The Pros and Cons of Hillary Clinton’s Apprentice Tax Credit

June 22, 2015

Last week, Hillary Clinton proposed a new federal tax credit for companies that employ apprentices. The tax credit would amount to $1,500 a year per apprentice, and is aimed at encouraging businesses to increase training for workers of all ages. Clinton’s plan is modeled off of the LEAP Act, currently under consideration in Congress, which creates a tax credit of $1,500 for businesses who employ apprentices under 25 years old and $1,000 for those who employ apprentices over 25.

The federal government already spends a significant amount of money promoting apprenticeships. This year, the Office of Apprenticeship in the Department of Labor received $31 million to oversee over 19,000 registered apprenticeship programs covering over 410,000 apprentices. The federal government is also expected to award over $100 million in “apprenticeship grants” in 2016 to businesses and government agencies that promote apprenticeships. Several states run their own apprenticeship programs, including South Carolina, where Clinton announced her proposed apprentice tax credit.

The theoretical case for an apprenticeship credit is based on the idea that the free market might produce a less-than-efficient level of worker training. As one paper from the OECD details, individuals may be too constrained by their economic circumstances to pay for an optimal level of training, and businesses may be wary of expending resources to provide general training to workers who might leave for other jobs. In economic terms, this is known as an “underprovision of human capital,” and there is some evidence that workers in the United States are not sufficiently trained. In addition, because the federal government already subsidizes certain methods of human capital formation, such as universities, subsidizing apprenticeships might “level the playing field” and reduce relative economic distortions.

On the other hand, an apprentice tax credit would have several potential drawbacks. For one thing, it is uncertain to what extent American workers lack sufficient training, with both conservative and liberal economists who claim that human capital is adequately provisioned in the United States. But even if we could quantify the optimal number of apprenticeships for the U.S. economy (a virtually impossible task), it might be the case that the U.S. government is already over-subsidizing apprenticeships through its existing programs. After all, if all of the apprenticeships that make economic sense have already been set up, it makes little sense to subsidize new ones into existence. Supporters of an apprentice tax credit should provide concrete evidence that the number of existing apprenticeships in the United States is still too low.

In addition, even if supporting apprenticeships is good economic policy, it is unclear that the tax code is the correct vehicle through which to encourage apprenticeships. An apprenticeship credit would add complexity to the corporate tax code, raising compliance costs for businesses. And, while the definition of apprenticeship is set by the Department of Labor, more generous tax breaks for apprenticeship might incentivize businesses to classify regular employees as apprentices, in the same way that many unpaid internships are classified as “educational.”

As we’ve often claimed, federal spending programs should usually take place on the expenditures side of the budget, rather than being administered through the tax code. Spending through the tax code is less transparent and requires the IRS to administer a diverse array of government programs.

So, an apprentice tax credit may have extensive economic benefits in theory, but designing and implementing it may also pose economic, political, and administrative difficulties.

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