tax policy center
Tax Topics

Tax Topics

2009 Tax Stimulus
2012 Election Tax Plans
2014 Budget
Alternative Minimum Tax (AMT)
American Jobs Act of 2011
Brief Description of the Model 2013
Current-Law Distribution of Taxes
Deficit Reduction Proposals
Distribution of the 2001 - 2008 Tax Cuts
Economic Stimulus
Education Tax Incentives
Estate and Gift Taxes
Expiration of the Bush Tax Cuts
Explanation of Income Measures 2013
Federal Budget
Fiscal Cliff
Fiscal Crisis
Flow-Through-Enterprises
Guide to TPC Tables
Health Insurance Tax Incentives
Homeownership
How to Interpret Distribution Tables 2013
Marriage Penalties
Model FAQ 2013
Model Related Resources and FAQs
Payroll Taxes
Presidential Transition - 2009
Recent Tax Stimulus Legislation
Retirement Saving
Tax Encyclopedia Index
Tax Expenditures
Tax Reform Proposals
Value-Added Tax (VAT)
Who Doesn't Pay Federal Taxes?
Working Families

E-mail Newsletter

Enter your e-mail address to receive periodic updates on TPC publications and events.

> newsletter archive

tax topics
 

senate stimulus bill report card

Return to main report card

INCENTIVES TO HIRE UNEMPLOYED VETERANS AND DISCONNECTED YOUTH

Key Points

 

·        The Work Opportunity Tax Credit offers subsidies to businesses that hire certain disadvantaged workers. The provision would expand the target groups of the credit to include a broader category of youth (“disconnected youth”) and unemployed veterans. The maximum credit available is $2,400.

·        Research suggests that the credit has not been effective in improving employment outcomes. Few businesses have used the Work Opportunity Tax Credit. The credit only benefits businesses with positive tax liability and the maximum credit of $2,400 is not likely to be enough to encourage hiring from these target groups.

·        To the extent that any new hiring is induced, the jobs will go to low-income individuals who are likely to spend their earnings, providing a modest stimulus.

·        JCT estimates that the proposal would cost $208 million over 10 years.

Current law

The Work Opportunity Tax Credit (WOTC) is available for employers hiring individuals from one or more of nine targeted groups including welfare recipients, food stamp recipients (age 18-39), poor and disabled veterans, youth from disadvantaged geographic areas, Supplemental Security Income recipients, and qualified ex-felons. An individual is not treated as a member of the target group unless she or he received a certification from a designated local agency before starting work or the employer completed a request for certification within four weeks of hiring the employee.

The credit is determined by the amount of qualified wages paid by the employer. Certified employees must work a minimum of 120 hours. Generally, the subsidy level is 40 percent (25 percent for employment of 400 hours or less) of qualified first-year wages up to $6,000, resulting in a maximum subsidy of $2,400 per qualified worker. The credit applies only to qualified first-year wages except in the case of workers who have received Temporary Assistance for Needy Families (TANF) for an extended period of time. Employers who hire these individuals receive a larger credit that covers both first and second year wages

Stimulus Proposal

The proposal would expand the target group to include disconnected youth and unemployed, recently discharged veterans hired in 2009 or 2010. Individuals would qualify as unemployed veterans if they were discharged or released from active duty during 2008, 2009 or 2010 and received unemployment compensation for not less than four weeks during year before being hired. Individuals would qualify as disconnected youths if they are at 16 and not yet 25 when hired, have not been regularly employed or attending school in the past 6 months, and lack basic skills.

Discussion

The small literature on the WOTC credit suggests that the credit has been vastly underutilized and has had no meaningful impact on employment rates among the disadvantaged (GAO 2002; Department of Labor 2001; Hamersma 2005). Few businesses participate in the program. GAO reported that in 1999, only about one out of 790 corporations and one out of 3,450 individuals with a business affiliation claimed the credit. Hamersma (2005) found that disadvantaged youth were especially unlikely to benefit from the credit. The relatively few workers whose employers have participated in the program did enjoy modestly higher earnings.

The proposal would substantially expand the population eligible for the credit. Veterans whose families were receiving (or recently received) Food Stamps and certain disabled veterans qualify under current law. Under the stimulus proposal, all recent veterans who are currently unemployed would qualify. Under current law, individuals between the ages of 18 and 39 who either (i) receive or recently received TANF payments or food stamps or (ii) live in disadvantaged communities qualify for the credit. Under the proposal, anyone between the ages of 16 and 24 who is not in school or working when hired qualifies if they lack basic skills. Both groups are likely to spend any additional income they earn as a result of the credit.

Although the expansion makes more potential workers eligible, the maximum credit of $2,400 is not likely to encourage many businesses to hire these workers in today’s deep recession. Many businesses will not have sufficient tax liability to claim the credit (although under current law they can carry the credit back one year and forward 20 years). On the other hand, businesses that are profitable and do owe tax will receive a benefit for hiring workers they would have employed anyway.

Grade: D

Based on past experience, this wage subsidy is not likely to be effective in generating jobs for the newly expanded target group. Further, the credit may subsidize hiring that would have occurred anyway.

 Return to main report card