The Work Opportunity Tax Credit (WOTC)
Prepared for Members and Committees of Congress
The Work Opportunity Tax Credit (WOTC), which was authorized by the Small Business Job
Protection Act of 1996, 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). Shortly thereafter, Congress passed the Welfare-to-Work
(WtW) tax credit in the Taxpayer Relief Act of 1997 to focus specifically on more disadvantaged th
TANF recipients. About ten years later, the 109 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 th
included in emergency supplemental appropriations during the 110 Congress. The U.S. Troop
Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Act of 2007 was signed
into law on May 25, 2007. P.L. 110-28 extends the WOTC for three-and-one-half years through
August 31, 2011. It also expands the definition of WOTC-eligible veterans to persons entitled to
compensation for service-connected disabilities (a) with a hiring date not more than one year after
having been discharged or released from active duty in the Armed Forces or (b) 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. Additionally, the law expands the age range of high-risk youth
from 18 to 24-year-olds to include 25 to 39-year-olds and renamed the WOTC-eligible group
“designated community residents.” It also clarifies the definition of vocational rehabilitation
referrals, adds “rural renewal county” to the places of residence for designated community
residents, and allows the WOTC and tip credit against the AMT.
Subsequently during the 110th Congress, legislation concerning the WOTC was introduced to,
among other things, extend the credit’s expiration from August 28, 2007, to December 31, 2009,
for firms who hire “Hurricane Katrina employees” to work in the disaster area. Such a provision
was part of the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).
Most recently, the WOTC has been mentioned in the context of the economic recovery package th
under development by the 111 Congress. The Chairman of the House Committee on Ways and
Means announced on January 15, 2009, that as part of providing tax relief to businesses he is
proposing to expand the WOTC to “disconnected youth” and unemployed, recently discharged
What Kind of Wage Subsidy Is the WOTC?...................................................................................1
A Description of the Credits............................................................................................................2
WOT C ....................................................................................................................................... 2
WtW Tax Credit........................................................................................................................5
WOT C ....................................................................................................................................... 6
WtW Tax Credit........................................................................................................................7
Evaluations of the WOTC and WtW Tax Credit.............................................................................9
During the 111th Congress........................................................................................................11 thth
From the 104 Congress Through the 110 Congress.............................................................11 th
107 Congress: 2002-2003 WOTC Expansion to Cover New York Liberty Zone
Employees and Authorization of the WtW Credit.........................................................12 th
109 Congress: Hurricane Disaster Relief, Modifying the WOTC, and
Incorporating the WtW Credit into the WOTC After Another Long Lapse...................13 th
110 Congress: Focus on Eligible Groups and Credit Extension.....................................15
Table 1. Value of WOTC and WtW Credits Claimed on Federal Income Tax Returns...................8
Author Contact Information..........................................................................................................16
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
Welfare-to-Work (WtW) tax credit—were initiated in the mid-1990s to encourage for-V
profit employers to hire from groups thought to experience difficulties in the labor market both in th
good and bad economic times. About a decade later, the 109 Congress incorporated the WtW th
credit into the WOTC, and the 110 Congress made additional changes to the WOTC that it
extended through August 31, 2011.
This report explains what type of subsidy the WOTC is and examines the credit’s immediate
predecessor, the Targeted Jobs Tax Credit, with which the WOTC shares features. A detailed
description of the WOTC and WtW credit follows. Next, activity under the tax incentives as well
as their costs are presented. The report closes with a discussion of legislative activity during the
current Congress and policy actions taken by prior Congresses in connection with the WOTC and
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
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 1
replace them with eligible workers. 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 2
contemporaneous efforts to move large numbers of welfare recipients into jobs. The results of a
report the General Accounting Office issued in 2001 suggested that the likelihood of employers 34
engaging in churning or displacement to maximize receipt of the WOTC is low.
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. For
more information on displacement in the context of welfare reform, see CRS Report 97-360, Welfare Reform and
Subsidized Public Sector Jobs, by Linda Levine, pp. 7-10 (out of print; available only 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).
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 5
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 lengthened from 120 hours or 90
days 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 6
program changes would prove effective at remedying the problems. Since the WOTC’s
inception, changes have been made that make it more closely resemble the TJTC (e.g., the
retention period was reduced to 120 hours from 400 hours or 180 days).
Through August 31, 2011, 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 7
ending on the hiring date;
4 U.S. General Accounting Office, Work Opportunity Credit: Employers Do Not Appear to Dismiss Employees to
Increase Tax Credits, GAO-01-329, March 2001. (Hereafter cited as GAO, Work Opportunity Credit.)
5 For more information on the TJTC, see CRS Report 95-981, The Targeted Jobs Tax Credit, 1978-1994, by Linda
Levine (out of print; available only from author).
6 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.)
7 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).
• qualified veterans are (a) 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 (b) entitled to
compensation for a service-connected disability and (1) having a hiring date that
is not more than one year after having been discharged or released from active
duty in the Armed Forces or (2) having aggregate periods of unemployment of at 8
least six months during the one-year period ending on the hiring date;
• 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 9
under the work requirement at Section 6(o) of the Food Stamp Act of 1977;
• 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 10
• summer youth (i.e., 16 to 17-year-olds hired for any 90-day period between May
• ex-felons with hiring dates within one year of the last date of conviction or 11
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, 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 12
requirements of such subsection are met); and
8 For veterans hired after May 25, 2007, P.L. 110-28 extended the group’s definition to (b). Note: Members of families
are those persons taken into account when determining eligibility for a food stamp program under the Food Stamp Act
9 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.
10 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.
11 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.
12 P.L. 110-28 clarified the group’s definition by adding the language concerning employment networks.
• 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 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 13
subsidy rate is 25%. Thus, the minimum employment period under the WOTC is 120 hours.
For members of the veterans group eligible because they 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.
The actual value of the WOTC to the employer could be less than $1,500-$2,400 per typical 14
eligible worker depending on the firm’s tax bracket. 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,15 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 16
participating agency. The jobseeker then uses it to market herself to an employer. 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
13 In the WOTC’s initial version (i.e., for persons hired from October 1, 1996 through September 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, April 21, 1997, p. A1.
14 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.
15 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.
16 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, October 1985.
starts working. The employer must also fill-in and submit to the ES the bottom of the ETA
(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 17
WOTC coordinator within 28 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 18
credit-related administration for firms. As was the case with the TJTC, these consultants play a
considerable role not only in securing WOTC certifications for large firms that hire many eligible 19
persons, but also in lobbying for reauthorization and modification of the credit.
The Welfare-to-Work Tax Credit was inserted as a separate provision in the Internal Revenue
Code to help the federal effort to move welfare recipients onto payrolls. It is meant to encourage
employers to hire particularly disadvantaged members of the TANF group, namely, long-term
recipients. Specifically, the 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 that 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 that is not more than two years after the date of benefit
For hiring an eligible long-term family assistance recipient before January 1, 2007, 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. Qualified wages 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. As in the WOTC’s initial version, employers must
retain WtW-eligible workers hired before January 1, 2007, 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
17 Before January 1, 2007, employers had 21 days to mail IRS Form 8850 to their state’s WOTC coordinator.
18 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.
19 Ben Wildavsky, “Taxation: Taking Credit,” National Journal, March 29, 1997. (Hereafter cited as Wildavsky,
Taxation: Taking Credit.)
described above. A firm cannot claim a WtW credit and a WOTC for the same individual in the
same taxable year.
Reflecting simplification recommendations made by the Joint Committee on Taxation, among th
others, the 109 Congress in the Tax Relief and Health Care Act of 2006 (P.L. 109-432) made
many changes to the WtW credit—including incorporating the separate provision for long-term
family assistance recipients into the WOTC. 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.
(For additional information, see the 109th Congress section of “Legislative Activity,” which
appears later in this report.)
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 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.
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, 2021
403,243 in FY2003, 244,445 in FY2004, 598,101 in FY2005, 325,178 in FY2006, and
612,052 in FY2007. The considerably higher figures in recent years 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
20 The unusually low figure for FY2004 is due to the credit’s nine-month hiatus.
21 The unusually low figure for FY2006 is due to the credit’s 13-month hiatus.
Although in much of the past certifications most often were issued for hiring members of the
TANF group, 45% of all certifications in FY2007 were for 18 to 24-year-olds in families
receiving food stamps, and 28% were for members of the AFDC/TANF group. The share of high-
risk youth had been on the rise through FY2004, but then began to decline and fell to 8% of the
total in FY2007. Ex-felons have accounted for a steadily growing proportion of WOTC 22
certifications, going from 3% in FY1997 to over 7% in FY2007. The share of SSI recipients (an
eligible group added in 1998) increased through FY2002, when it dropped from almost 8% to 6%
in FY2003, and remained much the same in the following four years. In contrast, the share of the
vocational rehabilitation group decreased almost steadily over the entire period and measured
under 4% by FY2007. The remaining two groups—veterans and summer youth—together
accounted for a little over 2% of certifications in FY2007.
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 youth food stamp and high-
risk groups. This gender pattern prompted proposals in Congress to extend the upper age limit of th
the two groups. (See section below on legislative activity in the 109 Congress for more
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 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.
The low number of WtW certifications in FY2004—15,601—reflects the expiration of the credit
during much of the period. Certifications rebounded to 32,817 in FY2005. The decrease to 13,859
in FY2006 once again reflects the credit’s expiration during the year before its retroactive
reauthorization. In FY2007, in contrast, WtW certifications numbered 21,771.
Most of the cost to the government from tax credits is in the form of revenue forgone rather than 23
appropriated funds. According to the U.S. Department of the Treasury, about $16 million in
22 The increase long predated the definition of ex-felons no longer being limited to “the economically disadvantaged.”
23 Spending for ES administration of the two programs generally has been less than $20 million per fiscal year.
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 $128 million in 2001.
Table 1. Value of WOTC and WtW Credits
Claimed on Federal Income Tax Returns
($ in millions)
WOTC WtW Credit
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.
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 24
was first proposed. 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 25
might “only offset the higher potential risk associated with hiring long-term welfare recipients.”
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
24 Wildavsky, Taxation: Taking Credit.
25 Joint Economic Committee, The Welfare-to-Work Tax Credit.
Studies of the two 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 26
and all for-profit employers generally would be more inclined to participate.
In March 2001, the General Accounting Office (GAO) surveyed a sample of employers who
utilized the WOTC program in two states with high certification 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 27
when their earnings totaled about $6,000 (the credit-maximizing level).
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
• “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
• the target-group members who were hired exhibited the high rates of turnover 28
typical of low-wage workers, 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
26 Westat, Process Evaluation of the WOTC Program (DOL, Employment and Training Administration, Office of
Strategic Planning and Policy Development, August 1997).
27 GAO, Work Opportunity Credit.
28 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.
(e.g., consolidate and streamline the forms), program design (e.g., broaden target-29
group eligibility criteria) and promotion of the program (e.g., increase use of 30
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 31
absence of the credit.
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
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 32
individual has worked 400 hours or more].
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
29 These two recommendations echo those made in the 1997 process evaluation.
30 See the section on Program Administration (supra) for the definition of a conditional certification and why it may be
31 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, March
32 Sarah Hamersma, “The Work Opportunity Tax Credit: Participation Rates Among Eligible Workers,” National Tax
Journal, vol. 56, no. 4 (December 2003), p. 736.
to the employment of persons with disabilities: top-management commitment, staff training, 33
mentoring, on-site consultation and technical assistance, and short-term outside assistance.
A more recent study analyzed the wage and tenure effects of the tax provisions by comparing
WOTC- and WtW-certified workers in Wisconsin with eligible but uncertified workers in the
state. A small absolute impact on earnings was estimated, but the difference of $121 per quarter
represents a non-negligible share (more than 10%) of the eligible population’s average quarterly
earnings of $1,150. 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 34
with the employer.” The study found no tenure effect, which coincides with results from the
2001 GAO report that suggest employers do not terminate eligible hires when the subsidy period
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 has caused consternation among employers who utilize the credit.
The WOTC has been mentioned in the context of the economic recovery package that is under
development. The Chairman of the House Committee on Ways and Means announced on January
15, 2009, that as part of providing tax relief to businesses he is proposing to expand the WOTC to
“disconnected youth” and unemployed, recently discharged veterans.
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.
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,
33 GAO, Business Tax Incentives to Employ Workers with Disabilities Receive Limited Use and Have an Uncertain
Impact, GAO-03-39, December 2002.
34 Sarah Hamersma, “The Work Opportunity and Welfare-to-Work Tax Credits,” Tax Policy Issues and Options, no.
15, October 2005, p. 5.
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).
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.
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.
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.
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 35
employees. 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
35 No information on certifications for Liberty Zone employees because they were exempt from the WOTC’s usual
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 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).
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.
The 109th Congress made two substantial changes to the tax provisions. Some changes were
temporary; others, permanent.
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,
• 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 36
waived, as is the usual certification process.
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%.
36 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.
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).
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 on January 10 (H.R. 2 the Fair Minimum Wage Act of 2007) did not include tax benefits.
But, the Senate Finance Committee marked up S. 349 (the Small Business and Work Opportunity
Act of 2007) on January 22 and incorporated it in the version of H.R. 2 that the Senate passed on
February 1. 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
H.R. 976 (the Small Business Tax Relief Act of 2007), which the House passed on February 16,
was meant 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.
On March 29, 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.
August 31, 2011, raises the age limit for “designated community residents” to less than 40-year
olds, and clarifies the 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.
In P.L. 110-343 at Division C (the Tax Extenders and Alternative Minimum Tax Relief Act of
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.
Specialist in Labor Economics