FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and distinguished Members of the Subcommittee, I am pleased to present the views of the Treasury Department today on the work opportunity tax credit. Mr. Chairman, we appreciate your leadership in enacting this credit and your efforts to extend the credit and strengthen its operation and effectiveness. The work opportunity and the welfare-to-work tax credits provide an incentive for employers to hire workers who would otherwise have a hard time finding work and attaining economic self sufficiency, including those who are trying to make the difficult transition from welfare to work. Employers are using these new incentives, as the Labor Department will report. Between FY 1997 and 1998, the number of certifications for work opportunity tax credits has more than doubled.

The Administration is strongly supportive of efforts to extend and improve these credits. Our FY 2000 budget would extend for one year both the work opportunity tax credit and the welfare-to-work tax credit. We would generally support a longer-term extension of the work opportunity tax credit and welfare-to-work tax credit, if done in a fiscally responsible way, because it would allow businesses to make future hiring plans knowing that the tax incentives would be available.

We look forward to working with the Subcommittee on the simplification of the work opportunity tax credit and the welfare-to-work tax credit in the context of a multi-year extension.

Background

The work opportunity tax credit was enacted by the Small Business Job Protection Act of 1996 as a replacement for the targeted jobs tax credit, which had expired on December 31, 1994. The work opportunity tax credit is intended to provide an incentive for employers to hire certain economically disadvantaged and disabled individuals, many of whom lack job skills. As originally enacted, the work opportunity tax credit was effective for wages paid or incurred to a qualified employee who began work for the employer after September 30, 1996 and before October 1, 1997. The credit was subsequently extended nine months (to July 1, 1998) by the Taxpayer Relief Act of 1997, and one year (to July 1, 1999) by the Tax and Trade Relief Extension Act of 1998.

The welfare-to-work tax credit was enacted by the Taxpayer Relief Act of 1997 in order to help move individuals from welfare to work. This credit is intended to encourage employers to hire long-term welfare recipients who may face the greatest challenges making the transition to employment, and to promote retention by providing a larger credit for the second year of employment. It also is intended to encourage employers to offer benefits, such as educational assistance, health plan coverage and dependent care that will help these workers succeed on the job. The originally enacted welfare-to-work tax credit was effective for wages paid or incurred to a qualified individual who began work for an employer on or after January 1, 1998, and before May 1, 1999. The Tax and Trade Relief Extension Act of 1998 extended the credit for two months (to July 1, 1999).

The work opportunity tax credit and the welfare-to-work tax credit are jointly administered by the Treasury Department through the Internal Revenue Service (IRS) and the Department of Labor through its Employment Service. The IRS is responsible for tax-related aspects of the program and the Employment Service, through the network of State Employment Security Agencies, is responsible for documenting worker eligibility.

The work opportunity tax credit encourages employers to hire individuals who are members of certain targeted groups. The credit equals a percentage of qualified wages paid during the first year of the individual's employment with the employer. The credit rate depends on the length of employment. An employer can claim a 25 percent credit for employment of at least 120 hours but less than 400 hours; the credit rate is 40 percent for employment of 400 or more hours. Up to $6,000 of wages may qualify for the credit. Thus, the maximum credit is $2,400 per eligible employee. The credit is scheduled to expire with respect to employees who begin work after June 30, 1999.

Eligible employees must be a member of one of the following targeted groups: (1) families receiving assistance under Title IV-A of the Social Security Act (The Temporary Assistance for Needy Families Program (TANF)); (2) qualified veterans; (3) qualified ex-felons; (4) high-risk youth; (5) vocational rehabilitation referrals; (6) qualified summer youth employees; (7) certain families receiving food stamps; and (8) qualified supplemental security income (SSI) recipients. Qualified wages generally include cash wages paid to an eligible employee.

To claim a credit for an employee, an employer must receive a written certification that the employee is a member of a targeted group. State employment security agencies are generally responsible for providing those certifications. The employer must have received the certification on or before the day on which the individual begins work for the employer, or must have completed a pre-screening notice with respect to the employee (containing the information that led the employer to believe the individual is a member of a targeted group) on or before the day the individual is offered employment with the employer and submitted such notice as part of a written request for certification not later than 21 days after the individual begins work for the employer.

The welfare-to-work tax credit enables employers to claim a tax credit for eligible wages paid to certain long-term family assistance recipients. The credit is 35 percent of the first $10,000 of qualified wages in the first year of employment and 50 percent of the first $10,000 of qualified wages in the second year of employment. Thus, the maximum credit for two years is $8,500 per eligible employee. The employee must work for the employer for at least 180 days or 400 hours. The credit is scheduled to expire with respect to individuals who begin work after June 30, 1999.

Qualified wages include cash wages paid to the employee plus amounts paid by the employer for the following: (1) educational assistance excludable under a section 127 program; (2) health plan coverage for an employee (subject to certain limits), and (3) dependent care assistance excludable under section 129.

The employment of economically disadvantaged and disabled workers is one of the Administration's most pressing concerns. The work opportunity tax credit provides an incentive for employers to hire individuals who have traditionally had difficulty obtaining employment and remaining in the work force. The welfare-to-work credit provides targeted employment incentives that will support the goals of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 and the Welfare-to-Work program created in the 1997 Balanced Budget Act by helping long-term welfare recipients make the transition to work and succeed in the workforce. The work experience encouraged by those credits is intended to promote job skills. Extension of both provisions is a high priority of this Administration.

In the FY 2000 budget, the Administration proposed a one-year extension of the work opportunity tax credit, so that the credit would apply with respect to employees who begin work before July 1, 2000. An extended credit would continue to serve as an inducement for employers to hire these hard-to-employ individuals and to help them develop valuable job skills. The revenue cost of a one-year extension of the work opportunity tax credit is estimated to be $415 million for FY 2000 û 2004.

The Administration also proposed a one-year extension of the welfare-to-work credit, so that the credit would be effective for individuals who begin work before July 1, 2000. Extending this credit would continue to encourage employers to hire long-term welfare recipients, and to invest in training, health care and dependent care benefits, and to encourage long-term employment. The revenue cost of a one-year extension of the welfare-to-work tax credit is estimated to be $87 million for FY 2000 û 2004.

It is important to ensure that the provisions work as they were intended. Under current law, one problem is that the benefits under the work opportunity tax credit and the welfare-to-work tax credit are not properly coordinated with respect to an individual whose first year of employment does not coincide with the employer's taxable year. To rectify this problem, we proposed a technical modification in the FY 2000 budget that would eliminate any unintended effects.

We are also taking steps to clarify the operation of the work opportunity tax credit and the welfare-to-work tax credit where an individual, in the process of moving from welfare to work, is employed by more than one employer. The typical case is where a nonprofit organization hires a former welfare recipient to participate in a transition-to-work training program to prepare the individual for employment with a for-profit business. Treasury and the IRS are about to issue a notice that will clarify that the for-profit employer who hires the former welfare recipient from the transition-to-work program is eligible for the full work opportunity tax credit or welfare-to-work tax credit if the individual satisfies the statutory requirements for qualification, even though the individual was not hired by the for-profit employer directly from the welfare rolls. We believe that the forthcoming notice will preserve the important role that nonprofit organizations play as a bridge between welfare and employment by for-profit businesses.

H.R. 2101 would (1) make the work opportunity tax credit permanent; (2) consolidate the work opportunity credit and the welfare-to-work credit; and (3) allow the credits to be claimed by tax-exempt organizations. We share the goals underlying many of these proposals, but have concerns about some of the specific proposals.

Because we are concerned about the efficient use of government revenues and the need to find revenue offsets, we believe that priority should be given to an extension of the credits and to the Administration's proposed clarification in the coordination of the work opportunity tax credit and the welfare-to-work tax credit. However, we recognize the need for a continuing employment incentive and more certainty for businesses when making hiring plans. Therefore, the Administration would support an extension of these credits that is longer than one year, provided that appropriate revenue offsets could be found.

We also want tax-exempt employers to continue to serve as a bridge between welfare and productive employment in the for-profit sector. For example, our proposed notice will clarify that an individual who is participating in a transition-to-work program with a tax-exempt entity will not lose eligibility under the work opportunity tax credit and welfare-to-work tax credit.

We would oppose, however, allowing a tax-exempt entity to claim these credits against its FICA tax liability. This unprecedented new role for the payroll tax system would allow it to be used as a backdoor mechanism for providing income tax credits. The payroll tax system must remain devoted to its vital core mission of financing Social Security and Medicare. Moreover, we object to allowing an income tax credit to entities that have been exempted by statute from income tax liability. Such a policy would mean that certain tax-exempt entities would effectively have a negative tax liability under the income tax that is, the income tax system would serve solely as a means of providing subsidies. That result would surely seem unfair to ordinarily taxable businesses that cannot use tax credits because they are unprofitable and thus have insufficient tax liability against which to claim the credits. Moreover, administering the proposal would be difficult because the payroll tax system and the income tax system are administered separately.

We would be pleased to work with you on simplification of the work opportunity tax credit and the welfare-to-work tax credit. In doing that, we would want to ensure that consolidation of the credits to streamline their operation does not sacrifice the special features aimed at helping long-term welfare recipients successfully reenter the work force.

In conclusion, Mr. Chairman, the Administration strongly supports an extension of the work opportunity tax credit and the welfare-to-work tax credit. We believe that these credits improve job opportunities for economically disadvantaged and disabled individuals, and help to ease the transition from welfare to work for long-term welfare recipients. Although extension of the credits and technical modifications to improve their coordination is our highest priority, we would be happy to work with you and other Members of this subcommittee on modifications that will simplify the credits in the context of a fiscally responsible multi-year extension.

This concludes my prepared remarks. I would be pleased to respond to your questions.