Work Opportunity Tax Credit and Welfare-to-Work Tax Credit

The Issue:
The restaurant industry uses these important employment credits to hire thousands of persons who may not otherwise be employed, moving thousands of Americans from welfare to the workforce. Unfortunately, businesses have been unable to fully utilize these programs as part of a sound long-term business strategy because they are two of several provisions in the tax code that are not permanent and must be reauthorized every few years.

Background:
The WOTC was initiated in 1996 (replacing the Targeted Jobs Tax Credit) as a temporary measure intended to encourage for-profit employers to hire members of specifically designated groups who experience employment problems in the labor market. Individuals in these groups are generally low-skilled and consist of (1) persons receiving Aid to Families with Dependent Children, (2) qualified veterans, (3) 18-24 year olds on food stamps, (4) high-risk youth, (5) summer youth, (6) SSI recipients, (7) ex-felons, and (8) persons with mental or physical disabilities. Rather than direct payments to employers, the WOTC operates as a credit applied against the employer's federal income tax liability, narrowing the gap between the productivity of these persons and the going wage for a certain job.

Businesses can claim an income tax credit of 25% of the first $6,000 in wages paid to eligible employees during their first year of employment, if they remain on the payroll between 120 and 399 hours. The rate increases to 40% for eligible hires who remain on the payroll for at least 400 hours.

Eligibility for Welfare-to-Work is limited to individuals who have been on welfare for a minimum of 18 consecutive months. W-t-W provides a 35% tax credit on the first $10,000 of wages for those working 400 hours in the first year. In the second year, the credit increases to 50% of the first $10,000 of wages earned.

NCCR Says:
Given projected federal budget surpluses and the proven track record of this employment incentive, Congress can and should extend these programs permanently. At a minimum, Congress should provide a long-term reauthorization of at least five years to ensure continued business utilization of these incentives. Moreover, Congress should consider expanding the eligibility for the WOTC program by eliminating the age eligibility ceiling (currently age 24) for members of food stamp households and individuals residing in EZ/EC's. Ninety percent of those on food stamps live below the poverty line and many food stamp households include adults who are not working.

Status:
In the 1st Session of the 107th Congress, Reps. Amo Houghton (R-NY) and Charles Rangel (D-NY) in the House and Sens. Jim Jeffords (R-VT) and Max Baucus (D-MT) in the Senate introduced the Work Opportunity Improvement Act of 2001. These bills would permanently extend both the WOTC and the W-t-W programs. In addition, they would extend WOTC eligibility to "absentee fathers" of children on welfare by modifying the current WOTC Food Stamp eligibility criteria to include anyone on Food Stamps through age 50.

NCCR achieved a great victory when authorization for these two tax credits, which had expired on December 31, 2001, was renewed and extended as part of the economic stimulus package that was signed by the President in early 2002. WOTC and W-t-W are now in effect through December 31, 2003.

Contact: NCCR at 202.626.8183