Order Code RL30089
CRS Report for Congress
Received through the CRS Web
The Work Opportunity Tax Credit (WOTC)
and the Welfare-to-Work (WtW) Tax Credit
Updated January 27, 2006
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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The Work Opportunity Tax Credit (WOTC)
and the Welfare-to-Work (WtW) Tax Credit
Summary
The Work Opportunity Tax Credit (WOTC) and the Welfare-to-Work (WtW)
Tax Credit are meant to induce employers to hire members of families receiving
benefits under the Temporary Assistance to Needy Families (TANF) program. The
WOTC also is available to employers who hire others thought to experience
employment problems in both good and bad economic times (e.g., qualified veterans
and 18- to 24-year-olds who are members of families receiving food stamp benefits;
18- to 24-year-olds living in empowerment zones, enterprise communities, and
renewal communities; and vocational rehabilitation referrals).
In September 2005, the 109th Congress passed and the President signed the
Katrina Emergency Tax Relief Act of 2005 (H.R. 3768, P.L. 109-73), which
temporarily added “a Hurricane Katrina employee” to the WOTC-eligible groups.
The act also included a retention credit for small employers whose operations in the
core disaster area ceased because of Hurricane Katrina, and who retain on their
payrolls persons in their employ on August 28, 2005. In December 2005, as part of
the Gulf Opportunity Zone Act of 2005 (H.R. 4440, P.L. 109-135) Congress dropped
the retention credit’s employer-size limit and applied it to all employers adversely
affected by Hurricanes Rita and Wilma in addition to Hurricane Katrina.
The Work Opportunity Tax Credit and Welfare-to-Work Tax Credit are
temporary provisions of the Internal Revenue Code. Since their initiation in the mid-
1990s, the Congress has allowed the credits to lapse four of the five times they were
up for reauthorization. In each instance, they were reinstated retroactive to their
expiration dates as part of large tax-related measures. Both credits most recently
expired on January 1, 2006. The WOTC’s expiration does not apply to the
“Hurricane Katrina employee” eligible group.
Tax reconciliation measures in both houses of the 109th Congress address the
two employment credits. S. 2020 (the Tax Relief Act of 2005), which the Senate
passed in November 2005, in some respects follows recommendations in the
President’s budget request with regard to the WOTC and WtW credit — namely,
repealing the latter after incorporating a modified version of it in the WOTC and then
extending the consolidated credit. A somewhat different version of consolidation
was in H.R. 4297 as introduced; however, the amended bill approved by the Ways
and Means Committee in November, and by the House in December, excluded it.
Instead, the Tax Relief Extension Reconciliation Act (H.R. 4297) would expand
eligibility of one WOTC-eligible group: youths in families receiving food stamps.
S. 2020 would expand the definition of two other groups as well, namely,
economically disadvantaged ex-felons and high-risk youths (renamed “designated
community residents”). Both bills would provide a one-year extension.
This report will be updated as legislative activity occurs.

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Contents
What Kind of Wage Subsidies Are the WOTC and WtW Credits? . . . . . . . . . . . 1
A Description of the Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
WOTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
WtW Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Program Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
WOTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
WtW Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Program Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Evaluations of the WOTC and WtW Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Legislative Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
From the 104th Congress Through the 108th Congress . . . . . . . . . . . . . . . . . 12
104th Congress: Creation of the WOTC . . . . . . . . . . . . . . . . . . . . . . . 12
105th Congress: Several Revisions . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
106th Congress: Expansion of WOTC-Eligible Groups . . . . . . . . . . . 12
107th Congress: 2002-2003 WOTC Expansion to Cover New York
Liberty Zone Employees and Authorization of the WtW Credit . 12
108th Congress: A Lengthy Lapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Legislative Activity During the 109th Congress . . . . . . . . . . . . . . . . . . . . . . 14
Combining and Modifying the Two Credits . . . . . . . . . . . . . . . . . . . . 14
Expanding Eligible Groups (e.g., Hurricane Katrina Employees) . . . . 15
List of Tables
Table 1. Value of WOTC and WtW Credits Claimed on Federal Income Tax
Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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The Work Opportunity Tax Credit (WOTC)
and the Welfare-to-Work (WtW) Tax Credit
Two income tax credits — the Work Opportunity Tax Credit (WOTC) and the
Welfare-to-Work (WtW) tax credit — intended to encourage for-profit employers to
hire from groups that experience difficulties in the labor market both in good and bad
economic times expired on January 1, 2006. A lapse in the credits, followed by
reauthorization retroactive to their expiration date, is not unusual. The 109th
Congress is poised to reauthorize, and perhaps consolidate, the two credits as part of
tax reconciliation.
This report explains what type of subsidies these tax provisions are and refers
to criticisms of their immediate predecessor, the Targeted Jobs Tax Credit, with
which they share features. It then moves on to a detailed description of the WOTC
and WtW credit (e.g., target groups, subsidy rate, retention period, and certification
process). Next, activity under the programs as well as their costs are presented. The
report closes with a brief legislative history and a discussion of current policy action.
What Kind of Wage Subsidies
Are the WOTC and WtW Credits?
They are selective or categorical hiring subsidies; that is, they attempt to steer
employers toward hiring members of prescribed groups from whom they would
otherwise have shied away. By its very nature, a selective subsidy favors individuals
from the designated population over other jobseekers. And more generally, as an
employment subsidy, it favors labor-intensive over capital-intensive enterprises.
Selective employment programs often focus on workers believed to have
relatively low skill levels. Because low productivity makes them less attractive to
employers than other labor force participants, the groups have comparatively high
unemployment rates and low wages regardless of aggregate economic conditions.
A subsidy — in the instant case, a tax expenditure rather than a direct (appropriated)
expenditure — lessens the productivity gap between target group members and other
workers. It thus is intended to make businesses more willing than they otherwise
would have been to hire from the designated population(s).
The WOTC and the WtW credit are not incremental subsidies. Because
employers do not have to create new jobs (i.e., increase the size of their workforces)
in order to get the credits, the programs’ design does not benefit faster- over slower-
growing firms. It does, however, favor companies that normally experience rapid
labor turnover or companies that are willing to fire ineligible employees and replace

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CRS-2
them with eligible workers.1 At the time the WtW credit was being considered, some
Members expressed concern about the chance for displacement of the working poor
in light of contemporaneous efforts to move large numbers of welfare recipients into
jobs.2 The results of a report the General Accounting Office issued in 2001 suggest
that the likelihood of employers engaging in churning3 or displacement to maximize
receipt of the WOTC is low.4
Some members of the public policy community also were mindful of the
experience with a similar program in effect from 1978 to 1994, the Targeted Jobs
Tax Credit (TJTC). The TJTC was criticized for the extent of windfall gains: the
credit was not a factor in the hiring decisions of most employers who claimed it, in
part because they normally hired persons like those in the eligible groups (i.e., low-
skilled, low-wage workers); thus, taxpayers appear to have largely subsidized firms
for doing what they would have done in the absence of the program. TJTC also was
criticized for the degree of assistance it provided individuals for whom the credit was
claimed: the hope was that through work experience and on-the-job training received
while in subsidized positions the workers would be better able to subsequently obtain
unsubsidized, higher-paying jobs; however, the short tenure of many TJTC hires
made it unlikely that subsidized employment much improved their future job
prospects.5
The WOTC and WtW credit were designed to try to mitigate these criticisms.
Some target groups were reformulated with the intention of focusing more narrowly
on those who truly need a credit for firms to risk hiring them. The certification
process was modified toward the same end, that is, to minimize windfall profits. In
addition, the minimum period a target group member must remain on the payroll in
order for an employer to claim a credit was lengthened from 120 hours or 90 days
under the TJTC, to 400 hours or 180 days under the WtW credit. This also was
briefly the case under the original version of the WOTC. The reason for extending
the retention period beyond the TJTC’s requirement was to enable eligible hires to
get the kind of work experience that would improve their long-term job
1 The willingness of companies to fire ineligible employees and replace them with eligible
job applicants is likely to be influenced by labor market conditions or by hiring and training
costs.
2 Robert Pear, “Clinton Will Seek Tax Break to Ease Path Off Welfare,” New York Times,
Jan. 28, 1997, p. A1. For more information on displacement in the context of welfare
reform, see archived CRS Report 97-360, Welfare Reform and Subsidized Public Sector
Jobs, by Linda Levine, pp. 7-10 (available from author).
3 “Churning” refers to hiring eligible group members and then firing them when they no
longer are eligible (e.g., their salary has reached the WOTC’s $6,000 earnings limit).
4 U.S. General Accounting Office, Work Opportunity Credit: Employers Do Not Appear to
Dismiss Employees to Increase Tax Credits, GAO-01-329, Mar. 2001. (Hereafter cited as
GAO, Work Opportunity Credit.)
5 For more information on the TJTC, see archived CRS Report 95-981, The Targeted Jobs
Tax Credit, 1978-1994, by Linda Levine (available from author).

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CRS-3
opportunities. However, some analysts have been skeptical that these program
changes will prove effective at remedying the problems.6
A Description of the Credits
WOTC
At present, for-profit employers are entitled to a credit against their federal
income tax liabilities for hiring members of the following eligible groups:
! members of families receiving benefits under the Aid to Families
with Dependent Children (AFDC) or its successor (Temporary
Assistance to Needy Families, TANF) program for any nine months
during the 18-month period ending on the hiring date;7
! qualified veterans who are members of families receiving benefits
under a food stamp program under the Food Stamp Act of 1977 for
at least a three-month period during the 15-month period ending on
the hiring date;8
! 18- to 24-year-olds who are members of families receiving food
stamp benefits for the six-month period ending on the hiring date, or
receiving benefits for at least three months of the five-month period
ending on the hiring date in the case of able-bodied adults without
dependents who cease to be eligible for assistance under the work
requirement at Section 6(o) of the Food Stamp Act of 1977;
! high-risk youth (i.e., 18- to 24-year-olds whose principal place of
abode is an empowerment zone, EZ, an enterprise community, EC,
or a renewal community, RC);
! summer youth (i.e., 16- to 17-year-olds hired for any 90-day period
between May 1 and September 15 whose principal place of abode is
an EZ, EC, or RC);
6 U.S. Congress, Joint Economic Committee, The Welfare-to-Work Tax Credit, Mar. 1997.
(Hereafter cited as Joint Economic Committee, The Welfare-to-Work Tax Credit.)
7 This is the group whose definition was altered by the Taxpayer Relief Act of 1997 (P.L.
105-34). Previously, group members had to have been receiving benefits for nine
consecutive months. Note: Members of families are only those persons taken into account
when determining eligibility for the AFDC or TANF program (i.e., those specifically listed
on the grant).
8 A qualified veteran is one who has served on active duty for more than 180 days or who
has been discharged or released from active duty for a service-connected disability. Note:
Members of families are only those persons taken into account when determining eligibility
for a food stamp program under the Food Stamp Act of 1977.

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CRS-4
! economically disadvantaged9 ex-felons with hiring dates within one
year of the last date of conviction or release from prison;
! vocational rehabilitation referrals (i.e., individuals with physical or
mental disabilities that result in substantial handicaps to employment
who have been referred to employers upon, or at any time after,
completing or while receiving rehabilitative services pursuant to an
individualized written plan for employment under a state plan for
vocational rehabilitative services approved under the Rehabilitation
Act of 1973 or through a vocational rehabilitation program for
veterans carried out under Chapter 31 of Title 38, U.S. Code); and
! Supplemental Security Income (SSI) recipients who have received
benefits under Title XVI of the Social Security Act for any month
ending within the 60-day period ending on the hiring date.
For eligible hires (except summer youth) who remain on a firm’s payroll at least
400 hours, an employer can claim an income tax credit of 40% of the first $6,000 in
wages paid during the worker’s first year of employment. For eligible hires (except
summer youth) who remain employed from 120 hours to 399 hours, the subsidy rate
is 25%. For summer youth hires, the 25% or 40% subsidy rate is applied against the
first $3,000 earned in any 90-day period between May 1 and September 15. Thus,
the minimum employment period under the WOTC currently is 120 hours.10
The actual value of the WOTC to the employer could be less than $1,500-
$2,400 per eligible worker ($750-$1,200 per summer youth hire) depending on the
firm’s tax bracket. A business’s tax deduction for wages and salaries must be
reduced by the amount of the credit. The credit cannot exceed 90% of a company’s
annual income tax liability. But, if after certain other nonrefundable credits have
been taken, 90% of an employer’s remaining income tax liability for the current year
is less than the amount of the WOTC, the excess can be carried back one year and
forward 20 years for workers hired on or after January 1, 1998. (Previously, the
carry-back and carry-forward periods were three years and 15 years, respectively).
9 “Economically disadvantaged” is defined as having an annualized family income of 70%
or less of the lower living standard income level (LLSIL). The U.S. Bureau of Labor
Statistics developed and subsequently eliminated the LLSIL along with other living
standards levels. In the many years since then, the U.S. Employment and Training
Administration has been updating the LLSIL by applying an inflation factor.
10 In the WOTC’s initial version (i.e., for persons hired from Oct. 1, 1996 through Sept. 30,
1997), the minimum employment period was 400 hours or 180 days and the subsidy rate was
35%. Note: For an anecdotal account of the difficulty firms had retaining WOTC-eligibles
for 400 hours, see Rochelle Sharpe, “Great Expectations: A Tax Credit Designed to Spur
Hiring Seems Promising — At First,” Wall Street Journal, Apr. 21, 1997, p. A1.

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CRS-5
State Employment Security (ES) agencies, in cooperation with participating
agencies,11 are charged with certifying whether newly hired workers belong to the
prescribed groups. If a request for certification is rejected, the state ES agency must
provide a written explanation of its decision to the employer.
The eligibility determination process can follow one of two paths described
below, but the second route is thought to be followed more often than the first.
(1) An eligible group member obtains a conditional certification (ETA Form
9062) from a participating agency. The jobseeker then uses it to market herself
to an employer.12 The employer completes a pre-screening/certification request
(IRS Form 8850) by the date a job offer is made and mails it to the state’s WOTC
coordinator within 21 days after the new hire starts working. The employer must
also fill-in and submit to the ES the bottom of the ETA form.
(2) An employer completes IRS Form 8850 by the date a job offer is made to an
applicant believed to belong to the WOTC population. The IRS form must be
mailed to the state’s WOTC coordinator within 21 days after the new hire starts
working. The employer can fill-in individual characteristics information (ETA
Form 9061) either during or after the selection process for submission to the ES.
“Employer representatives” are permitted to help firms screen job applicants for
credit eligibility and complete required paperwork. These management assistance
or services companies arose after enactment of the TJTC to inform the business
community of the program and perform credit-related administration for firms. As
was the case with the TJTC,13 these consultants play a considerable role not only in
securing WOTC certifications for large firms that hire many eligible persons, but also
in lobbying for reauthorization and modification of the credit.14
WtW Tax Credit
The Welfare-to-Work Tax Credit was initiated as part of the federal effort to
move welfare recipients onto payrolls.15 It is intended to encourage employers to hire
particularly disadvantaged members of the TANF group, namely, long-term
11 Participating agencies (e.g., one-stop career centers, job corps centers, vocational
rehabilitation agencies, local welfare agencies, veterans’ affairs offices, and food stamp
program agencies) determine the economic eligibility of most group members. State ES
agencies determine the economic eligibility of ex-felons.
12 There is limited evidence which suggests that advertising oneself as a member of a
subsidized group could actually reduce one’s chance of getting a job. Gary Burtless, “Are
Targeted Wage Subsidies Harmful? Evidence from a Wage Voucher Experiment,”
Industrial and Labor Relations Review, vol. 39, no. 1, Oct. 1985.
13 Christopher Howard, The Hidden Welfare State: Tax Expenditures and Social Policy in
the United States (Princeton, NJ: Princeton University Press, 1997), pp. 164-165, 171-172.
14 Ben Wildavsky, “Taxation: Taking Credit,” National Journal, Mar. 29, 1997. (Hereafter
cited as Wildavsky, Taxation: Taking Credit.)
15 For more information on prior employment tax credits with welfare recipients as their
designated population, see archived CRS Report 96-738, Welfare Recipients and Employer
Wage Subsidies, by Linda Levine (available from author).

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CRS-6
recipients. Specifically, the WtW credit’s definition of long-term family assistance
recipient is:
! a member of a family that has received benefits for at least the 18-
month period ending on the hiring date;
! a member of a family that has received benefits for a total of 18
months beginning after the credit’s enactment (August 5, 1997); and
! that has a hiring date which is not more than two years after the end
of the earliest such period; or
! a member of a family that no longer is eligible for assistance after
August 5, 1997 because of any federal- or state-imposed time limit,
and
! that has a hiring date which is not more than two years after the date
of benefit cessation.
For hiring an eligible long-term family assistance recipient, a firm may claim
a WtW credit against its federal income tax liability equal to 35% of the first $10,000
earned during the individual’s first year of employment, and 50% of the first $10,000
earned during the following year of employment. The actual value of the WtW credit
may be less than $3,500 in the first year and $5,000 in the second year of an eligible
hire’s employment (for elaboration see the WOTC program description).
Qualified wages under the WtW tax provision are defined more broadly than
under the WOTC. They include not only gross earnings, but also certain tax-exempt
amounts received under accident and health plans as well as under educational or
dependent assistance programs.
The WtW credit’s minimum employment period also differs from the WOTC’s
current requirement of 120 hours. As in the WOTC’s initial version, employers must
retain eligible workers at least 400 hours or 180 days in order to receive the credit.
The WtW credit’s certification procedure follows that of the WOTC as
described above. A firm cannot claim a WtW credit and a WOTC for the same
individual in the same taxable year.
As it is required to do annually under the Internal Revenue Code, the Joint
Committee on Taxation issued a report in 2004 to the House Committee on Ways
and Means and the Senate Committee on Finance that includes simplification
proposals. One proposal involves combination of the WOTC and the WtW credit
such that they would be governed by one set of rules pertaining to such things as
length of retention, definition of wages, level of subsidy rates, and limits on annual
salaries against which the rates are applied.
Program Activity
The U.S. Employment Service in the Employment and Training Administration
(ETA) collects figures on the number of certifications issued to employers
disaggregated by state, hourly wage and broad occupational group. The number of

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CRS-7
certifications could well be more than the number of employees for whom employers
claim credits because not all eligible hires fulfill the retention requirement. The
government does not collect statistics on the number of individuals for whom the
credits actually are claimed. It would be difficult to reconcile the number of
certifications and the number of credits claimed in a given year because companies
that receive a certification for an eligible individual hired late in one year may not
claim a credit for them until the following year, when the retention requirement has
been met. In addition, credits claimed for persons certified in one year may be
applied against income tax liabilities in past or future years.
WOTC
State ES agencies issued 123,407 WOTC certifications to employers in FY1997,
285,322 in FY1998, 335,707 in FY1999, 370,835 in FY2000, 383,357 in FY2001,
377,310 in FY2002, 403,243 in FY2003, and 244,445 in FY2004. The considerably
higher figures in recent years16 compared to FY1997 likely are related to the
program’s very slow start up at the state level, modifications of the credit that made
it more attractive to employers (e.g., the shortened retention requirement and
modified definition of AFDC/TANF recipients) and to tightening in the labor market
through much of the period.
Certifications most often have been issued for hiring members of the
AFDC/TANF group (e.g., 40% in FY2003). Another 27% of certifications in
FY2003 were for 18- to 24-year-olds in families receiving food stamps. The share
of high-risk youth has been on the rise, and it accounted for 13% of the total in
FY2003. The share of SSI recipients (an eligible group added in 1998) had been
increasing through FY2002, when it dropped from almost 8% to 6% in FY2003. In
contrast, the share of the vocational rehabilitation group had been decreasing steadily
before remaining flat at almost 5% in FY2002 and FY2003. The remaining groups
(i.e., ex-felons, veterans, and summer youth) together accounted for over 9% of
certifications in FY2003, with the majority issued to employers for hiring ex-felons
(over 6%).
Not surprisingly, many of the certifications issued likely have been for hiring
women. Men who face obstacles to employment were expected to be hired through
the young food stamp recipient and high-risk youth groups. This gender pattern has
prompted proposals in the Congress to extend the groups’ upper age limit. (See
section below on legislative activity in the 109th Congress for more information.)
WtW Tax Credit
In the nine months the credit was in operation in FY1998 (January-September),
state ES agencies issued 46,580 certifications. The figure for FY1999 was 104,998.
The number of certifications in FY2000 was 50% higher at 154,608. This represents
22,340 fewer certifications than were issued to employers for hiring WOTC-eligible
TANF recipients in FY2000, or 12.6% less. One year earlier, in contrast, WtW
16 The unusually low figure for FY2004 is an aberration due to the credit’s expiration during
much of the period.

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CRS-8
certifications were 41.6% below WOTC certifications for TANF- eligibles (or 74,713
less). The marked improvement in employers’ willingness to hire long-term family
assistance recipients is particularly notable in light of their initially expressed
reluctance toward utilizing the WtW credit versus the WOTC because of the former’s
longer retention requirement and more disadvantaged eligible group. The tightening
labor market through 2000 likely was a contributory factor.
The number of WtW certifications subsequently declined as the economy
experienced a recession and a “jobless recovery” through summer 2003. In FY2001,
WTW certifications were 97,072; in FY2002, 46,652; and in FY2003, a still lower
33,068. In contrast to this marked downward trend in WtW certifications, WOTC
certifications fluctuated over the period.
The low number of WtW certifications in FY2004 — 15,601 — reflects the
expiration of the credit during much of the period.
Program Costs
Spending for ES administration of the two programs generally has been less
than $20 million per fiscal year. For example, the Consolidated Appropriations Act
of 2005 (P.L. 108-447) provided almost $17.9 million after application of an across-
the-board reduction.
Most of the cost to the government from tax credits is in the form of revenue
forgone rather than appropriated funds. According to the U.S. Department of the
Treasury, about $16 million in Work Opportunity credits was earned on individual
and corporate tax returns in 1996. The WOTC’s low usage in that year likely is
attributable to the start-up of the program on October 1, 1996 and to the initial length
of the retention requirement. In contrast, almost $150 million in Work Opportunity
credits was earned on returns in 1997. In 1998, the value of the hiring credits
claimed by employers rose substantially: $291 million, in the case of the WOTC, and
$24 million in the case of the WtW credit.
As further shown in Table 1, WOTC credits claimed dipped slightly in tax year
1999 ($285 million) before spurting upward in 2000 ($400 million). Possibly
reflecting the recession, the value of WOTC credits claimed on federal income tax
returns dropped in 2001 ($267 million). The amount of WtW credits claimed
followed a different — steadily expanding — pattern, from $91 million in 1999, to
$114 million in 2000, and $128 million in 2001.
Even before any actual figures became available for the WtW credit, there was
speculation that they would likely be low because businesses that frequently had
claimed employment tax credits seemed less than enthusiastic about its target
population and retention period when the program was first proposed.17 A report
issued by the Joint Economic Committee at the time the WtW credit was being
considered noted that its larger subsidy compared to either the TJTC or the WOTC
17 Wildavsky, Taxation: Taking Credit.

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CRS-9
might “only offset the higher potential risk associated with hiring long-term welfare
recipients”.18 Moreover, the maximum amount of the WtW credit might rarely be
received by employers given the historically low wage levels (less than the credit’s
$10,000 annual cap) and limited fringe benefits associated with subsidized jobs as
well as their short-term nature (less than the credit’s two year limit).
Table 1. Value of WOTC and WtW Credits
Claimed on Federal Income Tax Returns
WOTC (in millions)
WtW Credit (in millions)
Year
Total
Corporations Individuals
Totals
Corporations Individuals
1996
$15.8
$7.3
$8.5
$0.0
$0.0
$0.0
1997
149.6
134.1
15.5
0.0
0.0
0.0
1998
290.9
261.8
29.0
24.2
21.6
2.6
1999
285.2
253.1
32.1
91.4
86.0
5.4
2000
399.6
369.2
30.4
114.0
103.4
10.6
2001
267.3
234.1a
33.2
127.9
111.7
16.2
Source: Data compiled by the Department of Treasury, Office of Tax Analysis, from Internal
Revenue Service Statistics of Income (SOI) data for individuals and corporations.
Note: Data on credits claimed on amended tax returns are not included.
a. Corporate data for 2001 are based on preliminary SOI data.
Evaluations of the WOTC and WtW Tax Credit
To date, studies of the employment tax credits have been limited in purpose or
scale. Shortly after the State Employment Security Agencies (SESA) began
implementing the WOTC in late 1996, the United States Department of Labor (DOL)
contracted for an evaluation of its administrative process (which, as noted above, is
the same as the WtW credit’s). Among other things brought out in the August 1997
study, state WOTC coordinators recommended that the paperwork burden on
employers be reduced and Form 8850 be made less confusing so that small
employers particularly and all for-profit employers generally would be more inclined
to participate.19
In March 2001, the General Accounting Office (GAO) surveyed a sample of
employers who utilized the WOTC program in two states with high certification
18 Joint Economic Committee, The Welfare-to-Work Tax Credit.
19 Westat, Process Evaluation of the WOTC Program (DOL, Employment and Training
Administration, Office of Strategic Planning and Policy Development, Aug. 1997).

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CRS-10
levels, namely, California and Texas. The study’s chief goal was to ascertain
whether employers fire workers who never were eligible for the WOTC or who no
longer are eligible for the WOTC in order to maximize credit receipt. The GAO
concluded that — while it could not definitely determine the extent of displacement
and churning, respectively, across all employers who participate in the program —
the sample data suggest that employers do not view the practices as cost-effective and
therefore presumably would not engage in them much, if at all. GAO’s estimate that
the WOTC offsets less than one-half of the cost of recruiting, hiring and training
credit-eligible workers, on average, supports the employers’ belief that the practices
are not cost-effective. Regarding churning specifically, certified workers in the two
states were found to be no more frequently terminated when their earnings totaled
about $6,000 (the credit-maximizing level).20
A study of the WOTC/WtW credit that was undertaken for the DOL also was
released in March 2001. Interviews of 16 establishments that had used the credits
were conducted in five states (California, Georgia, Maryland, Missouri, and
Wisconsin). As in the case of the GAO study, the authors emphasized that their
findings cannot be extrapolated to all other user firms. Among the report’s results
were:
! “the tax credits play little or no role in [the 16 employers’]
recruitment policies,” suggesting that employers would have hired
members of the target groups even if the programs were not
available;
! as credit-eligible hires’ job performance, work readiness, attendance
and punctuality were like those of ineligible employees in similar
positions, most of the interviewed employers thought there was no
need for special training or counseling programs;
! the target-group members who were hired exhibited the high rates of
turnover typical of low-wage workers,21 which meant that the
interviewed employers were able to claim the maximum credit for
relatively few eligible hires;
! the 16 employers gave the programs a positive assessment, although
they offered some suggestions for improvement having to do with
program administration (e.g., consolidate and streamline the forms),
program design (e.g., broaden target-group eligibility criteria)22 and
promotion of the program (e.g., increase use of conditional
certifications).23
The report’s authors recommended among other things that a study with a larger,
representative sample of employers be conducted, as
20 GAO, Work Opportunity Credit.
21 WOTC/WtW hires generally were paid the same entry-level wages as other hires, which
largely ranged between $5.15 and $8.00 an hour.
22 These two recommendations echo those made in the 1997 process evaluation.
23 See the section on Program Administration (supra) for the definition of a conditional
certification and why it may be little used.

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CRS-11
these observations do raise a question about the extent to which the tax credit is
serving the purpose for which it is intended — to serve as an economic incentive
to encourage employers to hire individuals from specified target groups whom
they would not have hired in the absence of the credit.24
An October 2002 analysis of participation rates for the WOTC’s two largest
eligible groups — TANF recipients and food stamp youth — estimated that relatively
few eligible new hires have the credit claimed for them. In 1999, employers were
estimated to have claimed the WOTC for less than one-third of newly employed
persons from the TANF group and for less than one-fifth of newly employed persons
from the food stamp youth group. Participation rates did increase considerably
between 1997 and 1999; however, this was due not just to an increase in credit-
claiming, but also to a substantial decrease in the size of the eligible populations
during implementation of welfare reform. The author suggested various reasons for
the low participation rates, including that the fairly short job tenure of the credit-
eligible population (like that of other low-wage individuals) translates into a small
tax credit value per WOTC-eligible hire. In other words,
Employers may be discouraged by the low returns to WOTC/WtW participation
for those workers whose employment ends before the 40 percent credit is reached
[i.e., before the individual have worked 400 hours or more].25
In a December 2002 report, the GAO attempted to specifically examine the few
tax incentives available for hiring, retaining, and accommodating workers with
disabilities. Persons with disabilities are the focus of two WOTC-eligible groups,
namely, vocational rehabilitation referrals and Supplemental Security Income (SSI)
recipients. Based upon an analysis of 1999 tax year data from the Internal Revenue
Service (IRS), the GAO found that relatively few employers utilize the WOTC. Data
on employer usage by WOTC-eligible group are not available from IRS data,
however. According to the agency’s interviews with government officials and
academic experts, fairly few persons with disabilities may have the credit claimed for
them because WOTC eligibility is limited to disabled individuals receiving publicly
funded vocational rehabilitation or SSI benefits. Perhaps not surprisingly, then,
interviewees supported expanding the WOTC’s coverage of disabled persons. The
agency also identified two national surveys related to disability employment issues
which determined that a very small share of supervisors of employees with
disabilities were aware of employment tax incentives and that human resource
managers regarded business tax incentives as less effective than any of the following
measures in reducing obstacles to the employment of persons with disabilities: top-
management commitment, staff training, mentoring, on-site consultation and
technical assistance, and short-term outside assistance.26
24 Westat and Decision Information Resources, Inc., Employers’ Use and Assessment of the
WOTC and Welfare-to-Work Tax Credits Program (DOL, Employment and Training
Administration, Office of Policy and Research, Mar. 2001).
25 Sarah Hamersma, “The Work Opportunity Tax Credit: Participation Rates Among Eligible
Workers,” National Tax Journal, vol. 56, no.4 (Dec. 2003), p. 736.
26 GAO, Business Tax Incentives to Employ Workers with Disabilities Receive Limited Use
(continued...)

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CRS-12
Legislative Activity
The Work Opportunity Tax Credit and Welfare-to-Work Tax Credit are
temporary provisions of the Internal Revenue Code. Since their initiation in the mid-
1990s, the Congress has allowed the credits to lapse four of the five times they were
up for reauthorization. In each instance, they were reinstated retroactive to their
expiration dates as part of large tax-related measures. The credits never have been
addressed independently of broader legislation.
From the 104th Congress Through the 108th Congress
104th Congress: Creation of the WOTC. As authorized in Section 1201
of the Small Business Job Protection Act of 1996 (P.L. 104-188), for-profit
employers were entitled to a WOTC against their federal income tax liabilities for
hiring members of seven specifically designated groups from October 1, 1996
through September 30, 1997.
105th Congress: Several Revisions. The Taxpayer Relief Act of 1997
(P.L. 105-34) substantially revised the program by shortening the minimum
employment requirement to 120 hours and creating a two-tier subsidy based on
length of retention. It also extended the temporary measure for nine months from
October 1, 1997 through June 30, 1998, added an eighth group (Social Security
Income recipients) and modified the definition of one group (see footnote 7).
After an almost four-month lapse, the WOTC was reauthorized for one year
(through June 30, 1999) retroactive to its expiration date in the Omnibus
Consolidated and Emergency Appropriations Act, 1999 (P.L. 105-277).
106th Congress: Expansion of WOTC-Eligible Groups. The credit
subsequently was reauthorized retroactive to its expiration date and extended through
December 31, 2001 in the Ticket to Work and Work Incentives Improvement Act of
1999 (P.L. 106-170).
The 106th Congress later expanded the definition of the “high risk” and “summer
youth” groups to include renewal communities (effective January 1, 2002) through
passage of the Consolidated Appropriations Act, 2001 (P.L. 106-554), which
incorporated the Community Renewal Tax Relief Act of 2000 (H.R. 5662).
Employers must coordinate claiming the WOTC with claiming another employment
tax credit equal to 15% of the first $10,000 in qualified wages paid to renewal
community residents who perform substantially all employment services within the
areas.
107th Congress: 2002-2003 WOTC Expansion to Cover New York
Liberty Zone Employees and Authorization of the WtW Credit. After
about a two-month lapse, the Job Creation and Worker Assistance Act of 2002 (P.L.
26 (...continued)
and Have an Uncertain Impact, GAO-03-39, Dec. 2002.

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CRS-13
107-147) reauthorized the WOTC. It was extended through December 31, 2003 for
eligible persons hired after December 31, 2001.
New York Liberty Zone Employees. The economic stimulus measure also
amended the WOTC’s eligible population to add “New York Liberty Zone business
employees.” Qualified businesses were defined as firms with 200 or fewer
employees located in the vicinity of the World Trade Center as well as those that, due
to property destruction or damage associated with the September 11 terrorist attack,
had to relocate to other sections of New York City. While the other WOTC group
members must be new hires in order for firms to claim a credit, New York Liberty
Zone business employees were both existing and newly hired employees. The
number of workers for whom firms that relocated elsewhere in New York City could
claim the credit was limited to those on the employers’ payrolls as of September 11,
2001; the cap did not have apply to firms that remained in the zone or that moved
into the zone. A qualified business could claim the WOTC for an eligible employee
in 2002, 2003, or both years. The portion of the WOTC associated with the new
target group was allowed against the alternative minimum tax.
Limited information is available regarding employer utilization of the WOTC
for Liberty Zone employees.27 Some 3,196 taxpayers claimed the WOTC in 2002 for
hiring members of the group, according to the Internal Revenue Service. (Taxpayers
include corporations, partnerships, and individuals who run their own businesses.)
For 2003, the preliminary number of taxpayers that claimed the WOTC for Liberty
Zone employees is 3,502.
The Welfare-to-Work Tax Credit. The Personal Responsibility and Work
Opportunity Act (P.L. 104-193) requires parents to work after a maximum of two
years of receiving TANF benefits, and Congress authorized the WtW credit to help
achieve that objective. It initially was to have expired on April 30, 1999, but it, like
the WOTC, was extended in P.L. 105-277 (through June 30, 1999), P.L. 106-170
(through December 31, 2001), and P.L. 107-147 (through December 31, 2003).
108th Congress: A Lengthy Lapse. The first bill taken up by the 108th
Congress that contained a WOTC-related provision was H.R. 743 (the Social
Security Protection Act of 2003). It passed the House on April 2, 2003. The Senate
subsequently passed the legislation, and on March 2, 2004, it was signed into law
(P.L. 108-203). Among many other things, the act modified the definition of the
WOTC’s vocational rehabilitation referral-eligible group in light of the Ticket to
Work and Work Incentives Improvement Act of 1999. It effectively expanded the
group to include disabled individuals with individualized work plans who are
referred to employers not only by a state vocational rehabilitation agency (as was the
case under prior law), but also by “employment networks” that were created by the
Ticket to Work legislation.
On September 23, 2004, the House and Senate passed the conference report for
H.R. 1308 (The Working Families Tax Relief Act of 2004). Following the credits’
27 No information on certifications for Liberty Zone employees because they were exempt
from the WOTC’s usual certification procedure.

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CRS-14
10-month lapse, it extended the WOTC and the WtW credit retroactive to their
expiration and through December 31, 2005. As originally introduced and passed by
the House in March 2003, however, H.R. 1308 (then called the Tax Relief,
Simplification, and Equity Act of 2003) did not mention the employment tax credits.
Neither did the amended version of the bill (The Relief for Working Families Tax
Act of 2003) that the Senate passed in June 2003. Conferees were appointed in 2003,
and on September 23, 2004, the conference report (H.Rept. 108-696) — with a two-
year extension of the otherwise unrevised WOTC and WtW credit — was filed. The
JCT estimated that revenue losses from the extension might total $603 million for the
WOTC and $122 million for the WtW credit over the FY2005-FY2009 period.
Legislative Activity During the 109th Congress
With the WOTC and WtW Tax Credit now set to expire on January 1, 2006,
legislation has been introduced in the 109th Congress to extend and otherwise amend
them.
Combining and Modifying the Two Credits. H.R. 1272/S. 595 (the
Encouraging Work Act of 2005) would, in addition to:
! making the WOTC permanent,
! expanding eligibility of ex-felons beyond those who are
economically disadvantaged,
! expanding eligibility of young food stamp recipients by including
persons aged 25 to 39, and
! renaming high-risk youth as “designated community residents”
while expanding their eligibility to include persons aged 25 to 39,
repeal the WtW credit as a separate tax provision. Instead, long-term family
assistance recipients would become a uniquely handled eligible group under the
WOTC. More specifically,
! employers who hire long-term family assistance recipients could
claim a credit if individuals are retained for a minimum of 120 hours
(rather than the current 400 hours or 180 days);
! the 25% subsidy rate for WOTC group members employed from 120
to 399 hours would apply to long-term family assistance recipients,
and the WtW credit’s 35% rate for those employed at least 400 hours
during their first year of employment would be raised to 40% as is
currently the case for WOTC-eligible hires;
! employers would continue to be able to claim a credit for retaining
long-term family assistance recipients during a second year at the
WtW’s current subsidy rate of 50%;
! the subsidy rates for long-term family assistance recipients would
continue to be applied against up to $10,000 earned in each of the
first and second years of employment; and
! qualified wages of long-term family assistance recipients would
become the same as those of WOTC-eligible hires, namely, cash
wages (i.e., certain benefits could no longer be included).

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CRS-15
The Administration included in its FY2006 budget request similar changes to
the two employment tax credits. Both the Administration’s proposal and
H.R.1272/S. 595 would consolidate the WtW credit within the WOTC. The
Administration’s proposal differs from H.R. 1272/S. 595 in two respects, namely, by
extending the WOTC for one year (through December 31, 2006) and modifying the
definition of the ex-felon group only.
As introduced, H.R. 4297 (the Tax Relief Extension Reconciliation Act of 2005)
would have consolidated the WtW credit with the WOTC. The bill approved by the
Ways and Means Committee and subsequently by the House on December 8, 2005,
excludes the consolidation. In contrast, S. 2020 (the Tax Relief Act of 2005) would
fold the WtW credit into the WOTC and treat long-term family assistance recipients
differently from other WOTC-eligibles, as also proposed in H.R. 1272/S. 595.
Specifically, S. 2020 would continue to allow employers to claim a credit for
retaining long-term family assistance recipients during their second year of
employment, and continue to have subsidy rates for long-term family assistance
recipients applied against up to $10,000 earned in each of the first and second years
of employment. The Senate passed S. 2020 on November 17, 2005.
Like H.R. 1272/S. 595, S. 2020 would expand the WOTC-eligibility of ex-
felons by eliminating the requirement that they be economically disadvantaged and
of high-risk youth (renamed “designated community residents”) by including persons
aged 25 to 39. Unlike S. 2020 and H.R. 1272/S. 595, H.R. 4297 would expand the
WOTC-eligibility of young food stamp recipients by including persons aged 25 to 34
rather than persons aged 25 to 39.
Both H.R. 4297 and S. 2020, like the President’s budget request, provide a one-
year extension through December 31, 2006. H.R. 1272/S. 595, in contrast, would
make a consolidated WOTC credit permanent, while H.R. 4297 (as introduced)
would have extended a consolidated credit for two years.
The Joint Committee on Taxation (JCT) estimates the revenue effect of the
WOTC provisions in H.R. 4297 to be $466 million from FY2006 through FY2010.
The revenue loss associated with the WtW credit in H.R. 4297 might be $80 million
between FY2006 and FY2010. According to the JCT, the revenue impact of
extending a consolidated WOTC-WtW credit and other amendments to the WOTC
in S. 2020 is $690 million over the FY2006-FY2010 period.
Expanding Eligible Groups (e.g., Hurricane Katrina Employees).
Other legislation introduced thus far that relates to the WOTC includes adding
eligible groups (e.g., qualified small business employees, and qualified veterans of
the military operations in Afghanistan or Iraq and their qualified dependents).
As it had after the September 11 attack on the World Trade Center, the Congress
has temporarily expanded the WOTC eligible-groups to include “a Hurricane Katrina
employee” as part of its emergency response. The House and Senate passed differing
versions of the Katrina Emergency Tax Relief Act of 2005 (H.R. 3768) on September
15, 2005.

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CRS-16
S.Amdt. 1728 also included a separate provision not in the House bill that
would have allowed employers whose trade or business in the disaster area became
inoperable, after August 28, 2005, and before January 1, 2006, due to Hurricane
Katrina, a credit equal to 40% of wages up to $6,000 per employee who worked in
the disaster area for those employers on August 28, 2005, or for members of the
Ready Reserve-National Guard currently on active duty who worked for such
employers immediately before their deployment. The credit would be applied against
wages paid to eligible employees from the time the businesses became inoperable
until the businesses resumed significant operations in the disaster area. It would not
matter whether employees actually perform services for the wages paid; whether
services are performed at a worksite other than their place of employment on August
28, 2005; or whether services are performed at the original place of employment
before significant operations resume there.
On September 21, 2005, the House approved an amendment to S.Amdt. 1728,
which the Senate passed the same day, that includes the following modification of
the WOTC and the retention credit. On September 23, 2005, the President signed it
into law (P.L. 109-73).
WOTC Amendment. “Hurricane Katrina employee” is added to the WOTC-
eligible groups. The group is defined as persons whose principal place of abode on
August 28, 2005 was in the core disaster area and who,
! beginning on such date and through August 28, 2007, is hired for a
position principally located in the core disaster area; and
! beginning on such date and through December 31, 2005, is hired for
a position regardless of its location.
The WOTC’s current rule denying its application to wages of employees who had
worked for the same employer at any prior time (except for those on the employer’s
payroll on August 28, 2005) is waived, as is the usual certification process. The
WOTC’s expiration date of December 31, 2005 also does not apply to Hurricane
Katrina employees.
The estimated revenue effect of the WOTC expansion, according to the Joint
Committee on Taxation, is $12 million in FY2006, $30 million in FY2007, $28
million in FY2008, $12 million in FY2009, and $6 million in FY2010. For the
FY2006-FY2010 period, then, the revenue loss could total $88 million. Through
FY2015, it could total $93 million.
Employee Retention Credit. Eligible employers whose trade or business
in the core disaster area became inoperable after August 28, 2005 and before January
1, 2006 because of damage sustained by Hurricane Katrina can claim a credit equal
to 40% of qualified wages up to $6,000 per person whose principal place of
employment had been with such employers on August 28, 2005. Under P.L. 109-73,
eligibility for the retention credit is limited to small employers (i.e., employers cannot
have employed an average of over 200 employees on business days during the
taxable year). The credit can be applied against wages paid or incurred by an eligible
firm from the time it became inoperable after August 28, 2005, until it resumes
significant operations at the eligible employee’s principal place of employment or

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CRS-17
before January 1, 2006. Qualified wages are those paid regardless of whether an
eligible employee performs services; performs services at a place of employment
other than his/her worksite on August 28, 2005; or performs services at his/her
worksite on August 28, 2005 before significant operations have resumed there. A
business cannot claim a retention credit for an employee during any period for which
it claims a Work Opportunity Tax Credit for such employee.
The estimated revenue effect of the retention credit, according to the Joint
Committee on Taxation (JCT), is $23 million in FY2006, $8 million in FY2007, $4
million in FY2008, and $2 million in FY2009. For the entire period, then, the
revenue loss could total $38 million.
S. 2020, the Tax Relief Act of 2005, revisits the Hurricane Katrina employee
retention credit by removing the employer-size cap. S. 2020 would, in addition,
provide an employee retention credit for employers affected by Hurricane Rita and
Hurricane Wilma. The estimated revenue effect of eliminating the employer size
limit, according to the JCT, is $90 million from FY2006 through FY2010. The
JCT’s revenue estimate for the retention credit associated with Hurricanes Rita and
Wilma, which also have no employer size limit, is $24 million over the FY2006-
FY2010 period.
As passed by the House on December 7, 2005, the Gulf Opportunity Zone Act
of 2005 would have extended the current employee retention credit available to
employers harmed by Hurricane Katrina to employers harmed by hurricanes Rita and
Wilma. Unlike S. 2020, H.R. 4440 would have continued to limit eligibility for the
retention credit to small employers. The amended version of H.R. 4440 that the
House and Senate passed on December 16, 2005, and the President signed on
December 22, 2005 (P.L. 109-135), drops the employer-size limit.
crsphpgw

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