The Work Opportunity Tax Credit (WOTC)
Christine Scott
Specialist in Social Policy
February 4, 2013
Congressional Research Service
7-5700
www.crs.gov
RL30089
CRS Report for Congress
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epared for Members and Committees of Congress
The Work Opportunity Tax Credit (WOTC)
Summary
The Work Opportunity Tax Credit (WOTC) is meant to induce employers to hire members of
families receiving benefits under the Temporary Assistance to Needy Families (TANF) program
and other groups thought to experience employment problems regardless of general economic
conditions (e.g., food stamp recipients and ex-felons). In 1997, Congress passed the Welfare-to-
Work (WtW) tax credit to focus specifically on more disadvantaged TANF recipients. The 109th
Congress folded the WtW credit into a revised WOTC as part of the Tax Relief and Health Care
Act of 2006.
Provisions to increase the minimum wage and to provide tax relief to small businesses were
included in emergency supplemental appropriations during the 110th Congress. The U.S. Troop
Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Act of 2007 (P.L. 110-28)
extended the WOTC for three-and-one-half years through August 31, 2011. It also expanded the
definition of WOTC-eligible veterans to persons entitled to compensation for service-connected
disabilities (1) with a hiring date not more than one year after having been discharged or released
from active duty in the Armed Forces or (2) having been unemployed for at least six months
during the one-year period ending on the hiring date, and doubled (to $12,000) the maximum
wage against which the subsidy rate could be applied for this component of the veterans group. In
addition, the law expanded the age range of high-risk youth to cover 18- to 39-year-olds and
renames the WOTC-eligible group “designated community residents.” The act also clarified the
definition of vocational rehabilitation referrals, added “rural renewal county” to the places of
residence for designated community residents, and allowed the WOTC and tip credit against the
Alternative Minimum Tax.
In the 111th Congress, the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5)
expanded the credit’s targeted groups to cover unemployed veterans and disconnected youth who
began working for an employer during 2009 or 2010. The Hiring Incentives to Restore
Employment Act (HIRE; P.L. 111-147) provided payroll tax forgiveness to employers who hired
certain unemployed individuals in 2010. Employers claiming the payroll tax forgiveness could
not claim the WOTC for those wages associated with payroll tax forgiveness. The Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended
the WOTC through December 31, 2011.
In the 112th Congress, P.L. 112-56 expanded the WOTC targeted group for veterans and provided
a higher level of first-year wages for calculating WOTC for hiring certain veterans through
December 31, 2012. Also in the 112th Congress, the American Taxpayer Relief Act of 2012 (P.L.
112-240) extended the WOTC for all eligible groups through December 31, 2013.
Congressional Research Service
The Work Opportunity Tax Credit (WOTC)
Contents
What Kind of Wage Subsidy Is the WOTC? ................................................................................... 5
A Description of the WOTC ............................................................................................................ 6
Program Activity and Costs ........................................................................................................... 10
Evaluations of the WOTC .............................................................................................................. 11
Legislative Activity ........................................................................................................................ 14
From the 104th Congress Through the 112th Congress ............................................................. 14
104th Congress: Creation of the WOTC ............................................................................ 14
105th Congress: Several Revisions .................................................................................... 14
106th Congress: Expansion of WOTC-Eligible Groups .................................................... 15
107th Congress: 2002-2003 WOTC Expansion to Cover New York Liberty Zone
Employees and Authorization of the WtW Credit .......................................................... 15
108th Congress: A Lengthy Lapse ...................................................................................... 16
109th Congress: Hurricane Disaster Relief, Modifying the WOTC, and
Incorporating the WtW Credit into the WOTC After Another Long Lapse ................... 16
110th Congress: Focus on Eligible Groups and Credit Extension ..................................... 18
111th Congress: Temporary Expansion and Extension of the Credit ................................. 19
112th Congress: Expansion of Veterans Targeted Group and Credit Extension ................. 19
Tables
Table 1. WOTC Certifications Issued by Target Group, FY2008-FY2012 ................................... 11
Contacts
Author Contact Information........................................................................................................... 20
Acknowledgments ......................................................................................................................... 21
Congressional Research Service
The Work Opportunity Tax Credit (WOTC)
ery few provisions in the Internal Revenue Code focus directly on employing individuals.
Two temporary income tax credits—the Work Opportunity Tax Credit (WOTC) and the
VWelfare-to-Work (WtW) tax credit—were initiated in the mid-1990s to encourage for-
profit employers to hire from groups thought to experience difficulties in the labor market both in
good and bad economic times. About a decade later, the 109th Congress incorporated the WtW
credit into the WOTC; the 110th Congress made additional changes to the WOTC that it extended
through August 31, 2011; and the 111th Congress extended the WOTC through December 31,
2011. In the 112th Congress, P.L. 112-56 expanded the targeted group for veterans and extended
the expiration of WOTC for veterans to December 31, 2012. Also in the 112th Congress, the
American Taxpayer Relief Act of 2012 (P.L. 112-240) extended the WOTC for all eligible groups
through December 31, 2013.
This report contains a description of the WOTC and closes with a legislative history of the
WOTC.
What Kind of Wage Subsidy Is the WOTC?
The WOTC is a
selective or
categorical hiring subsidy; that is, it attempts 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 is
not an incremental subsidy. Because employers do not have to create new jobs
(i.e., increase the size of their workforces) in order to get the credit, the program’s 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 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, now called the Government Accountability Office (GAO),
issued in 2001 suggested that the likelihood of employers engaging in churning3 or displacement
to maximize receipt of the WOTC is low.4
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, January 28, 1997, p. A1.
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
(continued...)
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The Work Opportunity Tax Credit (WOTC)
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.
The WOTC was 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 longer than the 120 hours or 90 days
requirement under the TJTC to enable eligible hires to get the kind of work experience that would
improve their long-term job opportunities. However, some analysts were skeptical that these
program changes would prove effective at remedying the problems.5 Since the WOTC’s
inception, however, changes have been made that make it more closely resemble the TJTC (e.g.,
the retention period was reduced from 400 hours or 180 days to 120 hours).
A Description of the WOTC
For-profit employers are entitled to a credit against their federal income tax liabilities for hiring
members of the following eligible groups after May 25, 2007 (the date of enactment of H.R.
2206, the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Act of
2007, P.L. 110-28):
• members of families receiving benefits under the Temporary Assistance to Needy
Families (TANF) program for any nine months during the 18-month period
ending on the hiring date;6
• qualified veterans who are (1) 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 12-month period ending on the hiring date or (2) entitled to
compensation for a service-connected disability and (a) having a hiring date that
is not more than one year after having been discharged or released from active
(...continued)
Increase Tax Credits, GAO-01-329, March 2001. (Hereafter cited as GAO,
Work Opportunity Credit.)
5 U.S. Congress, Joint Economic Committee,
The Welfare-to-Work Tax Credit, March 1997. (Hereafter cited as Joint
Economic Committee,
The Welfare-to-Work Tax Credit.)
6 The group’s 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 TANF program (i.e., those specifically listed on the grant).
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The Work Opportunity Tax Credit (WOTC)
duty in the Armed Forces or (b) having aggregate periods of unemployment of at
least six months during the one-year period ending on the hiring date;7
• 18- to 39-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;8
• designated community residents (formerly high-risk youth), defined as 18- to 39-
year-olds whose principal place of abode is an empowerment zone (EZ), an
enterprise community (EC), a renewal community (RC), or a rural renewal
county (RRC);9
• 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);
• ex-felons with hiring dates within one year of the last date of conviction or
release from prison;10
• 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, a vocational rehabilitation program for veterans
carried out under Chapter 31 of Title 38, U.S. Code, or an individual work plan
developed and implemented by an employment network pursuant to subsection
(g) of Section 1148 of the Social Security Act with respect to which the
requirements of such subsection are met);11 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.
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5) extended the WOTC to cover
two additional groups whose members are hired during 2009 or 2010:
7 For veterans hired after May 25, 2007, P.L. 110-28 extended the group’s definition to (2). Note: Members of families
are those persons taken into account when determining eligibility for a food stamp program under the Food Stamp Act
of 1977.
8 The Tax Relief and Health Care Act of 2006 (P.L. 109-432) expanded the group’s definition from 18 to 24 year olds
to 18 to 39 year olds hired on or after January 1, 2007.
9 The group’s name was changed by P.L. 110-28 and expanded to include 18 to 39 year olds hired after May 25, 2007.
The act also adds residents of a rural renewal county, which is defined as any county outside a metropolitan statistical
area that during the five-year periods 1990 to 1994 and 1995 to 1999 had a net population loss.
10 P.L. 109-432 eliminated the requirement that group members be “economically disadvantaged” for persons hired on
or after January 1, 2007. Economically disadvantaged was defined as having an annualized family income of 70% or
less of the lower living standard income level (LLSIL). After the U.S. Bureau of Labor Statistics eliminated the LLSIL
along with other living standards levels many years ago, the Employment and Training Administration updated the
LLSIL annually by applying an inflation factor.
11 P.L. 110-28 clarified the group’s definition by adding the language concerning employment networks.
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The Work Opportunity Tax Credit (WOTC)
• Unemployed veterans are persons discharged or released from active duty in the
Armed Forces within five years of their hiring date and having received
unemployment compensation for not less than four weeks during the one-year
period ending on the hiring date.
• Disconnected youth are 16- to 24-year olds who are not regularly attending
school during the six-month period preceding the hiring date, not regularly
employed within the same time frame, and not readily employable because they
lack a sufficient number of skills.
For eligible hires (except eligible veterans entitled to compensation for a service-connected
disability and 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 eligible veterans entitled to compensation for a service-
connected disability and summer youth) who remain employed from 120 hours to 399 hours, the
subsidy rate is 25%. Thus, the minimum employment period under the WOTC is 120 hours.
For eligible members of the veterans group who receive compensation for service-connected
disabilities, the maximum wage to which the subsidy rates can be applied is the first $12,000
earned. For summer youth hires, the maximum wage is the first $3,000 earned in any 90-day
period between May 1 and September 15.
For long-term family assistance recipients hired after January 1, 2007,
• employers can claim a credit equal to 25% of the first $10,000 earned during the
first year of employment if individuals are retained between 120 and 399 hours;
• employers can claim a credit equal to 40% of the first $10,000 earned during the
first year of employment if individuals are retained at least 400 hours;
• employers can claim a credit of 50% of the first $10,000 earned for retaining
long-term family assistance recipients during a second year; and
• qualified wages are cash wages.
A long-term family assistance recipient is a member of a family who has received TANF benefits
for at least the 18-month period ending on the hiring date; who has received benefits for a total of
18 months beginning after the credit’s enactment (August 5, 1997) and who has a hiring date that
is not more than two years after the end of the earliest such period; or who 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 that is not more than two years after the date of benefit cessation.
P.L. 112-56 expanded the targeted group for qualified veterans and changed the amount of first-
year wages that can be claimed for the WOTC, such that
• for veterans who are members of a family receiving SNAP benefits for at least
three months in the year prior to being hired, the maximum wages for the credit
would be $6,000;
• for veterans who have been unemployed for an aggregate of at least four weeks,
but less than six months, in the year prior to being hired, the maximum wages for
the credit would be $6,000;
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The Work Opportunity Tax Credit (WOTC)
• for veterans eligible for disability compensation from the VA and within one year
of discharge or release from active military duty when hired, the maximum
wages for the credit would be $12,000;
• for veterans who have been unemployed for an aggregate of at six months or
more in the year prior to being hired, the maximum wages for the credit would be
$14,000; and
• for veterans who are eligible for disability compensation from the VA and have
been unemployed for an aggregate of six months or more in the year prior to
being hired, the maximum wages for the credit would be $24,000.
For certain non-profit employers, the WOTC is refundable for hiring veterans. The refundable
credit would be the lesser of the calculated WOTC for hiring veterans who qualify for the WOTC
based on unemployment or the payroll taxes paid by the non-profit. Non-profit employers eligible
for the refundable credit would be 501(c) organizations that are tax-exempt under Section 501(a)
of the Internal Revenue Code.
P.L. 112-56 also extended the WOTC for qualified veterans to U.S. possessions with a tax system
that mirrors the U.S. tax system, with the Secretary of the Treasury paying to the possession the
amount lost to the possession in taxes because of the expansion of the WOTC for qualified
veterans.
P.L. 112-56 extended the expiration date of WOTC for veterans to December 31, 2012. The
American Taxpayer Relief Act of 2012 (AFTRA; P.L. 112-240) extended the expiration of WOTC
for all eligible groups to December 31, 2013.
The actual value of the WOTC to the employer could be less than $1,500-$2,400 per typical
eligible worker depending on the firm’s tax bracket.12 The tax deduction a business can take 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. In
addition, for credits determined in tax years beginning after December 31, 2006, the WOTC and
the credit for taxes paid with respect to employee cash tips are allowed against the Alternative
Minimum Tax (AMT).
State Employment Security (ES) agencies, in cooperation with participating agencies,13 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.
12 The credit maximums are $3,000-$4,800 per a veteran eligible by virtue of receiving compensation for a service-
connected disability and $750-$1,200 per summer youth hire.
13 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.
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The Work Opportunity Tax Credit (WOTC)
1. An eligible group member obtains a conditional certification (ETA Form 9062)
from a participating agency. The jobseeker then uses it to market himself or
herself to an employer.14 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 28 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 28 days after the new hire starts
working.15 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,16 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.17
Program Activity and Costs
The U.S. Employment Service in the Employment and Training Administration (ETA) collects
figures on the number of certifications issued to employers.
The number of 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.
As shown in
Table 1, in FY2012, there were 892,314 WOTC certifications of employees, with
SNAP recipients being the largest group (602,540, or 67.5% of the total).
14 Limited evidence 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, October 1985.
15 Before January 1, 2007, employers had 21 days to mail IRS Form 8850 to their state’s WOTC coordinator.
16 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.
17 Ben Wildavsky, “Taxation: Taking Credit,”
National Journal, March 29, 1997. (Hereafter cited as Wildavsky,
Taxation: Taking Credit.)
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Table 1. WOTC Certifications Issued by Target Group, FY2008-FY2012
FY2008
FY2009 FY2010 FY2011 FY2012
Short Term TANF Recipients
93,673
67,985
51,221
53,455
45,824
Long Term TANF Recipients
24,207
17,502
65,447
79,365
71,407
Veteran SNAP Recipients
9,132
9,385
9,044
11,228
15,183
Disabled
Veterans
— 190 2,452 3,367
6,642
VOW Act Unemployed
Veteransa
—
— — —
11,536
SNAP
Recipients
405,242
518,208 499,927 684,612
602,540
Ticket
Holders
—
719 649 986
584
Designated Community
Residents
72,651
22,837
65,495
60,631
50,589
Summer Youth
2,517
2,422
2,957
608
384
Ex-Felons
43,444
43,703 36,479 34,731
22,063
Vocational Rehabilitation
17,242
16,380
16,213
14,776
12,891
Referral
SSI
Recipients
24,313
19,542 12,701 12,458
10,981
ARRA Unemployed Veteransb — 55 1,560 3,117
1,154
ARRA Disconnected Youthb
— 886 150,346 201,189
40,536
Total Certifications Issued
692,421
719,814
914,491
1,160,523
892,314
Source: Table prepared by the Congressional Research Service using data from the Department of Labor.
a. Added by P.L. 112-56.
b. Added by P.L. 111-5. Expired on December 31, 2010.
Most of the cost to the government from tax credits is in the form of revenue forgone rather than
appropriated funds.18 Data publicly available from the Internal Revenue Service (IRS) show that
for tax year 2008 (the latest year available), corporations claimed $996.1 million in current year
WOTC as part of the general business credit.19 However, this does not reflect WOTC claimed on
individual tax returns by sole-proprietors or pass-thru entities (such as partnerships), or carryover
of WOTC from other tax years.
Evaluations of the WOTC
Studies of federal 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. 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.20
18 Spending for ES administration of the two programs generally has been less than $20 million per fiscal year.
19 Internal Revenue Service,
Corporation Complete Report, Table 21, available at http://www.irs.gov/pub/irs-soi/
08coccr.pdf.
20 Westat,
Process Evaluation of the WOTC Program (DOL, Employment and Training Administration, Office of
Strategic Planning and Policy Development, August 1997).
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In March 2001, the General Accounting Office (GAO) surveyed a sample of employers who used
the WOTC program in two states with high certification levels, namely, California and Texas. The
study’s chief goal was to ascertain whether employers fired workers who never were eligible for
the WOTC or who no longer were 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).21
A study of employment tax credits 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:
• “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,22 which meant that the interviewed employers were
able to claim the maximum credit for relatively few eligible hires; and
• 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)23 and promotion of the program (e.g., increase use of
conditional certifications).24
The report’s authors recommended among other things that a study with a larger, representative
sample of employers be conducted, as “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.”25
21 GAO,
Work Opportunity Credit.
22 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.
23 These two recommendations echo those made in the 1997 process evaluation.
24 See the section on Program Administration (
supra) for the definition of a conditional certification and why it may be
little used.
25 Westat and Decision Information Resources, Inc.,
Employers’ Use and Assessment of the WOTC and Welfare-to-
(continued...)
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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 has worked 400 hours or more].”26
In a December 2002 report, the GAO attempted to examine specifically 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.27
Another study that analyzed the tenure effect of employment tax credits found, like GAO, that
employers do not appear to terminate eligible hires when the subsidy period ends. This 2005
study, which compared certified workers in Wisconsin with eligible but uncertified workers in the
state, also estimated a small absolute impact on earnings. Hamersma extrapolated from the
Wisconsin data that “the average worker receives perhaps 40 percent of the value of the credit as
an earnings premium; the rest remains with the employer.”28
In 2007, Hamersma and Heinrich released an analysis of the labor market outcomes of credit-
eligible group members at temporary help services (THS) firms which, although not end-user
(...continued)
Work Tax Credits Program (DOL, Employment and Training Administration, Office of Policy and Research, March
2001).
26 Sarah Hamersma, “The Work Opportunity Tax Credit: Participation Rates Among Eligible Workers,”
National Tax
Journal, vol. 56, no. 4 (December 2003), p. 736.
27 GAO,
Business Tax Incentives to Employ Workers with Disabilities Receive Limited Use and Have an Uncertain
Impact, GAO-03-39, December 2002.
28 Sarah Hamersma, “The Work Opportunity and Welfare-to-Work Tax Credits,”
Tax Policy Issues and Options, no.
15, October 2005, p. 5.
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employers, are nonetheless able to claim the employment credits. Administrative data from
Wisconsin show that over the 1999-2002 period, certifications issued to THS firms grew steadily.
They found that, after taking into account observable differences between individuals, THS
workers with certifications had much higher earnings than credit-eligible THS workers without
certifications. “This suggests that some of the WOTC/WtW funds pass through to the THS
worker in the form of increased earnings per quarter, just as they do (though to a lesser extent) for
workers in other industries. Using panel estimation to examine longer-term outcomes, however,
the earnings difference between these workers is no longer statistically significant.”29
The researchers also compared the THS workers with certifications to workers in other industries
for whom certifications had been issued and estimated that the THS group earned much less
because of their much shorter job tenure. Hamersma and Heinrich also conducted a telephone
survey of Wisconsin THS firms and found that a majority of the 101 firms that responded not
only were aware of the credits but also claimed them.
Contrary to legislative intent, however, only one firm reported that prospective employees’
eligibility for the tax credits might affect their hiring decisions. Thus, our findings suggest
that concerns about the use of WOTC/WtW funds to subsidize THS employment are likely
warranted, since subsidies do not appear to improve the job outcomes of disadvantaged
workers in these jobs nor encourage the hiring of additional disadvantaged workers as
intended.30
Legislative Activity
The WOTC is a temporary provision of the Internal Revenue Code. Since its initiation, Congress
allowed the credit to lapse many times before reauthorizing it retroactive to its expiration date as
part of large tax-related measures. The relatively short extensions of the WOTC and its frequent
expiration have caused consternation among employers who utilize the credit.
From the 104th Congress Through the 112th 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 the
29 Sarah Hamersma and Carolyn Heinrich,
Temporary Help Service Firms’ Use of Employer Tax Credits: Implications
for Disadvantaged Workers’ Labor Market Outcomes, Upjohn Institute Staff Working Paper No. 07-135, February 12,
2007, p. 5.
30 Ibid.
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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 6).
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. 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 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.31 Some 3,196 taxpayers claimed the WOTC in 2002 for hiring members of the group,
31 No information on certifications for Liberty Zone employees because they were exempt from the WOTC’s usual
certification procedure.
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The Work Opportunity Tax Credit (WOTC)
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 in the Taxpayer Relief Act of 1997 (P.L. 105-34) 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 10-month lapse of the credits, Congress
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.
109th Congress: Hurricane Disaster Relief, Modifying the WOTC, and
Incorporating the WtW Credit into the WOTC After Another Long Lapse
The 109th Congress made two substantial changes to the tax provisions. Some changes were
temporary, others were permanent.
Hurricane Disaster Relief
As it did after the September 11 attack on the World Trade Center, Congress temporarily
expanded the WOTC eligible-groups to include “a Hurricane Katrina employee” as part of its
emergency response. P.L. 109-73 added to the WOTC-eligible groups persons whose principal
place of abode on August 28, 2005, was in the core disaster area and who,
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• beginning on such date and to August 28, 2007, is hired for a position principally
located in the core disaster area; and
• beginning on such date and to December 31, 2005, is hired for a position
regardless of its location.
The WOTC’s 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.32
Modifying the WOTC and Incorporating the WtW Credit into the WOTC
The two credits expired on January 1, 2006. They were substantively revised after the 109th
Congress passed H.R. 6111 (the Tax Relief and Health Care Act of 2006) in December 2006. Title
I of P.L. 109-432 reauthorized the WOTC for two years (from its expiration date to December 31,
2007). Other changes to the WOTC and to the WtW credit became effective for persons hired
after December 31, 2006. They are as follows:
• WOTC-eligibility for ex-felons was expanded by eliminating the requirement
that they are members of economically disadvantaged families;
• WOTC-eligibility of food stamp recipients was expanded from 18- to 24-year
olds to include 25 to 39 year olds;
• employers can file the required paperwork with their state’s WOTC coordinator
within 28 (rather than 21) days of an eligible-hire starting to work for them; and
• the WtW credit was repealed as a separate tax provision, with its eligible-group
of long-term family assistance recipients uniquely handled under the WOTC
effective January 1, 2007.
More specifically, employers who hire long-term family assistance recipients can claim a credit if
individuals are retained for a minimum of 120 hours (rather than the WtW credit’s 400-hour or
180-day requirement). The 25% subsidy rate for WOTC group members employed from 120 to
399 hours was applied 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 was raised to 40%, as
is the case for WOTC-eligible hires. Employers continue to be able to claim a credit for retaining
long-term family assistance recipients during a second year at the WtW’s subsidy rate of 50%.
32 P.L. 109-73 also created an employee retention credit for 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. Such employers could 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. Eligibility for the retention
credit initially was limited to small employers (i.e., employers cannot have employed an average of more than 200
employees on business days during the taxable year), but P.L. 109-135 (the Gulf Opportunity Zone Act of 2005)
dropped the employer size limit and extended the retention credit to employers harmed by hurricanes Rita and Wilma.
The retention credit could 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 before January 1, 2006. Qualified wages were those paid regardless of whether an eligible employee
performed services; performed services at a place of employment other than his or her worksite on August 28, 2005; or
performed services at his or her worksite on August 28, 2005, before significant operations resumed there. A business
could not claim a retention credit for an employee during any period for which it claimed a Work Opportunity Tax
Credit for such employee.
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The subsidy rates for long-term family assistance recipients continue to be applied against up to
$10,000 earned in each of the first and second years of employment. The definition of qualified
wages of long-term family assistance recipients was narrowed to that of WOTC-eligible hires—
namely, cash wages (i.e., certain benefits can no longer be included).
110th Congress: Focus on Eligible Groups and Credit Extension
Expansion of Certain Eligible Groups and Extension to August 2011
The WOTC was considered as part of a package of business tax incentives meant to offset the
impact of an increase in the federal minimum wage. The minimum wage bill that the House
passed (H.R. 2, the Fair Minimum Wage Act of 2007) did not include tax benefits. But, the Senate
Finance Committee subsequently marked up S. 349 (the Small Business and Work Opportunity
Act of 2007) and incorporated it in the version of H.R. 2 that passed the Senate. H.R. 2 (as
amended) extended the WOTC for five years to December 31, 2012. It also expanded the WOTC-
eligible group of veterans to persons entitled to compensation for service-connected disabilities
incurred after September 10, 2001, and raised from $6,000 to $12,000 the definition of qualified
wages that applies to these individuals. The high-risk youth group covered 18- to 39-year olds
(rather than 18- to 24-year olds) living in an EZ, EC, or RC and renamed the group “designated
community residents.” The definition of the vocational rehabilitation referral group was expand
as well, to include any person certified by a designated local agency as having a physical or
mental disability that is a substantial handicap to employment and who is referred to the employer
while receiving or after completing an individual work plan developed and implemented by an
employment network pursuant to subsection (g) of Section 1148 of the Social Security Act. The
JCT estimated that these amendments to the WOTC could have revenue effects of some $2.5
billion over the FY2007 to FY2012 period.
The House passed H.R. 976 (the Small Business Tax Relief Act of 2007) as an alternative to the
tax incentives added by the Senate to H.R. 2. Among the tax benefits in H.R. 976 was a one-year
extension of the WOTC to December 31, 2008. It expanded and renamed the high-risk youth
group and clarified the vocational rehabilitation referral group as in H.R. 2 (as amended). H.R.
976 also expanded the WOTC’s veterans group, but in a different way than the Senate: the group
was extended to persons entitled to compensation for service-connected disabilities with a hiring
date not more than one year after having been discharged or released from active duty in the
Armed Forces or having been unemployed for at least six months during the one-year period
ending on the date of hire. H.R. 976 set qualified wages for this component of the WOTC-eligible
veterans group at $12,000. In addition, the bill allowed the WOTC and the credit for taxes paid
with respect to employee cash tips against the Alternative Minimum Tax (AMT). The JCT
estimated that these amendments to the WOTC could have less costly revenue effects of almost
$1.1 billion over the FY2007 to FY2012 period.
The Senate added its further amended version of H.R. 2 to the emergency supplemental
appropriations bill, H.R. 1591. After a House-Senate conference committee agreed to a less costly
small business tax relief plan and the President vetoed the bill over troop withdrawal language,
the President signed H.R. 2206 (the U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and
Iraq Accountability Act of 2007, P.L. 110-28) into law on May 25, 2007. P.L. 110-28 combines
somewhat modified elements of H.R. 976, H.R. 2 (as amended), and H.R. 1591. It contains a
compromise on extension of the WOTC to three-and-one-half years through August 31, 2011,
raises the age limit for “designated community residents” to less than 40 years, and clarifies the
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The Work Opportunity Tax Credit (WOTC)
definition of vocational rehabilitation referrals. The act also adds “rural renewal county,” which
first appeared in H.R. 1591, to the places of residence for designated community residents. The
law adopts the definition of disabled veterans in H.R. 976 and its allowance of the WOTC and tip
credit against the AMT. The estimated cost of these amendments to the WOTC is almost $2.8
billion between FY2007 and FY2012.
“Hurricane Katrina Employees”
In P.L. 110-343 at Division C (the Tax Extenders and Alternative Minimum Tax Relief Act of
2008), Congress extended the WOTC’s expiration from August 28, 2007, to August 28, 2009, for
firms who hire “Hurricane Katrina employees” to work in the disaster area. The JCT estimated
the extension would cost $14 million in FY2009 and $8 million in FY2010.
111th Congress: Temporary Expansion and Extension of the Credit
Temporary Expansion for Unemployed Veterans and Disconnected Youth
The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) expanded the credit
to cover unemployed veterans and disconnected youth who begin working for an employer during
2009 or 2010. Unemployed veterans are persons discharged or released from active duty in the
Armed Forces within five years of their hiring date and having received unemployment
compensation for not less than four weeks during the one-year period ending on the hiring date.
Disconnected youth are 16- to 24-year olds who are not regularly attending school during the six-
month period preceding the hiring date, not regularly employed within the same time frame, and
not readily employable because they lack a sufficient number of skills. The estimated revenue
loss resulting from this expansion was $222 million in the FY2009-FY2013 period, with most of
the cost occurring in the first few years (i.e., $32 million in FY2009, $81 million in FY2010, and
$70 million in FY2011).
Interaction with Payroll Tax Forgiveness
The Hiring Incentives to Restore Employment Act (HIRE; P.L. 111-147) provided payroll tax
forgiveness to employers who hired certain unemployed individuals in 2010. Employers claiming
the payroll tax forgiveness could not claim the WOTC for those wages associated with payroll tax
forgiveness.
Extension to December 31, 2011
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L.
111-312) extended the WOTC through December 31, 2011.
112th Congress: Expansion of Veterans Targeted Group and Credit Extension
Expansion of Veterans Targeted Group
P.L. 112-56 expanded the targeted group for qualified veterans and changed the amount of first-
year wages that can be claimed for the WOTC, such that
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• for veterans who are members of a family receiving SNAP benefits for at least
three months in the year prior to being hired, the maximum wages for the credit
would be $6,000;
• for veterans who have been unemployed for an aggregate of at least four weeks,
but less than six months, in the year prior to being hired, the maximum wages for
the credit would be $6,000;
• for veterans eligible for disability compensation from the VA and within one year
of discharge or release from active military duty when hired, the maximum
wages for the credit would be $12,000;
• for veterans who have been unemployed for an aggregate of at six months or
more in the year prior to being hired, the maximum wages for the credit would be
$14,000; and
• for veterans who are eligible for disability compensation from the VA and have
been unemployed for an aggregate of six months or more in the year prior to
being hired, the maximum wages for the credit would be $24,000.
P.L. 112-56 made the WOTC refundable for certain non-profit employers. For these non-profit
employers, the refundable credit would be the lesser of the calculated WOTC for hiring veterans
who qualify for the WOTC based on unemployment or the payroll taxes paid by the non-profit.
Non-profit employers eligible for the refundable credit would be 501(c) organizations that are
tax-exempt under Section 501(a) of the Internal Revenue Code.
P.L. 112-56 extended the WOTC for qualified veterans to U.S. possessions33 with a tax system
that mirrors the U.S. tax system, with the Secretary of the Treasury paying to the possession the
amount lost to the possession in taxes because of the expansion of the WOTC for qualified
veterans.
P.L. 112-56 also extended the expiration date of WOTC for veterans to December 31, 2012.
Extension to December 31, 2013
The American Taxpayer Relief Act of 2012 (P.L. 112-240) extended the WOTC through
December 31, 2013.
Author Contact Information
Christine Scott
Specialist in Social Policy
cscott@crs.loc.gov, 7-7366
33 Possessions include American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of
Puerto Rico, Guam, and the United States Virgin Islands.
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Acknowledgments
This report was originally written by Linda Levine, specialist in Labor Economics. All questions should be
directed to the current author.
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