Weekly Legislative Update - April 2, 2018
Tax Reform Evaluation
TIA and the Work Opportunity Tax Credit Coalition presented testimony on March 14th to the Subcommittee on Tax Policy (Committee on Ways and Means, U.S. House of Representatives) addressing recently expired tax provisions, including WOTC, Empowerment Zones, and Indian Employment Tax Credits.
Each addresses poverty and the goal of improved income mobility for the poor. TIA showed how the work opportunity tax credit expands job opportunity for the poor, at-risk youth, veterans, and people with disabilities to help them advance in real wages. Department of Labor and Census Bureau data show that without these credits and their emphasis on work, our nation will continue to struggle with a large underclass of people living at the bottom from generation to generation. Research from the Census Bureau shows that during the latest period for which we have data, 2009-2012, of the 22.7 million households in the lowest quintile (income below $22,329), 31 percent moved to a higher quintile and 69 percent remained at the bottom, and overall income mobility fell between 2004 and 2012.
Historically, TIA has been a strong advocate for WOTC. WOTC's focus is on these 22.7 million households when they are unemployed and receiving public assistance. Because of the social safety net-TANF, housing assistance, child credit, food stamps, Medicaid, and other benefits-the poverty rate of those so aided is cut in half; but welfare benefits don't provide a job and steady income, the precondition for a better life by gaining skills and expanding one's own talents. In the WOTC model, nearly two million unemployed workers on public assistance find jobs each year, and once employed, if their annual earnings are low from illness, care-giving, or irregular work, they are eligible for the earned income tax credit (EITC). WOTC and EITC are in a "goldilocks" relationship fighting poverty-WOTC expanding job opportunity for those at the bottom, EITC boosting income when earnings are low-together, they are a cornerstone of the safety net.
The WOTC model has allowed many single mothers to obtain work with earnings that keep their children out of poverty after receiving welfare services and training from city and county welfare agencies who use WOTC as a job placement tool. WOTC is a way-station at the end of the line to exit welfare. WOTC is hard-wired to every city and county welfare services and economic renewal program which funnel low-skill workers into jobs. It is an integral component of our system to lift low-income households and help them advance in real wages and out of the bottom. The Empowerment Zone Employment Tax Credit and Indian Employment Tax Credit supplement WOTC by providing larger job creation incentives for census tracts with deepest poverty via economic recovery projects of city, county, and reservation economic development agencies, using Federal investment tax credits as well as EZTC and IETC.
Considering WOTC alone, total hires in fiscal year 2015 were 1.9 million, including 1,394,967 food stamp recipients, 210,674 welfare recipients (most of them long-term welfare cases), 75,310 residents of poverty-stressed rural counties, 123,578 veterans, 53,583 ex-felons, 28,150 people with disabilities, and 23,089 SSI recipients, including youths with a disability. That's nearly two million hires a year of a target population of 22 million households in the bottom quintile of income. WOTC is the only Federal jobs program that achieves a scale proportionate to the challenge at maximum cost of $1,900 per job in most cases, and every worker is certified eligible by a State Workforce Agency before an employer can claim the credit. The system of verifying eligibility by State Workforce Agencies matching public records has for two decades assured high program integrity, with no significant fraud or abuse.
WOTC jobs are real, productive, tax-paying, private sector jobs distributed among 23 occupational groups in every major sector of the economy. Labor Department data shows 29.8 percent in sales and related occupations; 21.9 percent in production operations, including manufacturing, transportation, and construction; 18.7 percent in office and administrative support occupations; 17.5 percent in food preparation and serving occupations; 4.7 percent in healthcare and support occupations; and 1.6 percent in buildings and grounds cleaning and maintenance. WOTC is clearly not a program used mainly by restaurants. Nor are these "dead-end" jobs: private employers fill openings and are willing to pay full compensation and taxes beyond WOTC's benefit, which is capped for most workers at a maximum cost to the Treasury of $1,900 (the average is about $1,500 per hire.) What happens to this tax saving? It's used to pay part of the worker's compensation, which means the tax saving is ploughed back into the local economy. States and cities with thousands of WOTC hires a year can tally every dollar of the boost their economies receive from jobs credits, earmarked mostly for communities with the highest poverty and welfare caseloads.
It is said that WOTC's take-up rate of disadvantaged workers is low, but this is based on WOTC's hires as percent of total disadvantaged population, rather than as percent of the total who looked for jobs and were successfully employed. Let's compare WOTC workers employed with total workers employed at low incomes, as $9 is the starting wage for most WOTC workers. For our testimony, we obtained from BLS un-published CPS data on income distribution of full and part-time workers ages 25 and older, by education level, in 2017. Consider the bottom ten percent (decile) of employed workers making the lowest average weekly wages. There were 10.1 million workers employed at this level in 2017, and DOL records show two million ages 18-24 hires via WOTC in an average year. After allowing for 33 percent of WOTC workers being under 25, WOTC hires comprise an estimated 1,353,000, or 13.4 percent take-up rate of bottom-decile, age-25 and older workers in 2017. Assuming turnover of 33 percent between 2017 and 2018, it's likely 900,000 of these age-25 WOTC workers employed in 2017 remained on payrolls in 2018, along with an estimated 1,353,000 new WOTC age 25 and older workers, plus 647,000 workers ages 18-24, for a total of 2.8 million or 27.7 percent take-up rate of WOTC for lowest-income workers in 2018. At lowest decile, WOTC's two million jobs for those on public assistance account for a large percentage of those employed.
As a policy instrument, WOTC has during the past two decades proven to be the most cost- effective Federal jobs program on record-no more than $1,900 per hire for ninety percent of workers (the credit is larger for long-term welfare recipients and certain veterans). The last time the Joint Economic Committee made a cost estimate for permanent WOTC was in 2013 (see JCX-11-13) and the ten-year cost was $14.215 billion. A study conducted by Professor Peter Cappelli of the Wharton School, University of Pennsylvania, estimates savings in welfare payments alone exceed twice the ten-year cost of WOTC. WOTC is ready-made for evidence-based policy evaluation: the immediate outputs are known, but tangible results in growth of real wages, retention, and long-run impact can be estimated, along with savings from lower public assistance payments.
WOTC has proven adaptable to changing economic conditions. Congress has frequently extended WOTC to aid recovery from disasters. It added "rural renewal counties" to help stimulate development in rural areas declining economically. Recently, Congress approved "long-term unemployed" as a target group. Our Coalition supports The Military Coalition's proposal to extend WOTC eligibility to dependents of service members on active duty, who are at a disadvantage in finding employment when re-locating. We also support a bill before Congress to add "transitioning foster youth" as a target group. Empowerment Zone Tax Credit has expired and should be renewed soon and permanently. The Indian Employment Tax Credit has also expired and should be made permanent immediately to relieve high unemployment on reservations. In addition, Native Americans who reside on reservations often travel long distances to find work off reservation; they should be eligible for WOTC. Congress should also consider boosting apprenticeships by granting WOTC to employers who hire and train workers in an officially-registered apprenticeship program.
There are six million disconnected youth who are out of school and out of work because they lack basic skills. Valuable models of intensive counseling, education, and training for such youth exist in city and county welfare departments who confront this problem regularly. The Human Resources Subcommittee received presentations on private models that are achieving excellent results, Year Up and Alternative Schools Network. From testimony, Year Up's model is six months of intensive classroom work followed by a six-month internship with an employer; its program will serve 3,600 people this year. ASN works with 2,500 high school dropouts a year at a cost of $14,200 per student who receive job referrals when they graduate. If ASN's model is extended to fifty states, 125,000 disadvantaged youth would graduate annually and be referred to employers, at a cost of $17.75 billion a year. (This is approximately today's cost of WOTC's 2 million placements.) Baltimore's privately-funded JumpStart intensive training program in construction trades has highly successful graduates but only 800 graduates in ten years. Clearly, intensive programs geared to the disadvantaged and utilizing professional case managers, counselors, and educators, are labor-intensive, high-cost, and don't achieve scale enough to make a serious dent in six million disconnected youth.
If "disconnected youth" were restored as a WOTC target group, there's little doubt this would catch employers' attention because, for entry level jobs, employers count on motivation more than skill. Given the importance of quickly reducing those "out of school and out of work" to support the nation's plan to ignite economic growth, incorporating WOTC into national economic planning by making "disconnected youth" a target group until age 31 offers a good route to a rapid boost in hiring of those who presently have a low workforce participation rate, at lower cost per hire than any Federal jobs program. The "disconnected youth" provision enacted in 2009 ARRA should be copied verbatim and made a permanent part of WOTC, but it should capture more age groups left behind. The original program was highly effective because WOTC is the only program scale-able to the size of the challenge at reasonable cost.
Criticizing employers, who use the credit, as riding a gravy train ignores that they're investing in disadvantaged workers as Congress intended, and it's paying off with nearly two million hires a year for people who, with a job, are on their way to exiting public assistance. Critics are unaware of the extent to which WOTC is hard-wired into every city and county government in the nation, via their welfare and economic development agencies, veterans job programs, ex-felons and people with disabilities programs, which look to WOTC to match workers with jobs, and thus exit public assistance. To cities and counties, loss of WOTC would be a huge blow, and a workable state-by-state WOTC unthinkable.
In conclusion, our recommendations pertinent to the Subcommittee are:
- Enact permanent authorization of WOTC;
- Authorize WOTC for dependents of armed forces members on active duty;
- Make the Empowerment Zone Tax Credit permanent;
- Permanently extend the Indian Employment Tax Credit, and extend WOTC to native Americans who reside on Indian reservations but work elsewhere;
- Reinstate the disconnected youth target group, as enacted in ARRA, from ages 16 to 31;
- Authorize WOTC for all workers receiving cash payments under SSDI and SSI;
- Double the tax benefit for hiring SSDI and SSI recipients and Vocational Rehabilitation and ticket-to-work Employment Network referrals;
- Authorize WOTC for special needs students for two years after leaving high school;
- Extend WOTC eligibility to transitioning foster youth;
- Make non-profit employers eligible for WOTC to expand job opportunities, especially in healthcare and education;
- Allow WOTC to be claimed against FICA tax, while reimbursing the trust funds from the general fund of the Treasury;
- Consider extending WOTC to workers hired by an employer who participates in a publicly-registered and approved apprenticeship program;
- Authorize WOTC for food stamp recipients over the age of 40.