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Thursday, February 25, 2010

The Work Opportunity Tax Credit (WOTC)

Linda Levine
Specialist in Labor Economics

The Work Opportunity Tax Credit (WOTC) 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). One year later, in 1997, Congress passed the Welfare-to-Work (WtW) tax credit to focus specifically on more disadvantaged TANF recipients. The 109th 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 included in emergency supplemental appropriations during the 110th Congress. The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Act of 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 (1) with a hiring date not more than one year after having been discharged or released from active duty in the Armed Forces or (2) 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 to cover 18 to 39 year olds and renamed the WOTC-eligible group "designated community residents." The act 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 Alternative Minimum Tax. 

Early in the 111th Congress, the WOTC was amended in the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). The credit's targeted groups were extended to cover unemployed veterans and disconnected youth who begin working for an employer during 2009 or 2010. Unemployed veterans are persons discharged or released from active duty in the Armed Forces within five years of their hiring date and having received unemployment compensation for not less than four weeks during the one-year period ending on the hiring date. Disconnected youth are 16 to 24 year olds who are not regularly attending school during the six-month period preceding the hiring date, not regularly employed within the same time frame, and not readily employable because they lack a sufficient number of skills. 

Bills have since been introduced to amend the WOTC to improve the employment prospects of workers unemployed during the latest recession (e.g., H.R. 3953). Although it would not amend the WOTC, S. 2983 has a similar purpose. It is meant to spur firms to hire the unemployed by exempting for-profit and non-profit employers from their share of social security taxes for hiring in 2010 persons who had not worked for 60 days. Unlike other recent job tax proposals, neither WOTC-related bills nor S. 2983 are incremental in nature. See CRS Report R41034, Business Investment and Employment Tax Incentives to Stimulate the Economy for more information.

Date of Report: February 16, 2010
Number of Pages: 20
Order Number: RL30089
Price: $29.95

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