The Work Opportunity Tax Credit (WOTC) and the Welfare-to-Work (WtW) Tax Credit

Publication Date: September 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Social conditions

Type:

Abstract:

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 for-profit employers who hire others thought to experience employment problems in both good and bad economic times (e.g., qualified veterans and youth who are members of families receiving food stamp benefits, high-risk youth, Supplemental Security Income recipients, and economically disadvantaged ex-felons). Most recently (passed the House and Senate on September 15), the Katrina Emergency Tax Relief Act of 2005 (H.R. 3768) would add to WOTC-eligible groups a Hurricane Katrina employee.

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. The employment tax credits never have been addressed independently of broader legislation.

The 108th Congress took up legislation related to the WOTC in early 2003. It did not address both credits’ then-upcoming expiration on January 1, 2004. The Social Security Protection Act of 2003 (P.L. 108-203) ultimately was enacted into law in March 2004. It included language that effectively expanded the WOTC’s vocational rehabilitation referral group. Then, some 10 months after the credits’ expiration, the House and Senate passed the conference report (H.Rept. 108-696) for H.R. 1308 (The Working Families Tax Relief Act of 2004); it included a two-year extension of the Work Opportunity Tax Credit and Welfare-to-Work Tax Credit retroactive to their expiration and through December 31, 2005. Neither the House nor Senate-passed versions of the bill had mentioned the two employment credits.

As it has in the past, the President’s FY2006 budget request would repeal the WtW tax credit after incorporating a modified version of it in the WOTC. The Administration’s proposal also would extend the consolidated credit for one year (through December 31, 2006). As introduced in the 109th Congress, H.R. 1272/S. 595 also would fold a revised WtW tax credit into the WOTC. The bills would, in contrast to the President’s proposal, make the consolidated credit permanent. In addition, they effectively would expand eligibility for three groups: ex-felons no longer would be required to be economically disadvantaged, and the upper age limit of young food stamp recipients and of high-risk youth would be raised. Other bills introduced thus far during the current Congress would, like the Katrina Emergency Tax Relief Act of 2005 (H.R. 3768), add eligible groups to the WOTC.

This report will be updated as legislative activity occurs.