaged, thereby expanding opportunity for those facing poverty, stigma, or other barriers to employment. We believe WOTC has proven its worth and should be made permanent. There's much evidence to validate this judgment, and WOTC can be even more effective as Congress turns to dealing with persistent poverty via location-based solutions like Opportunity Zones. WOTC's availability to employers helps attract capital to an area, and the synergy between capital investment and the labor of those who need work can increase productivity and purchasing power, opening more opportunity to escape poverty.
Evidence-based results speak for themselves: each year more than 2 million unemployed public assistance recipients (TANF, SNAP, SSDI, SSI), veterans, disconnected youth, and residents of high-poverty areas of cities and counties find jobs by checking a box on a one-page form accompanying their job application. State workforce agencies must verify each worker's eligibility before employers can claim the credit, making WOTC consistently free of fraud and abuse. WOTC has been proven to be the Federal government's most cost-effective jobs program, costing a maximum of $1,900 per job for most workers, private employers paying the rest, pumping income into local communities. A study by the University of Pennsylvania's Wharton School shows that saving on public assistance from WOTC is more than twice the ten-year cost estimated by the Joint Committee on Taxation at $19 billion.
Workers hired using WOTC are mostly under 30, with low skills or less education, including the 20 percent who don't graduate from high school. For many, family dissolution, homelessness, and discouragement contribute to a history of intermittent work and low earnings. The population most at risk of stagnating in high-poverty communities is daunting: nearly 20 million have poor job readiness or disabilities, according to BLS. Still, research finds most of the low-earning population are highly motivated to work. Every job is a critical lifeline for these workers because having a job, staying healthy, and studying has been shown to be the route to higher earnings. WOTC offers a better chance for a job, and in conjunction with the earned income and child tax credits, forms the cornerstone of the social safety net. Looking at the bottom rank of workers with lowest average weekly wages-11 million altogether, and 2 million single parents, we find WOTC hires account for an estimated 28 percent of those employed. WOTC reaches workers most in need of a job-those on welfare or living in depressed areas-and has a high take-up rate,
Department of Labor data for fiscal year 2013 (the last year available), when there were 1.6 million WOTC hires, show 600,000 hired above $9 an hour, the rest below $9. Thirty percent were in sales occupations, 22 percent in production including manufacturing, 19 percent in office administration, 17 percent in food preparation and serving, 5 percent in healthcare, and 2 percent in buildings and grounds maintenance. Overall, WOTC workers were distributed in 23 occupations representing all major sectors of the economy; WOTC jobs are not dominated by food service and hospitality sectors. As healthcare is a growing sector with good jobs, the data show that WOTC should be open to private non-profit employers.
Moreover, WOTC is the only jobs program, of the many models Congress has studied, that's demonstrated an ability to reach a scale in hiring proportionate to the size of the disadvantaged population, without exploding the cost. Attractive models that rely on mentoring, testing, and training, often including life-skills, have produced quality results, but these programs are labor-intensive, requiring a staff of case managers, counselors, trainers, and others; as a result, their size and output is invariably low, and cost per graduate many times that of WOTC, where individuals start with a job and advance on their own by commitment and learning.
In fact, WOTC is often used to obtain jobs for graduates of special training programs. City and county welfare and economic development agencies, at the cutting edge of training TANF and other low-income populations, say they need WOTC for job placement after training. These local agencies have some of the finest individual training programs and they are regularly re-evaluated and improved by adopting new and more cost-effective techniques. Because they never have enough money for training, they depend on WOTC for jobs for the majority of clients exiting welfare. The present system of community-based training for the disadvantaged, combined with WOTC for job development and placement, is effective and should be supported.
WOTC is adaptable to new labor market challenges, as demonstrated by the explosion of veterans' hires after enactment of the VOW To Hire Heroes Act, and its expansion to residents of depressed areas located in empowerment zones and several hundred rural counties. It's sometimes alleged that, because employers have a vacancy that must be filled, those vacancies will go to people on public assistance, disconnected youth, the disabled, or veterans without the need for WOTC. This doesn't square with the facts. Any job seeker can verify that he or she must compete for a job, often against people with more education, a stable home, and money for getting to work, compared to coming from poor schools, subsidized housing, and bus money that leaves less for food. Without WOTC, hiring managers will choose the most promising worker, and those on public assistance or stigmatized will lose the competition and often stop looking for work. Most often, non-disadvantaged applicants outnumber the disadvantaged by 2:1 to 4:1; WOTC levels the playing field. It acts as a magnet to pull disconnected youth and other disadvantaged workers off the sidelines.
Nor does a low national unemployment rate mean WOTC is unnecessary. Governors have identified thousands of high-poverty areas for designation as Opportunity Zones. By lowering the cost of a job to employers and boosting demand for labor, WOTC complements investors' capital and the synergy of the two can raise productivity and boost prospects for success of renewal projects. WOTC is efficient because it's targeted, flowing to where it's most needed. The credit is capped, and an employer can take it only once for the same worker.
TIA continues working to make WOTC permanent.
BASE EROSION ANTI-ABUSE TAX (BEAT) UNFAIRLY INJURES COMPETITIVE ADVANTAGE OF MANY AMERICAN MULTINATIONAL CORPORATIONS, BANKS, AND INSURANCE COMPANIES
Public Law 115-97, Tax Cuts and Jobs Act (TCJA), section 59A, imposes generally on US multinational corporations, banks, insurance companies, and securities dealers, with $500 million or more in gross receipts, a Base Erosion Anti-Abuse Tax (BEAT) reputedly to curb structuring of transactions with related foreign parties to minimize US taxes. BEAT must be paid in addition to all other taxes, including regular corporate tax, FDII, and GILTI.
BEAT is discriminatory, unfair, and imprudent tax policy because, for tax years beginning in 2018 and ending in 2027, BEAT is structured to deny a percentage of most deductions, NOL, depreciation, and similar transactions with foreign affiliates, as well as recapturing the total amount claimed on regular corporate tax for all but four of forty tax credits included in the General Business Credit, section 38 of the Code (exceptions are the research, low-income housing, renewable electricity, and energy investment credits). As BEAT violates the canon of a level playing field by taxing some corporations more than others, thereby eroding the terms of competition for US-based firms in the highly competitive global economy, the simplest and fairest remedy is to repeal BEAT to restore uniform taxation of corporate income under the overall tax regime of TCJA, and retroactively restore any benefits denied by BEAT.
The scheme of BEAT requires comparing corporate regular taxable income and "modified taxable income." Regular taxable income remains as defined in Section 26(b). "Modified taxable income" is income after removing "base erosion payments," such as NOL carryover, royalties, interest, management fees, depreciation or amortization of real property purchased from a related foreign party, reinsurance premiums, etc.-all transactions generally for which a tax deduction is taken except dividends, cost of goods sold, or other inputs to produce a product or service. Issued regulations define what is, or is not, a "base erosion payment" or a "base erosion tax benefit" (the tax deduction arising from a payment).
To calculate BEAT, the law requires taxpayers to compare their regular tax liability, calculated at21% of taxable income and allowed credits, with tax liability on "modified taxable income" at a lower rate while denying the full amount of certain Section 38 credits claimed on regular tax. Tax on modified taxable income is at a rate of 5% in 2018, 10% thru 2025, and 12.5% thru 2027.
BEAT, calculated on the difference between tax liability on modified income and disallowance of certain Section 38 credits, and regular tax liability reduced by credits, results in the full amount of the credits claimed on regular tax being included in the BEAT tax amount. Even though BEAT is calculated at a lower rate, it is important to note that BEAT is always an addition to regular tax and not a re-computation of regular tax. See "Model for Computation of BEAT," Appendix A.
Taxing economic activity should enhance the competitiveness of US workers and industry and not give America's competitors in the global marketplace a competitive advantage by singling out some US firms for an additional tax, officially estimated at $150 billion over ten years. Singling out some taxpayers for unfavorable treatment, eroding the level playing field, changing the terms of competition by imposing a haircut on allowed deductions and charges, recapturing tax credits and disrupting the programs they support, creating additional complexity and administrative burden, undermines the competitiveness not only of the impacted firms but of the US economy generally. BEAT is unwise policy.
Section 38 credits (which comprise the General Business Credit) provide capital and other inducements to encourage new start-ups, new technology, and wider opportunity-incentives to achieve a policy goal. Since all but four of the credits are totally recaptured if claimed by an impacted taxpayer, it's likely they'll not be claimed. (See list of Section 38 credits, Appendix B.)
To illustrate, the Work Opportunity Tax Credit is a key component of the social safety net, stimulating annual hiring of nearly 2 million veterans, people with disabilities, ex-felons, the homeless and many single parents, welfare and food stamp recipients, disadvantaged youth, long term-unemployed, Supplemental Security Income recipients, residents of rural renewal counties and disaster areas. Corporations impacted by BEAT have job openings suitable to these workers, many of whom carry burdens of poverty or stigma, but without the WOTC incentive there is much evidence that disadvantaged workers will lose the competition for jobs to those who are better-educated and more job-ready, resulting in continued concentration of the poor in distressed areas, urban and rural, as exemplified by Opportunity Zones.
Tax credits like WOTC are policy instruments, their purpose is to achieve a policy goal via financial incentive or other inducement. Financial incentive is the means, value to society is in the aims achieved. Tax credits readily stand up to evidence-based evaluation of cost-effectiveness because their outputs are directly measurable. We face a situation where all but four section 38 credits will be denied to BEAT-impacted corporations from now through 2027 unless Congress reconsiders the matter and repeals this law retroactively. It's prudent for taxpayers to continue accounting for and claiming these credits, as Congress can restore them.
Advocacy to Hold Three Small Business Roundtables on DOL's New Overtime Rules in Alabama, DC & Florida
The U.S. Small Business Administration, Office of Advocacy will be hosting roundtables to discuss DOL's new Overtime Regulations under the Fair Labor Standards Act, which increases the minimum salary for the "white collar" overtime exemption from $23,660 annually to $35,308 annually.
This means that workers making under $35,308 annually would be eligible for overtime pay. The purpose of the roundtable will be to hear directly from small businesses about the impact of the proposed rule.
Comments on the rule are due mid-May 2019.
For more information, please visit: https://www.dol.gov/whd/overtime_pay.htm
Interested parties must RSVP to: Janis.Reyes@sba.gov
Florida SBDC at the University of South Florida Port Tampa Bay Building 1101 Channelside Dr., Suite 210 Tampa, FL 33602
Thursday April 11, 2019 - 2:00 pm - 4:00 pm (EDT)
SBA Headquarters, Eisenhower Room B
409 Third Street SW Washington, DC 20416
(Call-in option available)
Tuesday April 30, 2019 - 9:00am - 11:00 am (CDT)
Mobile Area Chamber of Commerce
451 Government St.
Mobile, Alabama 36602