The Work Opportunity Tax Credit and the 105th Congress

The Work Opportunity Tax Credit and the 105th Congress

97-540 E
Updated May 14, 1998
CRS Report for Congress
Received through the CRS Web
The Work Opportunity Tax Credit and
the 105th Congress
Linda Levine
Specialist in Labor Economics
Economics Division
Summary
The Work Opportunity Tax Credit (WOTC) was initiated in the Small Business Job
Protection Act of 1996 (P.L. 104-188). It is a temporary measure intended to encourage
for-profit employers to hire members of specifically designated groups thought to
experience recurring problems in the labor market. The Taxpayer Relief Act of 1997
(P.L. 105-34) modified the employment credit and extended it through June 30, 1998.
H.R. 3125 would extend WOTC for 3 years, through June 30, 2001; other bills would
increase the number of eligible groups, apply WOTC to the employment taxes of tax-
exempt organizations, and allow the credit against the alternative minimum tax. P.L.
105-34 also initiated a new credit, the Welfare-to-Work Tax Credit (WWTC), to
promote employment of long-term welfare recipients. It is authorized to run through
April 30, 1999. In its FY1999 budget request, the Administration has proposed
extending the WOTC and WWTC through April 30, 2000.
What is WOTC?
WOTC is a selective hiring subsidy, that is, it is intended to encourage employers to
hire members of prescribed groups. By their very nature, selective hiring subsidies favor
individuals from the prescribed groups over other jobseekers. Members of these groups
are believed to be low skilled, such that their productivity does not warrant employers
paying them the going wage, which in turn results in the groups’ members having
chronically low incomes or high unemployment rates. A subsidy — in the instant case
offered as a credit against an employer’s federal income tax liability as opposed to a direct
payment to an employer — serves to narrow the gap between the productivity of these
individuals and the going wage for a particular job.
WOTC is not an incremental subsidy, that is, firms do not have to increase the size
of their workforces in order to get the credit. Consequently, employers can claim the
credit by hiring eligible group members to fill either newly created or already existing
positions. The availability of WOTC could thus prompt some firms to deliberately
Congressional Research Service ˜ The Library of Congress

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displace ineligible employees in order to fill their jobs with eligible workers, or to favor
eligible over ineligible job applicants when new positions are created or when vacant
positions develop through voluntary employee turnover. Some Members of Congress
have been concerned about the prospect for displacement in light of ongoing efforts to
move welfare recipients into jobs.1
WOTC: Its Current Form
Under WOTC as authorized by the Small Business Job Protection Act of 1996 (P.L.
104-188), for-profit employers were entitled to a credit against their federal income tax
liabilities for hiring members of 7 specifically designated groups. The Taxpayer Relief
Act of 1997 (P.L. 105-34) added an eighth group and modified the definition of one
group. It also shortened the retention period, changed the subsidy rate, and extended the
temporary measure for 9 months through June 30, 1998. The amendments apply to
eligible individuals hired after September 30, 1997.
WOTC’s eligible groups currently are as follows:
! 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 9-month period ending during the 18-month period ending
on the hiring date;2
! 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 3-month period
during the 15-month period ending on the hiring date;3
! 18-24 year olds who are members of families receiving food stamp benefits for the
6-month period ending on the hiring date, or receiving benefits for at least 3
months of the 5-month period ending on the hiring date in the case of family
members no longer eligible for assistance under section 6(o) of the Food Stamp
Act of 1977;
! high-risk youth (i.e., 18-24 year olds whose principal place of abode is an
empowerment zone or an enterprise community);
1 For more information on displacement in the context of welfare reform, see: U.S. Library
of Congress. Congressional Research Service. Welfare Reform and Subsidized Public Sector
Jobs. CRS Report 97-360 E, by Linda Levine. pp. 7-10.
2 Members of families are only those persons taken into account when determining
eligibility for the AFDC or TANF program. Previously, group members had to have been
receiving benefits for 9 consecutive months.
3 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. 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.

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! summer youth (i.e., 16-17 year olds hired for any 90-day period between May 1
and September 15 whose principal place of abode is an empowerment zone or an
enterprise community);
! Supplemental Security Income recipients who have received benefits for any
month ending within the 60-day period ending on the hiring date;4
! economically disadvantaged ex-felons with hiring dates within 1 year of the las
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date of conviction or release from prison; and,
! 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 completion of or while receiving rehabilitative services
under the Rehabilitation Act of 1973 or through a program carried out under
chapter 31 of title 38, United States Code).
An employer can claim an income tax credit of 40% of the first $6,000 in wages paid
to eligible group members (except summer youth) during their first year of employment,
if the employees are retained for at least 400 hours. The subsidy rate is 25% for eligible-
hires (except summer youth) who remain on the payroll between 120 and 399 hours.
Thus, the minimum retention period is 120 hours.6
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. The actual value
of the credit to the employer could be less than $1,500-$2,400 per eligible worker (or
$750-$1,200 per summer-youth hire) depending on the firm’s tax bracket. A business’
tax deduction for wages and salaries must be reduced by the amount of the credit as well.
And, the credit cannot exceed 90% of a firm’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 WOTC, the excess can
be carried back 3 years and carried forward 15 years.
Local Employment Service (ES) offices are charged with certifying the eligibility of
jobseekers. This can occur in two different ways: (1) either a firm must receive a written
certification from the ES that a new-hire belongs to a WOTC group on or before the day
the individual begins to work for the employer; or, (2) the employer must complete a “pre-
screening notice” (Form 8850) on or before the day the jobseeker is offered a position and
then must submit the notice (signed by the employer and new-hire under penalties of
perjury) to an ES office within 21 days after the new-hire begins to work for the
4 This is the group added by P.L. 105-34.
5 Economically disadvantaged is defined as having an annualized family income of 70% or
less of the lower living standard income level.
6 In WOTC’s initial version, the minimum retention period was 400 hours or 180 days. The
subsidy rate was 35%.

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employer.7 If the ES rejects a firm’s request for certification, the office must provide a
written explanation of its decision to the employer.
The ES issued 126,113 WOTC certifications to employers in FY1997. Most (60%)
were for members of the AFDC/TANF group. Another 21% were for members of the
group comprised of 18-24 year olds in families receiving food stamps. The high-risk
youth and vocational rehabilitation groups each accounted for nearly 7% of the
certifications. A little over 3% were for the ex-felon group. Slightly more than 1% of the
certifications applied to members of the veterans group and slightly less than 1% to
members of the summer youth group.
The great majority of WOTC’s cost to the government comes from revenue forgone
rather than from appropriated funds. According to the Administration’s FY1999 budget
documents, the revenue loss to the treasury associated with P.L. 105-34's extension and
modification of WOTC could total $340 million between FY1999 and FY2003. I
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contrast, the Labor Department’s appropriation for FY1998 (P.L. 105-78) earmarked $20
million for ES administration of the program. The same appropriation level has been
requested for FY1999.
Legislation Pending Before the 105 Congress
th
As part of its FY1999 budget request, the Administration has proposed that WOTC
and the Welfare-to-Work Tax Credit (WWTC) be extended through April 30, 2000. It
is estimated that the proposal to extend WOTC from June 30, 1998 through April 30,
2000 could cost the treasury $778 million in revenue forgone between FY1999 and
FY2003; and, to extend WWTC from April 30, 1999 through April 30, 2000, $169
million over the 5-year period.
On January 28, 1998, H.R. 3125 was introduced. It would extend WOTC for 3
years, through June 30, 2001.
On April 30, 1998, H.R. 3772 and S. 2018 were introduced. The former would allow
WOTC against the alternative minimum tax for years beginning after December 31, 1997.
The latter would permit firms in certified economic dislocation areas to receive the credit
for hiring qualified dislocated workers after December 31, 1998.
Just before the close of the 105 Congress’ first session, the Communit
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y
Employment Partnership Act of 1997 (H.R. 2995) was proposed. It would permit tax-
exempt organizations (excluding governmental units as well as agencies or
instrumentalities of governmental units) to apply a modified version of WOTC against
their quarterly employment taxes. Instead of WOTC’s 40% subsidy rate applicable to for-
profit employers who retain eligible-hires at least 400 hours, H.R. 2995 would substitute
7 Under WOTC’s predecessor, the Targeted Jobs Tax Credit, the first method was used
infrequently.
8 The estimated revenue loss due to firms hiring long-term welfare recipients under the
WWTC is $90 million between FY1999 and FY2003. For information on the WWTC, see: U.S.
Library of Congress. Congressional Research Service. The Welfare-to-Work Tax Credit: A Fact
Sheet . CRS Report 97-784 E, by Linda Levine.

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a 30% rate for tax-exempt employers; and, instead of WOTC’s 25% rate applicable to
taxable firms who retain eligible-hires between 120 and 399 hours, the bill would
substitute a 20% rate for tax-exempt employers. Tax-exempt organizations who hire
WOTC-eligibles could reduce their quarterly employment tax payments by the amount
of the subsidy they expect to be entitled to claim during the calendar year. At year end,
adjustments would be made to reflect the actual as opposed to estimated hours of work
of eligible-hires during the calendar year, and consequently, actual as opposed to
estimated reductions in prior quarterly employment tax payments.
WOTC also is incorporated in legislation introduced earlier in the first session of the
105
th Congress. Bills that focus on providing assistance to distressed communities would
do such things as expand WOTC’s high-risk youth and summer youth groups to include
individuals living in renewal communities (H.R. 1031/S. 432), add to the credit’s eligible
groups graduates of specialized academies located in education zones who are hired
within 6 months of graduation (H.R. 1512), and apply an increased subsidy rate of 50%
to the wages of eligible-hires during their first 3 years of employment (S. 23).