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WebMemo #495 on Jobs and Jobs and Labor Policy

May 4, 2004

More Trade, Less Assistance: Why TAA Should Not Be Expanded

By , and

The Senate is currently considering an amendment that would expand Trade Adjustment Assistance, which provides aid and retraining to those whose jobs have been displaced by trade, to service workers. This would be an empty gesture, however, as service workers are eligible to receive similar assistance from other programs. Even worse, the amendment is likely to delay the corporate tax bill, which will prolong WTO-blessed tariffs on U.S. exports; drain vitality from one of the most robust sectors of the economy; and undermine a health care tax-credit program. Instead of playing political football with jobs, the Senate should make U.S. exporters more competitive by reforming corporate taxation.

The Amendment

The Wyden/Rockefeller/Coleman amendment aims to offer TAA coverage to workers in services and related sectors such as law, accounting, software, and advertising. It would lower the age requirement for workers who are eligible to participate in the "wage insurance program" from 50 years to 40 years and older. The amendment also has provisions to establish TAA for communities. In all, the amendment could double the number of workers covered by TAA.

But an expanded TAA would aid few displaced workers because it would be duplicative. Currently, workers who do not qualify for TAA are eligible to receive assistance under the Workforce Investment Act.

Nonetheless, expanding TAA would be costly. Current proposals-which include extended unemployment benefits, training benefits, relocation expenses, and health care subsidies-would cost more than $5 billion from 2005 through 2014.

Of even greater concern, the amendment is hampering efforts to lower tariffs for U.S. exporters. The WTO ruled against the U.S. preferential tax rate for export related income (FSC/ETI), stating that such treatment is a subsidy, and the EU began levying tariffs on a variety of U.S. goods in March. These tariffs are set to increase every month through March 2005 when they will reach 17 percent. Tariffs put U.S. exporters at a comparative disadvantage and could soon cost U.S. jobs. Legislation to comply with the WTO's ruling on U.S. tax policy and end the tariffs is being delayed in the Senate by efforts to expand TAA.

TAA for the Service Sector

Expanding TAA into the service sector may drain vitality from a sector of the economy in which American workers and firms hold substantial advantages over their competitors in terms of education, skill, and creativity. TAA benefits, which include health insurance and retraining, may serve to delay the re-entry of workers into the workforce in those situations where foreign trade is found to be a factor in the loss of a job.

In particular, the job-retraining portion of TAA could lure service sector workers out of what may still be potentially lucrative careers. TAA retraining of manufacturing workers has a rational purpose because manufacturing jobs have generally been decreasing. Retraining will often be the best choice for unemployed manufacturing workers. But service sector jobs, in spite of new international competition, have been increasing.

For all the talk of "outsourcing" of service sector and high tech work, the number of such jobs lost to overseas competitors remains small in comparison to the overall American labor market-the largest estimate of jobs that might be "outsourced" amounts to less than one percent of expected job losses. The last thing the government should be doing is encouraging high-tech and service sector workers to "bail out" by offering them a special training program.

Health Care Policy

The proposed amendment would also make changes to the newly established health care tax credits (HCTC). Today, individuals who are eligible for TAA and certain individuals whose pensions are administered by the Pension Benefit Guarantee Corporation have access to refundable, advanceable tax credits worth 65 percent of the cost of their health care premiums. These credits can only be applied to certain government-designated coverage options: three automatic coverage options, for which not all workers qualify, and several state-based options, which states elect to offer.

While preliminary surveys already exist on the HCTC experience, efforts to change the conditions and parameters of the HCTC at this time would be premature and potentially disruptive. As proposed, the amendment would increase the tax credit amount and add to the conditions and requirements of coverage.

Proponents of these changes suggest that increasing the tax credit would assist those individuals who find the remaining 35 percent of the premium too costly. However, increasing the credit amount may still not solve the problem. HCTC recipients who are on a fixed budget with little disposable income will continue to face competing demands for their limited financial resources.

Furthermore, policies available to the HCTC recipients are already limited and stifled by government regulation. Efforts to add complexity to available state-opted coverage options, while perhaps well intentioned, may actually undermine and disrupt existing coverage and deter other states from offering these coverage options.

Instead of adding layers of regulatory complexity, policymakers should focus on making the coverage options simpler-by making the requirements more realistic, with respect to the current marketplace, and by ensuring that the broadest range of coverage options are available for the tax credit. Allowing each HCTC recipient to decide which coverage option is the best value and choice for him or her would be a much better way to guarantee satisfaction and results.

There is still much to learn from the HCTC experience. Preliminary observations are helpful in identifying potential difficulties and key areas to monitor. However, policy changes should be considered after further analysis has been undertaken, in order to better understand the HCTC experience and its full policy implications.

Conclusion

The Senate should promote free trade and U.S. competitiveness by complying with the WTO's ruling and reforming corporate taxation. Advancing free trade in this way will help the American economy. In contrast, a larger TAA would aid few workers, increase government spending, and be a drag on the economy.

Sara Fitzgerald is Policy Analyst in the Center for International Trade and Economics, Paul Kersey is Bradley Visiting Fellow in Labor Economics, and Nina Owcharenko is Senior Policy Analyst in the Center for Health Policy Studies, at The Heritage Foundation.

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