How a knowledge tax credit could stop decline in corporate training

Corporate investment in workforce training has declined significantly in the past two decades, and that is a big problem for American productivity and international competitiveness. And this situation is only exacerbated by the increased education and training investment being undertaken by our key international competitors. To address this problem, Congress should create a knowledge tax credit to incentivize workforce training investment, which will ultimately assist the entire economy.

Historically, workforce training and education was a competitive advantage for the United States. We had a higher share of students graduating from college and our companies invested significantly in the skills of their workforce, enabling them to be more productive and more easily use new technologies.

{mosads}However, the workforce advantage enjoyed by the U.S. for nearly a century has been eroded by stagnating educational attainment and declining training investment domestically, coupled with real improvements by our global competitors. Of particular concern, highlighted in the latest Economic Report of the President, is the decline in employer-sponsored and on-the-job training. In fact, the proportion of workers that received employer-sponsored training dropped 42 percent between 1996 and 2008. And despite the rhetoric that workers are the main priority for companies, corporate spending on training as a share of gross domestic product (GDP) declined from more than half a percent in 2000 down to one-third of a percent in 2013. These cuts have made it harder for workers to find new employment after they are laid off and have made it more difficult for U.S. firms to boost productivity and global competitiveness.

Corporations have cut their investment in workforce training for a number of reasons. Declines in employee tenure in the 1980s and 1990s meant that more and more firms sought to simply hire workers with the requisite skills instead of paying to train them. After all, why invest in human capital development when that asset will likely walk out the door to a competitor firm before the investment pays off? The increasing focus on short-term profits has also driven corporations to invest less in the future than they did previously. And it’s likely that increased cost-based competition with China has caused firms in globally traded industries to cut back on workforce investment, just as studies have shown that those firms have cut back on basic and applied research spending for the same reason.

In short, this is a classic case of market failure. Firms invest less in training than is optimal from a societal and economic perspective and it negatively impacts economic growth and innovation. It’s the same reason firms invest less in research and development than is societally optimal. To fix the latter problem, Congress created the research and experimentation (R&E) tax credit in 1983 to incentivize companies to spend more on research and development (R&D). We need to follow the same model here. Congress should turn the R&E credit into a knowledge tax credit by allowing qualified expenditures on both R&D and workforce training to be taken as a credit. Under the current alternative simplified R&D credit, firms can claim 14 percent of all expenditures above 50 percent of base period expenditures (the president’s budget proposed increasing that to 18 percent). To ensure that companies use this credit to focus on the skills of the majority of their workers, and not just managers, firms taking advantage of the credit would need to abide by rules similar to those for pension program distribution, which limit focus on highly compensated employees. We estimate that under static budget scoring that this would cost the Treasury $12 billion per year, but if dynamic scoring were used, it would likely score as a net plus to the Treasury, provided the budget window was longer than five years.

While business training expenditures might partially recover as the labor market and economy continue to improve, the deeper changes that made training investment less appealing for firms are not going away anytime soon. This means that we will need creative solutions in order to maintain a productive and dynamic workforce. Allowing corporations to take a tax credit for at least 50 percent of training expenditures would provide a much stronger incentive for businesses to expand training investments, while at same time reducing the effective U.S. corporate tax rate, already one of the highest in the world. In this sense, it’s a win-win for the U.S. economy.

Atkinson is president of the Information Technology and Innovation Foundation.