CRS REPORTS ON EXPIRED CODE PROVISIONS FOR WORKER TRAINING.

                       CRS REPORT FOR CONGRESS

LABOR MARKET CONTEXT ²

The skills that individuals possess are important to their success in the labor market, and this has become increasingly so in recent decades. For example, many blue-collar jobs which require relatively little education but provide fairly high wages have been in large part foreclosed to new entrants to the labor force. Employers have been responding to foreign competition by restructuring their operations

by moving assembly operations overseas or by introducing more productive equipment . . . [M]any workers who received high wages to repeat simple tasks required by the mass production techniques employed throughout the U.S. economy lost their jobs or moved to other, less well-paying jobs. In some cases, their jobs were reorganized to require an ability to monitor a machine or to work as part of a team; either responsibility makes demands on reading, mathematical, communication, and other skills that operator, fabricator, and laborer jobs typically do not require. ³

In contrast with the downward trend since 1979 in the number of less skilled blue-collar jobs, much of the job growth in occupations which typically require that workers have no more than a high school degree has occurred in relatively low-paying jobs -- such as cleaning, food, and health service jobs.

Job growth has been most rapid among occupations that typically require the highest levels of educational attainment. About 62 percent of workers between 25 and 64 years old who held managerial and professional jobs in 1994 were at least college graduates, according to data from the U.S. Bureau of Labor Statistics. Employment in this occupational group grew by 59 percent (or 12.6 million jobs) between 1979 and 1994. ⁴ During these years, job growth across all occupational groups averaged 24.5 percent (or 24.2 million jobs). Thus, the increased demand for workers in the highest skilled group accounted for somewhat more than half of total job growth in the 15-year period.

Moreover, less educated workers have borne the brunt of the decline in real earnings which has been going on since the mid-1970s. The most striking trend has been the poor performance among men who have not graduated from high school: the real weekly earnings of all men aged 25-64 with 11 or fewer years of education fell by about 26 percent between 1979 and 1993. ⁵ Although real earnings also declined among men who were high school graduates (by 18 percent) and among men with some postsecondary education (by 12 percent), the falloff was not nearly as steep. Among women, only those who did not graduate high school experienced a drop (by 9 percent) in real weekly earnings over the period.

As a consequence, the wage gap between more and less educated workers has widened considerably. Changes in employer demand for occupational groups might account for roughly one-third of the increase in the education-earnings differential during the 1980s. However, the demand for skills typically possessed by more educated workers actually began to rise during the 1970s. But, in that decade, there was less of a supply-demand mismatch because many highly educated baby-boomers were entering the labor force, which helped to fill the increased demand for skilled workers. In contrast, college graduates entered the labor force at a decelerating rate during the 1980s. Steady increases in the relative demand for skilled workers seemingly outpaced increases in supply, so that the wage premium for college-educated workers rose during the decade. Moreover, there may have been

an increase in the return to the general skills possessed by college graduates (for example, the analytical and cognitive skills that are not specific to a particular job), and not just to the more specialized skills demanded in the types of occupations college graduates tend to fill. ⁶

It thus appears that in order to succeed in the current labor market, skill acquisition matters even more than it did in the not so distant past. This is true not only for workers newly entering the labor force, but also for experienced workers striving to improve their skills while remaining in the same field as well as those seeking better opportunities in other fields. In the latter case, some experienced workers may voluntarily be trying to change occupations; others may feel compelled to do so because, as noted above, demand for their occupational "skill bundle" has diminished. ⁷ Consequently, both training AND retraining would seem to be important elements in the development of a workforce capable of adapting to ongoing economic change.

Various legislative proposals have been suggested in recent Congresses to help train prospective employees for jobs or retrain current employees for more skilled jobs. These proposals are based upon the belief that human resources are no less important to the economy and welfare of the Nation than the updating of business plant and equipment. Programs that provide training are seen as one method to help solve unemployment problems. This report explains the provisions related to training and retraining that are already contained in the income tax laws.

TRADE OR BUSINESS EXPENSES (SECTION 162) ⁸

Qualified educational expenses may be deducted by an individual taxpayer or by a business firm.

EXPENDITURES BY INDIVIDUALS

Under the individual income tax, expenses for training made by the employee (himself or herself) may be deductible if they qualify under the provisions for employee educational expenses. The educational expenses deduction for the individual is NOT geared toward retraining and has limits which make it unusable for many taxpayers.

Your Federal Income Tax, Publication 17 of the Internal Revenue Service, states:

"REQUIREMENTS. The education must:

1) Be required by your employer or the law to keep your present salary, status, or job (and serve a business purpose of your employer), or

2) Maintain or improve skills needed in your present work." ⁹

There are two conditions under which a taxpayer may NOT claim a deduction for such educational expenses:

"EXCEPTION. Even if your education meets one of the requirements above, it is not qualifying education if it:

1) Is needed to meet the minimum educational requirements of your present trade or business, or

2) Is part of a program of study that can qualify you for a new trade or business, even if you have no plans to enter that trade or business.

PRESENT WORK. Your education must relate to your present work. Education that will relate to work you may enter in the future is not qualifying education. Education that prepares you for a future occupation includes any education that keeps you up-to- date for a return to work or that qualifies you to reenter a job you had in the past." ¹⁰

Furthermore, the educational expense deduction may only be claimed by taxpayers who itemize their deductions. Such taxpayers tend to be higher income taxpayers. With the passage of the Tax Reform Act of 1986 (P.L. 99-514), educational expenses must now be added together with other miscellaneous deductions, and then subject to a floor of two percent of adjusted gross income. Simply stated, only when educational expenses combined with other deductible miscellaneous deductions exceed two percent of adjusted gross income may the portion that exceeds the two percent floor be deducted. The floor negates the benefit of the deduction for many taxpayers who otherwise itemize.

In addition to the two percent floor on miscellaneous deductions, high income taxpayers are subject to a limitation on certain itemized deductions. ¹¹ Itemized deductions are reduced by three percent of the amount by which the taxpayer's adjusted gross income exceeds a threshold (indexed for inflation). For 1995, the phaseout threshold is $114,700. The threshold amount increases to $117,950 for 1996. The law does not allow the affected subgroup of itemized deductions to be reduced by more than 80 percent in the aggregate.

The Tax Reform Act of 1986 also provided that educational travel was no longer to be allowable as a deduction. The Conference Report states: "No deduction is allowed for costs of travel that would be deductible only on the grounds that the travel itself constitutes a form of education (e.g., where a teacher of French travels to France to maintain general familiarity with the French language and culture, or where a social studies teacher travels to another State to learn about or photograph its people, customs, geography, etc.)." ¹²

EXPENDITURES BY BUSINESSES

For a business, training and retraining expenses may be deductible as either in-house training or outside educational assistance. On a business tax return, in-house training expenses could be subsumed under salaries and equipment expenses or could be accounted for as payments to contractors. Outside educational assistance is likely to be accounted for under employee benefits expenses.

DEFINITION OF GROSS INCOME (SECTION 61)

Benefit payments to participants in certain training and retraining programs and work-training programs are not included in the gross income of recipients, as defined for tax purposes. Simply stated, payments are exempt from income taxation. Under generally accepted principles of taxation, such benefit payments would be treated as income and taxable to the recipient. Thus, the exclusion of these benefit payments from individual income taxation provides a tax incentive effect for individuals to participate in these training, retraining, and work-training programs. The programs are all publicly sponsored by Federal, State, or local government.

TARGETED JOBS TAX CREDIT (TJTC) (SECTION 51) ¹³

SPECIAL NOTE: THIS PROVISION EXPIRED AS OF DECEMBER 31, 1994.

The targeted jobs tax credit was intended to promote the private sector hiring of members of specifically designated, hard-to-employ groups. The tax credit was available to employers who hired members of nine targeted groups believed to have educational deficiencies that hampered their members' employment prospects and might require that they receive more than the average amount of training once employed. IN ORDER FOR AN EMPLOYER TO HAVE RECEIVED THE TAX CREDIT, THE EMPLOYER NEEDED ONLY TO HIRE THE WORKER -- THE PROVISION OF TRAINING WAS NOT REQUIRED. The nine targeted groups were: vocational rehabilitation referrals, economically disadvantaged youth (18-22 years old), economically disadvantaged Vietnam-era veterans, SSI recipients, AFDC recipients or WIN registrants, general assistance recipients, economically disadvantaged students (16-19 years old) participating in cooperative education programs, economically disadvantaged ex-offenders, ¹⁴ and economically disadvantaged youth (18-22 years old) hired for summer jobs.

The credit was equal to 40 percent of the first $6,000 of qualified first-year wages for all target group members except summer youth, for whom it was 40 percent of up to $3,000. The amount of the company's deduction for wages was reduced dollar-for-dollar by the amount of the credit. In order to qualify for the credit the employer must have retained these employees for a minimum of 90 days or 120 hours of service, except for summer youth hires whose minimum retention period was 14 days or 20 hours.

PROPOSAL FOR A WORK OPPORTUNITY CREDIT

In September 1995, the House Ways and Means Committee approved and included in the Revenue Reconciliation provisions a jobs credit that is substantially revised and even renamed. The expired TJTC was not extended. Instead, the committee passed a new tax credit called the Work Opportunity Tax Credit.

The new credit would be available for newly hired employees who begin work after January 1, 1996, and before January 1, 1998. The credit rate of 35 percent (5 percentage points less than the TJTC) is applied to the first $6,000 of wages. Qualified first-year wages are $3,000 for summer youth employees.

The number of targeted groups would be reduced from nine to five. In some cases, the description of members included within the group is modified. The five groups would include: individuals in families receiving AFDC benefits (including discharged veterans of the armed services with a service-connected disability), qualified ex-felons, high-risk youth who reside in empowerment zones or enterprise communities, vocational rehabilitation referrals, and summer youth employees who reside in empowerment zones or enterprise communities. While the Committee stated its belief "that a tax credit mechanism can provide an important incentive for employers to undertake the expense of providing jobs and training to economically disadvantaged individuals, many of whom are underskilled and/or undereducated," ¹⁵ the proposal contains no requirement for employer-provided training.

LEGISLATIVE HISTORY OF THE TJTC

The targeted jobs tax credit was first created with the passage of the Revenue Act of 1978 (P.L. 95-600), effective through the end of 1981. The provision was both amended and extended for one year by the Economic Recovery Tax Act of 1981 (P.L. 97-34). An extension for two additional years (through 1984) and the establishment of a special credit for creation of summer jobs for economically disadvantaged 16- and 17-year-olds was provided under provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248). A one-year extension was provided by the Deficit Reduction Act of 1984 (P.L. 98-369). The Tax Reform Act of 1986 (P.L. 99-514) reauthorized the credit retroactively to December 31, 1985, and extended it for three years (through December 31, 1988). The Act reduced the credit rate, eliminated the second-year credit, and added a retention requirement.

Again, with passage of the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647), the credit was amended and extended, this time for a one-year period which expired on December 31, 1989. With the passage of the Revenue Reconciliation Act of 1989 (P.L. 101-239) the provision was extended through September 30, 1990. Once again the program was extended retroactively, this time through December 31, 1991, by the passage of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508).

In order to prevent the program from expiring the Congress passed the Tax Extension Act of 1991 (P.L. 102-227) which continued this and a number of other expiring provisions until June 30, 1992. The Congress provided for further extension of the provision in H.R. 4210, Tax Fairness and Economic Growth Act of 1992, but the legislation was vetoed by President Bush. The credit was reauthorized and made retroactive to July 1, 1992, with an extension only through December 31, 1994, by the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66).

Thus, the targeted jobs tax credit has expired and been reauthorized retroactively three times. Federal budgetary constraints and negative research findings contributed to the credit's remaining a temporary measure.

EMPLOYER EDUCATIONAL ASSISTANCE (SECTION 127) ¹⁶

SPECIAL NOTE: THIS PROVISION EXPIRED AFTER DECEMBER 31, 1994.

Under a comprehensive income tax, employer payments for educational assistance would be treated as income and taxable to the recipient. Thus, like the excluded benefit payments from gross income discussed earlier under I.R.C. section 61, the exclusion of educational payments made by an employer from individual income taxation provides a tax incentive effect for employees to participate in employer-paid educational assistance programs.

Under the expired law, individual taxpayers were able to exclude from gross income employer payments for educational assistance which encompassed tuition, fees, books, supplies, etc. The annual limit for excluded employer payments was $5,250 per employee. THE EXCLUSION WAS NOT LIMITED TO EDUCATION THAT WAS NEEDED FOR ONE'S CURRENT TRADE OR BUSINESS, AS IS THE CASE WITH EDUCATIONAL EXPENSE DEDUCTIONS PERMITTED UNDER SEC. 162 (DISCUSSED PREVIOUSLY). CONSEQUENTLY, IT COULD HAVE APPLIED TO TRAINING FOR A NEW JOB OR CAREER THUS, THE TAX CODE FAVORED TRAINING AND RETRAINING FINANCED BY EMPLOYERS OVER THAT FINANCED BY INDIVIDUALS.

Beginning in 1991, the exclusion amount applied to employer payment for graduate level courses taken by an individual pursuing a program leading to a law, business, medical, or similar advanced academic or professional degree. However, this rule did not apply to graduate teaching or research assistants receiving tuition reduction under Internal Revenue Code section 117(d). Courses involving sports, games, or hobbies were covered only if they involved the employer's business or were part of a degree program. ¹⁷

PROPOSAL FOR EXTENSION AND MODIFICATION

The Revenue Reconciliation provisions approved by the House Committee on Ways and Means in September 1995 included an extension of the exclusion for employer provided educational assistance (section 127), with modification. The Committee's version would restore the provision retroactively and extend it through December 31, 1997. The Committee maintained the exclusion for graduate level courses for tax year 1995 since the past practice of reauthorizing the provision after expiration may have led both employers and employees to assume such courses would remain covered. However, because of budgetary constraints and a desire to target the benefit to those most in need of educational opportunities, in tax years beginning after December 31, 1995, the exclusion amount would not apply to graduate level courses.

LEGISLATIVE HISTORY OF SECTION 127

Section 127 was first added to the Internal Revenue Code with the passage of the Revenue Act of 1978 (P.L. 95-600), effective through the end of 1983. The provision was extended from the end of 1983 through 1985 by Education Assistance Programs (P.L. 98-611), which also established a $5,000 annual limit on the exclusion. The Tax Reform Act of 1986 (P.L. 99-514) raised the maximum excludable assistance from $5,000 to the current level of $5,250 and extended it through 1987. The Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647) reauthorized the exclusion retroactively to January 1, 1988, and extended it until December 31, 1988. The Revenue Reconciliation Act of 1989 (P.L. 101-239) again reauthorized the provision retroactively to January 1, 1989, and extended it through September 30, 1990. With the passage of the Revenue Reconciliation Act of 1990 (P.L. 101-239), the provision was extended through December 31, 1991.

The provision was further extended for six months (through June 30, 1992) by the Tax Extension Act of 1991 (P.L. 102-227). The six- month extension was provided while Congress tried to fashion a longer term solution to the continual reauthorization of the provision. Congress passed legislation in the 102nd Congress to extend the provision (H.R. 4210, Tax Fairness and Economic Growth Act of 1992), but the bill was vetoed by President Bush. During the first session of the 103d Congress, this provision, along with a number of others (see targeted jobs tax credit), was retroactively extended from July 1, 1992 through December 31, 1994, under provisions of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66). Budget constraints have been a principal factor in preventing the Congress from making the provision a permanent one.

² The authors gratefully acknowledge the writing of Linda Levine, Section Head of the Labor and Industries Section of the Economics Division, in this introductory section on the labor market.

³ Eck, Alan. Job-Related Education and Training: Their Impact on Earnings. Monthly Labor Review, October 1993. p. 36.

⁴ U.S. Library of Congress. Congressional Research Service. Employment Trends: A Fact Sheet. Report no. 95-763 E, by Linda Levine. Washington, June 29, 1995. 2 p.

⁵ U.S. Bureau of Labor Statistics. Report on the American Workforce. Wash., 1994. p. 70. For more information on this issue, see: U.S. Library of Congress. Congressional Research Service. Real Wage Trends: An Overview. Report no. 95-537 E, by Gail McCallion. Washington, April 27, 1995. 20 p.

⁶ Gittleman, Maury. Earnings in the 1980's: An Occupational Perspective. Monthly Labor Review, July 1994. p. 25.

⁷ For more information on the incidence and job and wage prospects of dislocated workers, see: U.S. Library of Congress. Congressional Research Service. Dislocated Workers: Characteristics and Experiences, 1979-1992. Report no. 92-813 E, by Linda Levine. Washington, Nov. 16, 1992. 26 p.

⁸ Internal Revenue Code (I.R.C.) section numbers are provided (in parentheses) from the I.R.C. of 1986.

⁹ U.S. Department of the Treasury, Internal Revenue Service. Your Federal Income Tax for Individuals, For Use in Preparing 1994 Returns. Tax Guide 1994. Publication 17. Washington, U.S. Govt. Print. Off., 1993. p. 224.

¹⁰ Ibid.

¹¹ Itemized deductions of high-income taxpayers subject to the limitation include deductions for mortgage interest, State and local taxes, and charitable contributions. The limitation does not apply to deductions for medical expenses, casualty and theft losses, and investment interest expenses.

¹² U.S. Congress. Conference Committees, 1986. Tax Reform Act of 1986. Conference Report to Accompany H.R. 3838. Washington, U.S. Govt. Print. Off., 1986. p. 30. (House, 99th Congress 2nd session, House Report No. 99-841)

¹³ U.S. Library of Congress. Congressional Research Service. Targeted Jobs Tax Credit: Prospects in the 104th Congress. Issue Brief No. IB95005, by Linda Levine, (continually updated). Washington, 1995. 14 p. See also: The Targeted Jobs Tax Credit, 1978- 1994. CRS Report no. 95-981 E, by Linda Levine. Washington, September 19, 1995. 21 p.

¹⁴ The Revenue Reconciliation Act of 1990 clarified that an individual is to be treated as convicted if a State court places him or her on probation without making a finding of guilty.

¹⁵ Chairman Bill Archer of Ways and Means has submitted Report Language on Titles XIII and XIV, Revenue Reconciliation Provisions As Reported by House Ways and Means Committee to Chairman Kasich of the Committee on Budget and dated September 22, 1995. This submission was reproduced in The Bureau of National Affairs, Inc., Daily Tax Report, Special Supplement, Report No. 186 on September 26, 1995. See page S- 8.

¹⁶ U.S. Library of Congress. Congressional Research Service. Employer Education Assistance: Overview of Tax Status and Legislation in the 104th Congress. Report 94-761 EPW, by Bob Lyke. Washington, Updated September 20, 1995. 2 p.

¹⁷ Commerce Clearing House, Inc. 1995 United States Master Tax Guide. Chicago, Commerce Clearing House, 1994. p. 240.