CRS REPORT EXAMINES EMPLOYMENT TAX TO ENCOURAGE EMPLOYEE EDUCATION.

                              Bob Lyke

During the campaign, President-elect Clinton proposed a new employment tax to encourage employee education and training (The Chroniele of Higher Education, Oct. 21, 1992). While few details of his plan are available, in general such proposals would require employers either to spend a percentage of their payroll on education and training or to pay a penalty tax for similar public programs. Mandating services or benefits in this way is sometimes called "PLAY OR PAY" legislation.

Proposals for an education and training employment tax ("training levy" for short) originate from growing concerns about the quality of the American workforce. Many workers are poorly prepared for economic changes the Nation is said to face: both experienced and new employees may have difficulty learning new, higher-level skills and adapting to reorganized workplaces. These shortcomings may be partly responsible for the slow productivity growth and stagnant real wages the country has experienced during the last two decades.

While workforce quality problems have multiple causes, limited employee education and training is among the most important. According to a number of studies, there is less organized workforce training in the United States than in other major industrial countries. Proponents of the training levy say it would be an incentive for employers to develop higher, more flexible skills in their workers so both can respond quickly to competitive changes. They claim that the cost of the additional training would be recovered through higher productivity. At issue, however, is why employers would not provide more education and training on their own if it were profitable to do so. A higher skilled, more flexible workforce may not be efficient for many firms, and imposing one by mandate may be costly.

COVERAGE

Training levies can be designed a variety of ways, as existing levies in France, Australia, and Korea show. One key question is whether the purpose increase employee education and training in ALL firms or only in those that do little or none. The flat one and one- half percent tax proposed by President elect Clinton is aimed at the latter problem: it would provide no incentive to firms that already spend more. (What expenses can be counted toward this percentage goal is an important issue: many firms might meet the one and one-half percent mark if wage expenses during training time were taken into account. Other questions include whether coverage should extend to all industries and economic sectors; whether it should include nonprofit and government organizations; and whether exemptions might be given for small firms (e.g., fewer than 50 employees) and temporary workers.

EMPLOYER RESPONSE

An assumption behind the training levy is that most firms would increase their education and training expenditures at least to the level of the tax. Firms most likely to do so might include those facing increased competition from other industrialized countries and those finding it difficult to hire skilled workers. On the other hand, some firms may find it less expensive to pay the tax than bear increased administrative costs. Firms with high employee turnover rates may consider additional training wasteful. Some firms might think their workers would be better served by a public program.

Employers are unlikely to bear the full cost of a training levy. Since the total supply of labor is relatively inelastic, employers may be able to shift most of the cost of a broad-based levy to employees by making smaller increases in their wages than otherwise, even taking into account their increased productivity. Depending on the industry, some of the cost might also be passed on to consumers through higher prices. To the extent the levy did increase the cost of labor to employers, they might substitute more equipment for labor inputs or otherwise reduce employment. On the other hand, the greater productivity of higher-skilled workers might compensate for their higher cost.

WHO IS TRAINED

Currently most employment-based education and training is aimed at managers and technical workers; less is provided to production workers, laborers, and administrative support staff. Typically, people with the most education are more likely to get training; men get more than women, whites more than minorities. If employers have discretion to select who is trained, these patterns might not change; workers most in need of training could pay for it through lower wages without receiving any benefit. Conceivably, employers could be required to treat all workers equitably, though this would be difficult to define and enforce. Some proposals would focus training on front-line production workers.

OTHER LEGISLATIVE ISSUES

Four other important legislative issues include how education and training would be defined, and whether minimum standards would be established; how the training levy would relate to income taxes and other incentives for employee education and training; how the Internal Revenue Service would administer the levy; and how funds raised by the tax would be allocated and used.