IF PRESIDENT OBAMA gets his way, small-business owners will have about 5,000 reasons to hire new workers this year.

On Friday, Obama visited a small business in Baltimore, where he offered more on the finer points of his most recent jobs proposal, which seeks to provide an incentive for businesses to jump-start their hiring plans. At a cost of about $33 billion, the plan, which Obama first announced with little detail on Wednesday in his State of the Union address, is estimated to support more than one million small businesses.

Under the plan, known as the Small Business Jobs and Wages Tax Cut, companies that hire new workers in 2010 will receive a $5,000 tax credit for every new employee they add to their ranks. This credit, which is being paid for with remaining Troubled Asset Relief Program, or TARP, funds, would be retroactive to the beginning of the 2010 calendar year. The proposal would also reimburse employers who expand wages -- by offering raises or increasing hours -- for the Social Security portion of the payroll taxes employers pay on those added wages, or 6.2%. And to ensure that companies receive these benefits quickly, they’ll be able to claim the credit quarterly.

In the past, similar jobs proposals have stalled, but the sluggish job market has Americans now overwhelmingly in favor of a plan. Of the multiple jobs plans in circulation -- several members of Congress have their own hiring tax credit ideas -- a jobs bill of some description is expected to reach President Obama’s desk before the year is out. The question on the minds of small-business owners is: Will it work?

At first blush, “these tax credits will be somewhat of a bonanza for small businesses,” says Dean Baker, a co-director at the nonpartisan Center for Economic and Policy Research in Washington, D.C. If the intent is to give businesses that are currently considering hiring a greater incentive to do so, this plan will certainly do that. But if the idea is to add workers who wouldn’t otherwise be hired in 2010 to the nation’s payroll, then the plan will likely be much less effective, he says. “There is a lot of research connected with the minimum wage that shows that firms do not change their hiring in response to modest changes in wages,” Baker says.

Baker also thinks that there is potential for gaming under this plan, in spite of precautions taken by the administration. Among them: capping the total amount of the credit for any one firm at $500,000, not extending the credit to contractors turned full-time employees and only allowing start-up firms to claim half the credit, or 3.1% of aggregate wages in excess of inflation. (Note that the payroll tax credit is only applicable on wage increases up to current Social Security taxable maximum, or $106,800.) In addition, the internal revenue code would be amended to cut down on the potential for gaming abuses.

Tom Murphy, the executive vice president of manufacturing and wholesale distribution at Minneapolis accountancy firm RSM McGladrey, thinks that this move is a “step in the right direction.” What he isn’t sure about is whether a tax credit will drive employers to hire. “Will I go out and hire somebody because I’m going to get a tax credit? No,” he says. “I will, however, be more likely to hire somebody when demand starts improving,” Murphy says.

Echoing that sentiment is Rebecca Fernandez, the co-owner of the Mad Woodchuck, a custom carpentry firm in Los Gatos, Calif. “The tax incentives and the extension of write offs that President Obama spoke of will be helpful. However they would be more helpful if we were actually making money,” she says. “Our problem seems to stem from the fact that our clients are ordering only what they need and are looking to pay as little as possible for those needs.”

Melinda F. Emerson, the president of MFE Consulting, a small-business coaching service and consultancy in Upper Darby, Pa., adds that until the credit situation improves small businesses -- including her own -- will have to put off hiring. “Right now small businesses are getting paid in 60 to 120 days,” she says, adding that the slowdown in receivables, combined with a lack of credit, makes doing business and even paying workers more difficult. “Until they fix the credit problem, nobody is going to hire,” Emerson says.

Still, if the tax credit prompts even a small number of businesses to hire, the program would be considered a success, says Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., who authored a similar hiring tax credit. “The credit does not need to be relevant to every business for it to work,” says Bartik, who estimates that this plan would create roughly one million jobs. “You’re trying to jump-start the labor market. We don’t need to have more than 2% to 3% to 4% of businesses respond to this for that to happen.” 

—Write to Diana Ransom at dransom@smartmoney.com

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