CRS Updates Welfare-to-Work and Work Opportunity Credit Developments

The Work Opportunity Tax Credit (WOTC) and the Welfare-to-Work (WtW) Tax Credit are meant to induce employers to hire members of families receiving benefits under the Temporary Assistance to Needy Families (TANF) program. The WOTC also is available to employers who hire others thought to experience employment problems in both good and bad economic times (e.g., qualified veterans and 18- to 24-year-olds who are members of families receiving food stamp benefits; 18- to 24-year-olds living in empowerment zones, enterprise communities, and renewal communities; and vocational rehabilitation referrals).

In September 2005, the 109th Congress passed and the President signed the Katrina Emergency Tax Relief Act of 2005 (H.R. 3768, P.L. 109-73), which temporarily adds "a Hurricane Katrina employee" to the WOTC-eligible groups. The act also includes a retention credit for small employers whose operations in the core disaster area ceased because of Hurricane Katrina, and who retain on their payrolls persons in their employ on August 28, 2005.

The Work Opportunity Tax Credit and Welfare-to-Work Tax Credit are temporary provisions of the Internal Revenue Code. Since their initiation in the mid-1990s, the Congress has allowed the credits to lapse four of the five times they were up for reauthorization. In each instance, they were reinstated retroactive to their expiration dates as part of large tax-related measures.

Tax reconciliation measures in both houses of the 109th Congress address the two employment credits. S. 2020 (the Tax Relief Act of 2005), which the Senate passed in November 2005, in some respects follows recommendations in the President's budget request with regard to the WOTC and WtW credit -- namely, repealing the latter after incorporating a modified version of it in the WOTC and then extending the consolidated credit. A somewhat different version of consolidation was in H.R. 4297 as introduced; however, the amended bill approved by the Ways and Means Committee on November 16, and by the House on December 8, excluded it. Instead, the Tax Relief Extension Reconciliation Act (H.R. 4297) would expand eligibility of one WOTC-eligible group: youths in families receiving food stamps. S. 2020 would expand the definition of two other groups as well, namely, economically disadvantaged ex-felons and high-risk youths (renamed "designated community residents"). Both bills provide a one-year extension through December 31, 2006.

S. 2020 also revisits the Hurricane Katrina employee retention credit by making it available to larger employers and extending it to all employers adversely affected by Hurricane Rita and Hurricane Wilma. Both of these provisions are included in H.R. 4440 as amended (the Gulf Opportunity Zone Act of 2005, which the House and Senate passed on December 16, 2005).

This report will be updated as legislative activity occurs.

Contents

 What Kind of Wage Subsidies Are the WOTC and WtW Credits?

This report explains what type of subsidies these tax provisions are and refers to criticisms of their immediate predecessor, the Targeted Jobs Tax Credit, with which they share features. It then moves on to a detailed description of the WOTC and WtW credit (e.g., target groups, subsidy rate, retention period, and certification process). Next, activity under the programs as well as their costs are presented. The report closes with a brief legislative history and a discussion of current policy action.

Selective employment programs often focus on workers believed to have relatively low skill levels. Because low productivity makes them less attractive to employers than other labor force participants, the groups have comparatively high unemployment rates and low wages regardless of aggregate economic conditions. A subsidy -- in the instant case, a tax expenditure rather than a direct (appropriated) expenditure -- lessens the productivity gap between target group members and other workers. It thus is intended to make businesses more willing than they otherwise would have been to hire from the designated population(s).

The WOTC and the WtW credit are not incremental subsidies. Because employers do not have to create new jobs (i.e., increase the size of their workforces) in order to get the credits, the programs' design does not benefit faster- over slower-growing firms. It does, however, favor companies that normally experience rapid labor turnover or companies that are willing to fire ineligible employees and replace them with eligible workers.¹ At the time the WtW credit was being considered, some Members expressed concern about the chance for displacement of the working poor in light of contemporaneous efforts to move large numbers of welfare recipients into jobs.² The results of a report the General Accounting Office issued in 2001 suggest that the likelihood of employers engaging in churning³ or displacement to maximize receipt of the WOTC is low.⁴

Some members of the public policy community also were mindful of the experience with a similar program in effect from 1978 to 1994, the Targeted Jobs Tax Credit (TJTC). The TJTC was criticized for the extent of windfall gains: the credit was not a factor in the hiring decisions of most employers who claimed it, in part because they normally hired persons like those in the eligible groups (i.e., lowskilled, low-wage workers); thus, taxpayers appear to have largely subsidized firms for doing what they would have done in the absence of the program. TJTC also was criticized for the degree of assistance it provided individuals for whom the credit was claimed: the hope was that through work experience and on-the-job training received while in subsidized positions the workers would be better able to subsequently obtain unsubsidized, higher-paying jobs; however, the short tenure of many TJTC hires made it unlikely that subsidized employment much improved their future job prospects.⁵

The WOTC and WtW credit were designed to try to mitigate these criticisms. Some target groups were reformulated with the intention of focusing more narrowly on those who truly need a credit for firms to risk hiring them. The certification process was modified toward the same end, that is, to minimize windfall profits. In addition, the minimum period a target group member must remain on the payroll in order for an employer to claim a credit was lengthened from 120 hours or 90 days under the TJTC, to 400 hours or 180 days under the WtW credit. This also was briefly the case under the original version of the WOTC. The reason for extending the retention period beyond the TJTC's requirement was to enable eligible hires to get the kind of work experience that would improve their long-term job opportunities. However, some analysts have been skeptical that these program changes will prove effective at remedying the problems.⁶

At present, for-profit employers are entitled to a credit against their federal income tax liabilities for hiring members of the following eligible groups:

• members of families receiving benefits under the Aid to Families with Dependent Children (AFDC) or its successor Assistance to Needy Families, TANF) program for any nine months during the 18-month period ending on the hiring date;⁷

• qualified veterans who are members of families receiving benefits under a food stamp program under the Food Stamp Act of 1977 for at least a three-month period during the 15-month period ending on the hiring date;⁸

• 18- to 24-year-olds who are members of families receiving food stamp benefits for the six-month period ending on the hiring date, or receiving benefits for at least three months of the five-month period ending on the hiring date in the case of able-bodied adults without dependents who cease to be eligible for assistance under the work requirement at Section 6(o) of the Food Stamp Act of 1977;

• high-risk youth (i.e., 18- to 24-year-olds whose principal place of abode is an empowerment zone, EZ, an enterprise community, EC, or a renewal community, RC);

• summer youth (i.e., 16- to 17-year-olds hired for any 90-day period between May 1 and September 15 whose principal place of abode is an EZ, EC, or RC);

• economically disadvantaged⁹ ex-felons with hiring dates within one year of the last date of conviction or release from prison;

• vocational rehabilitation referrals (i.e., individuals with physical or mental disabilities that result in substantial handicaps to employment who have been referred to employers upon, or at any time after, completing or while receiving rehabilitative services pursuant to an individualized written plan for employment under a state plan for vocational rehabilitative services approved under the Rehabilitation Act of 1973 or through a vocational rehabilitation program for veterans carried out under Chapter 31 of Title 38, U.S. Code); and

• Supplemental Security Income (SSI) recipients who have received benefits under Title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date.

The actual value of the WOTC to the employer could be less than $1,500-$2,400 per eligible worker ($750-$1,200 per summer youth hire) depending on the firm's tax bracket. A business's tax deduction for wages and salaries must be reduced by the amount of the credit. The credit cannot exceed 90% of a company's annual income tax liability. But, if after certain other nonrefundable credits have been taken, 90% of an employer's remaining income tax liability for the current year is less than the amount of the WOTC, the excess can be carried back one year and forward 20 years for workers hired on or after January 1, 1998. (Previously, the carry-back and carry-forward periods were three years and 15 years, respectively).

State Employment Security (ES) agencies, in cooperation with participating agencies,¹¹ are charged with certifying whether newly hired workers belong to the prescribed groups. If a request for certification is rejected, the state ES agency must provide a written explanation of its decision to the employer.

The eligibility determination process can follow one of two paths described below, but the second route is thought to be followed more often than the first.

WtW Tax Credit

The Welfare-to-Work Tax Credit was initiated as part of the federal effort to move welfare recipients onto payrolls.¹⁵ It is intended to encourage employers to hire particularly disadvantaged members of the TANF group, namely, long-term recipients. Specifically, the WtW credit's definition of long-term family assistance recipient is:

• a member of a family that has received benefits for at least the 18-month period ending on the hiring date;

• a member of a family that has received benefits for a total of 18 months beginning after the credit's enactment (August 5, 1997); and

• that has a hiring date which is not more than two years after the end of the earliest such period; or

• a member of a family that no longer is eligible for assistance after August 5, 1997 because of any federal- or state-imposed time limit, and

• that has a hiring date which is not more than two years after the date of benefit cessation.

Qualified wages under the WtW tax provision are defined more broadly than under the WOTC. They include not only gross earnings, but also certain tax-exempt amounts received under accident and health plans as well as under educational or dependent assistance programs.

The WtW credit's minimum employment period also differs from the WOTC's current requirement of 120 hours. As in the WOTC's initial version, employers must retain eligible workers at least 400 hours or 180 days in order to receive the credit.

The WtW credit's certification procedure follows that of the WOTC as described above. A firm cannot claim a WtW credit and a WOTC for the same individual in the same taxable year.

As it is required to do annually under the Internal Revenue Code, the Joint Committee on Taxation issued a report in 2004 to the House Committee on Ways and Means and the Senate Committee on Finance that includes simplification proposals. One proposal involves combination of the WOTC and the WtW credit such that they would be governed by one set of rules pertaining to such things as length of retention, definition of wages, level of subsidy rates, and limits on annual salaries against which the rates are applied.

WOTC

State ES agencies issued 123,407 WOTC certifications to employers in FY1997, 285,322 in FY1998, 335,707 in FY1999, 370,835 in FY2000, 383,357 in FY2001, 377,310 in FY2002, 403,243 in FY2003, and 244,445 in FY2004. The considerably higher figures in recent years¹⁶ compared to FY1997 likely are related to the program's very slow start up at the state level, modifications of the credit that made it more attractive to employers (e.g., the shortened retention requirement and modified definition of AFDC/TANF recipients) and to tightening in the labor market through much of the period.

Certifications most often have been issued for hiring members of the AFDC/TANF group (e.g., 40% in FY2003). Another 27% of certifications in FY2003 were for 18- to 24-year-olds in families receiving food stamps. The share of high-risk youth has been on the rise, and it accounted for 13% of the total in FY2003. The share of SSI recipients (an eligible group added in 1998) had been increasing through FY2002, when it dropped from almost 8% to 6% in FY2003. In contrast, the share of the vocational rehabilitation group had been decreasing steadily before remaining flat at almost 5% in FY2002 and FY2003. The remaining groups (i.e., ex-felons, veterans, and summer youth) together accounted for over 9% of certifications in FY2003, with the majority issued to employers for hiring ex-felons (over 6%).

Not surprisingly, many of the certifications issued likely have been for hiring women. Men who face obstacles to employment were expected to be hired through the young food stamp recipient and high- risk youth groups. This gender pattern has prompted proposals in the Congress to extend the groups' upper age limit. (See section below on legislative activity in the 109th Congress for more information.)

WtW Tax Credit

In the nine months the credit was in operation in FY1998 (January-September), state ES agencies issued 46,580 certifications. The figure for FY1999 was 104,998. The number of certifications in FY2000 was 50% higher at 154,608. This represents 22,340 fewer certifications than were issued to employers for hiring WOTC-eligible TANF recipients in FY2000, or 12.6% less. One year earlier, in contrast, WtW certifications were 41.6% below WOTC certifications for TANF-eligibles (or 74,713 less). The marked improvement in employers' willingness to hire long-term family assistance recipients is particularly notable in light of their initially expressed reluctance toward utilizing the WtW credit versus the WOTC because of the former's longer retention requirement and more disadvantaged eligible group. The tightening labor market through 2000 likely was a contributory factor.

The number of WtW certifications subsequently declined as the economy experienced a recession and a "jobless recovery" through summer 2003. In FY2001, WTW certifications were 97,072; in FY2002, 46,652; and in FY2003, a still lower 33,068. In contrast to this marked downward trend in WtW certifications, WOTC certifications fluctuated over the period.

The low number of WtW certifications in FY2004 -- 15,601 -- reflects the expiration of the credit during much of the period.

Most of the cost to the government from tax credits is in the form of revenue forgone rather than appropriated funds. According to the U.S. Department of the Treasury, about $16 million in Work Opportunity credits was earned on individual and corporate tax returns in 1996. The WOTC's low usage in that year likely is attributable to the start-up of the program on October 1, 1996 and to the initial length of the retention requirement. In contrast, almost $150 million in Work Opportunity credits was earned on returns in 1997. In 1998, the value of the hiring credits claimed by employers rose substantially: $291 million, in the case of the WOTC, and $24 million in the case of the WtW credit.

As further shown in Table 1, WOTC credits claimed dipped slightly in tax year 1999 ($285 million) before spurting upward in 2000 ($400 million). Possibly reflecting the recession, the value of WOTC credits claimed on federal income tax returns dropped in 2001 ($267 million). The amount of WtW credits claimed followed a different -- steadily expanding -- pattern, from $91 million in 1999, to $114 million in 2000, and $128 million in 2001.

Even before any actual figures became available for the WtW credit, there was speculation that they would likely be low because businesses that frequently had claimed employment tax credits seemed less than enthusiastic about its target population and retention period when the program was first proposed.¹⁷ A report issued by the Joint Economic Committee at the time the WtW credit was being considered noted that its larger subsidy compared to either the TJTC or the WOTC might "only offset the higher potential risk associated with hiring long-term welfare recipients".¹⁸ Moreover, the maximum amount of the WtW credit might rarely be received by employers given the historically low wage levels (less than the credit's $10,000 annual cap) and limited fringe benefits associated with subsidized jobs as well as their short-term nature (less than the credit's two year limit).

                Table 1. Value of WOTC and WtW Credits

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 when their earnings totaled about $6,000 (the credit-maximizing level).²⁰

A study of the WOTC/WtW credit that was undertaken for the DOL also was released in March 2001. Interviews of 16 establishments that had used the credits were conducted in five states (California, Georgia, Maryland, Missouri, and Wisconsin). As in the case of the GAO study, the authors emphasized that their findings cannot be extrapolated to all other user firms. Among the report's results were:

• "the tax credits play little or no role in [the 16 employers'] recruitment policies," suggesting that employers would have hired members of the target groups even if the programs were not available;

• as credit-eligible hires' job performance, work readiness, attendance and punctuality were like those of ineligible employees in similar positions, most of the interviewed employers thought there was no need for special training or counseling programs;

• the target-group members who were hired exhibited the high rates of turnover typical of low-wage workers,²¹ which meant that the interviewed employers were able to claim the maximum credit for relatively few eligible hires;

• the 16 employers gave the programs a positive assessment, although they offered some suggestions for improvement having to do with program administration (e.g., consolidate and streamline the forms), program design (e.g., broaden target-group eligibility criteria)²² and promotion of the program (e.g., increase use of conditional certifications).²³

From the 104th Congress Through the 108th Congress

104th Congress: Creation of the WOTC. As authorized in Section 1201 of the Small Business Job Protection Act of 1996 (P.L. 104-188), for-profit employers were entitled to a WOTC against their federal income tax liabilities for hiring members of seven specifically designated groups from October 1, 1996 through September 30, 1997.

105th Congress: Several Revisions. The Taxpayer Relief Act of 1997 (P.L. 105-34) substantially revised the program by shortening the minimum employment requirement to 120 hours and creating a two-tier subsidy based on length of retention. It also extended the temporary measure for nine months from October 1, 1997 through June 30, 1998, added an eighth group (Social Security Income recipients) and modified the definition of one group (see footnote 7).

After an almost four-month lapse, the WOTC was reauthorized for one year (through June 30, 1999) retroactive to its expiration date in the Omnibus Consolidated and Emergency Appropriations Act, 1999 (P.L. 105-277).

106th Congress: Expansion of WOTC-Eligible Groups. The credit subsequently was reauthorized retroactive to its expiration date and extended through December 31, 2001 in the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170).

The 106th Congress later expanded the definition of the "high risk" and "summer youth" groups to include renewal communities (effective January 1, 2002) through passage of the Consolidated Appropriations Act, 2001 (P.L. 106-554), which incorporated the Community Renewal Tax Relief Act of 2000 (H.R. 5662). Employers must coordinate claiming the WOTC with claiming another employment tax credit equal to 15% of the first $10,000 in qualified wages paid to renewal community residents who perform substantially all employment services within the areas.

107th Congress: 2002-2003 WOTC Expansion to Cover New York Liberty Zone Employees and Authorization of the WtW Credit. After about a two-month lapse, the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) reauthorized the WOTC. It was extended through December 31, 2003 for eligible persons hired after December 31, 2001.

New York Liberty Zone Employees. The economic stimulus measure also amended the WOTC's eligible population to add "New York Liberty Zone business employees." Qualified businesses were defined as firms with 200 or fewer employees located in the vicinity of the World Trade Center as well as those that, due to property destruction or damage associated with the September 11 terrorist attack, had to relocate to other sections of New York City. While the other WOTC group members must be new hires in order for firms to claim a credit, New York Liberty Zone business employees were both existing and newly hired employees. The number of workers for whom firms that relocated elsewhere in New York City could claim the credit was limited to those on the employers' payrolls as of September 11, 2001; the cap did not have apply to firms that remained in the zone or that moved into the zone. A qualified business could claim the WOTC for an eligible employee in 2002, 2003, or both years. The portion of the WOTC associated with the new target group was allowed against the alternative minimum tax.

Limited information is available regarding employer utilization of the WOTC for Liberty Zone employees.²⁷ Some 3,196 taxpayers claimed the WOTC in 2002 for hiring members of the group, according to the Internal Revenue Service. (Taxpayers include corporations, partnerships, and individuals who run their own businesses.) For 2003, the preliminary number of taxpayers that claimed the WOTC for Liberty Zone employees is 3,502.

The Welfare-to-Work Tax Credit. The Personal Responsibility and Work Opportunity Act (P.L. 104-193) requires parents to work after a maximum of two years of receiving TANF benefits, and Congress authorized the WtW credit to help achieve that objective. It initially was to have expired on April 30, 1999, but it, like the WOTC, was extended in P.L. 105-277 (through June 30, 1999), P.L. 106-170 (through December 31, 2001), and P.L. 107-147 (through December 31, 2003).

108th Congress: A Lengthy Lapse. The first bill taken up by the 108th Congress that contained a WOTC-related provision was H.R. 743 (the Social Security Protection Act of 2003). It passed the House on April 2, 2003. The Senate subsequently passed the legislation, and on March 2, 2004, it was signed into law (P.L. 108-203). Among many other things, the act modified the definition of the WOTC's vocational rehabilitation referral-eligible group in light of the Ticket to Work and Work Incentives Improvement Act of 1999. It effectively expanded the group to include disabled individuals with individualized work plans who are referred to employers not only by a state vocational rehabilitation agency (as was the case under prior law), but also by "employment networks" that were created by the Ticket to Work legislation.

On September 23, 2004, the House and Senate passed the conference report for H.R. 1308 (The Working Families Tax Relief Act of 2004). Following the credits' 10-month lapse, it extended the WOTC and the WtW credit retroactive to their expiration and through December 31, 2005. As originally introduced and passed by the House in March 2003, however, H.R. 1308 (then called the Tax Relief, Simplification, and Equity Act of 2003) did not mention the employment tax credits. Neither did the amended version of the bill (The Relief for Working Families Tax Act of 2003) that the Senate passed in June 2003. Conferees were appointed in 2003, and on September 23, 2004, the conference report (H.Rept. 108-696) -- with a two-year extension of the otherwise unrevised WOTC and WtW credit -- was filed. The JCT estimated that revenue losses from the extension might total $603 million for the WOTC and $122 million for the WtW credit over the FY2005-FY2009 period.

Legislative Activity During the 109th Congress

With the WOTC and WtW Tax Credit now set to expire on January 1, 2006, legislation has been introduced in the 109th Congress to extend and otherwise amend them.

Combining and Modifying the Two Credits. H.R. 1272/S. 595 (the Encouraging Work Act of 2005) would, in addition to:

• making the WOTC permanent,

• expanding eligibility of ex-felons beyond those who are economically disadvantaged,

• expanding eligibility of young food stamp recipients by including persons aged 25 to 39, and

• renaming high-risk youth as "designated community residents" while expanding their eligibility to include persons aged 25 to 39,

• employers who hire long-term family assistance recipients could claim a credit if individuals are retained for a minimum of 120 hours (rather than the current 400 hours or 180 days);

• the 25% subsidy rate for WOTC group members employed from 120 to 399 hours would apply to long-term family assistance recipients, and the WtW credit's 35% rate for those employed at least 400 hours during their first year of employment would be raised to 40% as is currently the case for WOTC-eligible hires;

• employers would continue to be able to claim a credit for retaining long-term family assistance recipients during a second year at the WtW's current subsidy rate of 50%;

• the subsidy rates for long-term family assistance recipients would continue to be applied against up to $10,000 earned in each of the first and second years of employment; and

• qualified wages of long-term family assistance recipients would become the same as those of WOTC-eligible hires, namely, cash wages (i.e., certain benefits could no longer be included).

As introduced, H.R. 4297 (the Tax Relief Extension Reconciliation Act of 2005) would have consolidated the WtW credit with the WOTC. The bill approved by the Ways and Means Committee excludes the consolidation. In contrast, S. 2020 (the Tax Relief Act of 2005) would fold the WtW credit into the WOTC and treat long-term family assistance recipients differently from other WOTC-eligibles, as also proposed in H.R. 1272/S. 595. Specifically, S. 2020 would continue to allow employers to claim a credit for retaining long-term family assistance recipients during their second year of employment, and continue to have subsidy rates for long-term family assistance recipients applied against up to $10,000 earned in each of the first and second years of employment.

Like H.R. 1272/S. 595, S. 2020 would expand the WOTC-eligibility of ex-felons by eliminating the requirement that they be economically disadvantaged, and of high-risk youth (renamed "designated community residents") by including persons aged 25 to 39. Unlike S. 2020 and H.R. 1272/S. 595, H.R. 4297 would expand the WOTC-eligibility of young food stamp recipients by including persons aged 25 to 34 rather than persons aged 25 to 39.

Both H.R. 4297 and S. 2020, like the President's budget request, provide a one-year extension through December 31, 2006. H.R. 1272/S. 595, in contrast, would make a consolidated WOTC credit permanent, while H.R. 4297 (as introduced) would have extended a consolidated credit for two years.

The Joint Committee on Taxation (JCT) estimates the revenue effect of the WOTC provisions in H.R. 4297 to be $466 million from FY2006 through FY2010. The revenue loss associated with the WtW credit in H.R. 4297 might be $80 million between FY2006 and FY2010. According to the JCT, the revenue impact of extending a consolidated WOTC-WtW credit and other amendments to the WOTC in S. 2020 is $690 million over the FY2006-FY2010 period.

The Ways and Means Committee approved H.R. 4297 (as amended) on November 16, 2005; the House, on December 8. The Senate passed S. 2020 on November 17, 2005. (Additional provisions in S. 2020 concerning employment tax credits in connection with Hurricane Katrina, Hurricane Rita, and Hurricane Wilma are analyzed below.)

Expanding Eligible Groups (e.g., Hurricane Katrina Employees). Other legislation introduced thus far that relates to the WOTC includes adding eligible groups (e.g., qualified small business employees, and qualified veterans of the military operations in Afghanistan or Iraq and their qualified dependents).

As it had after the September 11 attack on the World Trade Center, the Congress has temporarily expanded the WOTC eligible-groups to include "a Hurricane Katrina employee" as part of its emergency response. The House and Senate passed differing versions of the Katrina Emergency Tax Relief Act of 2005 (H.R. 3768) on September 15, 2005.²⁸

SA 1728 also included a separate provision not in the House bill that allows employers whose trade or business in the disaster area became inoperable, after August 28, 2005 and before January 1, 2006 due to Hurricane Katrina, a credit equal to 40% of wages up to $6,000 per employee who worked in the disaster area for those employers on August 28, 2005, or for members of the Ready Reserve-National Guard currently on active duty who worked for such employers immediately before their deployment. The credit would be applied against wages paid to eligible employees from the time the businesses became inoperable until the businesses resumed significant operations in the disaster area. It would not matter whether employees actually perform services for the wages paid; whether services are performed at a worksite other than their place of employment on August 28, 2005; or whether services are performed at the original place of employment before significant operations resume there.

On September 21, 2005, the House approved an amendment to SA 1728, which the Senate passed the same day, that includes the following modification of the WOTC and the retention credit. The bill was sent to the President on September 22, 2005. On September 23, 2005, the President signed it into law (P.L. 109-73).

WOTC Amendment. "Hurricane Katrina employee" is added to the WOTC-eligible groups. The group is defined as persons whose principal place of abode on August 28, 2005 was in the core disaster area and who,

• beginning on such date and through August 28, 2007, is hired for a position principally located in the core disaster area; and

• beginning on such date and through December 31, 2005, is hired for a position regardless of its location.

The estimated revenue effect of the WOTC expansion, according to the Joint Committee on Taxation, is $12 million in FY2006, $30 million in FY2007, $28 million in FY2008, $12 million in FY2009, and $6 million in FY2010. For the FY2006-FY2010 period, then, the revenue loss could total $88 million. Through FY2015, it could total $93 million.

Employee Retention Credit. Eligible employers whose trade or business in the core disaster area became inoperable after August 28, 2005 and before January 1, 2006 because of damage sustained by Hurricane Katrina can claim a credit equal to 40% of qualified wages up to $6,000 per person whose principal place of employment had been with such employers on August 28, 2005. To be eligible for the credit, employers cannot have employed an average of over 200 employees on business days during the taxable year. The credit can be applied against wages paid or incurred by an eligible firm from the time it became inoperable after August 28, 2005, until it resumes significant operations at the eligible employee's principal place of employment or before January 1, 2006. Qualified wages are those paid regardless of whether an eligible employee performs services; performs services at a place of employment other than his/her worksite on August 28, 2005; or performs services at his/her worksite on August 28, 2005 before significant operations have resumed there. A business cannot claim a retention credit for an employee during any period for which it claims a Work Opportunity Tax Credit for such employee.

The estimated revenue effect of the retention credit, according to the Joint Committee on Taxation (JCT), is $23 million in FY2006, $8 million in FY2007, $4 million in FY2008, and $2 million in FY2009. For the entire period, then, the revenue loss could total $38 million.

S. 2020, the Tax Relief Act of 2005, revisits the Hurricane Katrina employee retention credit by removing the employer-size cap. S. 2020 would, in addition, provide an employee retention credit for employers affected by Hurricane Rita and Hurricane Wilma. The estimated revenue effect of eliminating the employer size limit, according to the JCT, is $90 million from FY2006 through FY2010. The JCT's revenue estimate for the retention credit associated with Hurricanes Rita and Wilma, which also have no employer size limit, is $24 million over the FY2006-FY2010 period.

As passed by the House on December 7, 2005, the Gulf Opportunity Zone Act of 2005 would have extended the current employee retention credit available to employers harmed by Hurricane Katrina to employers harmed by hurricanes Rita and Wilma. Unlike S. 2020, H.R. 4440 would have continued to limit eligibility for the retention credit to small employers. But the amended version of H.R. 4440 that the House and Senate passed on December 16, 2005 drops the size limit.

² Robert Pear, "Clinton Will Seek Tax Break to Ease Path Off Welfare," New York Times, Jan. 28, 1997, p. A1. For more information on displacement in the context of welfare reform, see archived CRS Report 97-360, Welfare Reform and Subsidized Public Sector Jobs, by Linda Levine, pp. 7-10 (available from author).

³ "Churning" refers to hiring eligible group members and then firing them when they no longer are eligible (e.g., their salary has reached the WOTC's $6,000 earnings limit).

⁴ U.S. General Accounting Office, Work Opportunity Credit: Employers Do Not Appear to Dismiss Employees to Increase Tax Credits, GAO-01-329, Mar. 2001. (Hereafter cited as GAO, Work Opportunity Credit.)

⁵ For more information on the TJTC, see archived CRS Report 95-981, The Targeted Jobs Tax Credit, 1978-1994, by Linda Levine (available from author).

⁶ U.S. Congress, Joint Economic Committee, The Welfare-to-Work Tax Credit, Mar. 1997. (Hereafter cited as Joint Economic Committee, The Welfare-to-Work Tax Credit.)

⁷ This is the group whose definition was altered by the Taxpayer Relief Act of 1997 (P.L. 105-34). Previously, group members had to have been receiving benefits for nine consecutive months. Note: Members of families are only those persons taken into account when determining eligibility for the AFDC or TANF program (i.e., those specifically listed on the grant).

⁸ A qualified veteran is one who has served on active duty for more than 180 days or who has been discharged or released from active duty for a service-connected disability. Note: Members of families are only those persons taken into account when determining eligibility for a food stamp program under the Food Stamp Act of 1977.

⁹ "Economically disadvantaged" is defined as having an annualized family income of 70% or less of the lower living standard income level (LLSIL). The U.S. Bureau of Labor Statistics developed and subsequently eliminated the LLSIL along with other living standards levels. In the many years since then, the U.S. Employment and Training Administration has been updating the LLSIL by applying an inflation factor.

¹⁰ In the WOTC's initial version (i.e., for persons hired from Oct. 1, 1996 through Sept. 30, 1997), the minimum employment period was 400 hours or 180 days and the subsidy rate was 35%. Note: For an anecdotal account of the difficulty firms had retaining WOTC-eligibles for 400 hours, see Rochelle Sharpe, "Great Expectations: A Tax Credit Designed to Spur Hiring Seems Promising -- At First," Wall Street Journal, Apr. 21, 1997, p. A1.

¹¹ Participating agencies (e.g., one-stop career centers, job corps centers, vocational rehabilitation agencies, local welfare agencies, veterans' affairs offices, and food stamp program agencies) determine the economic eligibility of most group members. State ES agencies determine the economic eligibility of ex-felons.

¹² There is limited evidence which suggests that advertising oneself as a member of a subsidized group could actually reduce one's chance of getting a job. Gary Burtless, "Are Targeted Wage Subsidies Harmful? Evidence from a Wage Voucher Experiment," Industrial and Labor Relations Review, vol. 39, no. 1, Oct. 1985.

¹³ Christopher Howard, The Hidden Welfare State: Tax Expenditures and Social Policy in the United States (Princeton, NJ: Princeton University Press, 1997), pp. 164-165, 171-172.

¹⁴ Ben Wildavsky, "Taxation: Taking Credit," National Journal, Mar. 29, 1997. (Hereafter cited as Wildavsky, Taxation: Taking Credit.)

¹⁵ For more information on prior employment tax credits with welfare recipients as their designated population, see archived CRS Report 96-738, Welfare Recipients and Employer Wage Subsidies, by Linda Levine (available from author).

¹⁶ The unusually low figure for FY2004 is an aberration due to the credit's expiration during much of the period.

¹⁷ Wildavsky, Taxation: Taking Credit.

¹⁸ Joint Economic Committee, The Welfare-to-Work Tax Credit.

¹⁹ Westat, Process Evaluation of the WOTC Program (DOL, Employment and Training Administration, Office of Strategic Planning and Policy Development, Aug. 1997).

²⁰ GAO, Work Opportunity Credit.

²¹ WOTC/WtW hires generally were paid the same entry- level wages as other hires, which largely ranged between $5.15 and $8.00 an hour.

²² These two recommendations echo those made in the 1997 process evaluation.

²³ See the section on Program Administration (supra) for the definition of a conditional certification and why it may be little used.

²⁴ Westat and Decision Information Resources, Inc., Employers' Use and Assessment of the WOTC and Welfare-to-Work Tax Credits Program (DOL, Employment and Training Administration, Office of Policy and Research, Mar. 2001).

²⁵ Sarah Hamersma, "The Work Opportunity Tax Credit: Participation Rates Among Eligible Workers," National Tax Journal, vol. 56, no.4 (Dec. 2003), p. 736.

²⁶ GAO, Business Tax Incentives to Employ Workers with Disabilities Receive Limited Use and Have an Uncertain Impact, GAO-03-39, Dec. 2002.

²⁷ No information on certifications for Liberty Zone employees because they were exempt from the WOTC's usual certification procedure.

²⁸ Under the original measure approved by the House, an eligible employee is one who had his/her principal place of abode in the disaster area on Aug. 28, 2005, and who begins working at a place of employment principally located in the disaster area during the two-year period starting on Aug. 29, 2005. The disaster area is that determined by the President to merit individual assistance or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of Hurricane Katrina. The existing rule that denies the credit's application to wages of employees who had worked for the same employer at any prior time, excluding those working for the employer on Aug. 28, 2005, is waived. The WOTC's expiration date of Dec. 31, 2005 also is waived in the case of Hurricane Katrina employees. The Senate-approved amendment differs by additionally allowing employers located outside the disaster area to claim a WOTC credit for Hurricane Katrina employees who start working for the employers during the six-month period beginning on Aug. 29, 2005.