Sen. Reid proposes tax break for U.S. hires

Legislation would give two-year tax break to businesses that replace offshore employees with U.S. workers

U.S. Senate Majority Leader Harry Reid (D-Nevada) has introduced legislation that would provide tax breaks to employers who hire U.S. workers to replace offshore workers.

The legislation, called The Creating American Jobs and Ending Offshoring Act, aims to provide businesses "with relief from the employer share of the Social Security payroll tax on wages paid to new U.S. employees performing services in the United States," according to a Reid's office.

The bill, S. 3816, is not yet posted online.

Under the proposed law, a business must certify that a U.S. worker is replacing an employee who had been performing similar duties overseas to be eligible for the tax break. The tax break would continue 24 months for employees hired during a three-year period starting today.

Democrats are increasingly citing the shift of jobs offshore as an issue in this mid-term election. When he was in Ohio this month, President Barack Obama said that "I think if we're going to give tax breaks to companies, they should go to companies that create jobs in America -- not that create jobs overseas."

Obama described the issue as one that separates Democrats from Republicans.

Separately, Ohio Gov. Ted Strickland this month issued an order banning the offshoring of any state work.

Reid's bill would also end subsidies for plant closing costs, prohibiting deductions, loss or credit "for amounts paid in connection with reducing or ending the operation of a trade or business in the U.S. and starting or expanding a similar trade or business overseas." It would not affect severance costs.

The proposed legislation would also end a federal tax subsidy "that rewards U.S. firms that move their production overseas," Reis's office said. Under current law, U.S. companies can defer paying U.S. tax on income earned by their foreign subsidiaries until that income is brought back to the United States. That action is known as "deferral."

Ron Hira, an associate professor of public policy at the Rochester Institute of Technology, said the legislation, "would be a common sense and practical use of the tax code to help slow offshoring and potentially reverse some that has already occurred.

"Unlike every other country, which uses its tax code to encourage job creation and economic development within its borders, America chooses to use its tax code to subsidize the offshoring of its jobs," said Hira. "This legislation not only would right an obvious wrong, it would go one step further by encouraging the inshoring of jobs."

Hira said the proposal is but one of number of changes that are needed.

Regarding the merits the approach of using tax breaks, Surendra Kaushik, a professor of finance at Pace University's Lubin School of Business in New York, said that "long term it creates some incentive to local business to try to create talent. It's not a bad idea, it's introducing a little competition."

But the impact of the tax break will be mostly at the margins, and won't change the direction of the big IT firms that have been moving offshore as part of a long-term structural change, said Kaushik.

The tax break may help smaller firms that are writing software for increasing numbers of specialized activities, "so good entrepreneurs could employ a lot of people on a smaller scale," said Kaushik.

Patrick Thibodeau covers SaaS and enterprise applications, outsourcing, government IT policies, data centers and IT workforce issues for Computerworld. Follow Patrick on Twitter at @DCgov , or subscribe to Patrick's RSS feed . His e-mail address is .

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Copyright © 2010 IDG Communications, Inc.

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