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This paper was requested by Chairman Dan Rostenkowski of the House Ways
and Means Committee. It was prepared under the supervision of Nancy M.
Gordon, Assistant Director, Human Resources and Community Development Division,
CBO. Questions regarding the analysis may be addressed to Sandra Christensen.
This paper was written by Sandra Christensen, at
the request of the Committee on Ways and Means of the U.S. House of Representatives.
Christensen is in CBO's Human Resources and Community Development Division
under the direction of Nancy Gordon and Martin Levine. Others who contributed
to preparation of the paper include Howard Levine and Roald Euller, who
provided computer assistance; Francis Pierce, who edited the paper; and
Mary Braxton, who prepared it for distribution.
SUMMARY
CHAPTER I. INTRODUCTION
CHAPTER II. THE TARGETED JOBS TAX CREDIT
CHAPTER III. RESPONSES OF EMPLOYERS TO THE TJTC
CHAPTER IV. EFFECTS OF THE TJTC ON THE YOUTH TARGET GROUP
APPENDIX A. EMPLOYER SURVEY: DATA AND METHODOLOGY
APPENDIX B. CURRENT POPULATION SURVEY: DATA AND METHODOLOGY
| TABLES | |
| 1. | TJTC CERTIFICATES ISSUED |
| 2. | TARGETED JOBS TAX CREDITS, BY TARGET GROUPS, 1983 |
| 3. | ESTIMATED USE OF THE TJTC BY EMPLOYERS, 1982 |
| 4. | EMPLOYER USE OF THE TJTC, BY REGION, 1982 |
| 5. | REASONS EMPLOYERS GIVE FOR NOT PLANNING TO USE THE TJTC IN THE FUTURE |
| 6. | CHARACTERISTICS OF TJTC, CETA, AND OTHER LOW-INCOME YOUTH, 1981 |
| 7. | CHARACTERISTICS OF JOBS HELD BY YOUTH, 1981 |
| A-1. | GEOGRAPHIC COVERAGE OF THE EMPLOYER SURVEY |
| A-2. | ESTIMATED USE OF THE TJTC BY SURVEY RESPONDENTS AND BY ALL EMPLOYERS IN THE SURVEY SITES, 1982 |
| A-3. | DETERMINANTS OF TJTC USE BY FIRMS FOR 1980 AND 1981 |
| A-4. | EFFECT OF THE TJTC ON THE PERCENT OF FIRM EMPLOYMENT THAT IS UNDER AGE 25 IN 1982 |
| A-5. | EFFECT OF THE TJTC ON THE CHANGE IN THE PERCENT OF FIRM EMPLOYMENT THAT IS UNDER AGE 25 IN 1982 |
| A-6. | EFFECT OF THE TJTC ON TOTAL FIRM EMPLOYMENT FOR 1981 |
| A-7. | EFFECT OF THE TJTC ON THE CHANGE IN TOTAL FIRM EMPLOYMENT |
| B-1. | LOGISTIC REGRESSION EQUATIONS ESTIMATING THE INCIDENCE OF EMPLOYMENT IN 1982 |
| B-2. | LOGISTIC REGRESSION EQUATIONS ESTIMATING THE INCIDENCE OF EMPLOYMENT IN MARCH 1983 |
The Targeted Jobs Tax Credit (TJTC)--an employer
tax credit that reduces the cost of hiring workers from certain disadvantaged
groups--is scheduled to expire at the end of 1984. To assist the Congress
in considering whether to reauthorize the TJTC, this study reviews information
about the operation of the program and discusses the findings from analyses
by the Congressional Budget Office (CBO) regarding its effectiveness.
BACKGROUND
The TJTC is a nonrefundable employer tax credit. The credit seeks to induce private-sector employers to try workers from high-risk groups that they might not otherwise choose to hire. Under current law, employers may claim a tax credit for up to two years--50 percent the first year and 25 percent the second year--of the first $6,000 earned annually by newly hired eligible employees. Workers eligible for this credit include low-income youth age 18 to 24, low-income youth age 16 to 19 in cooperative education (work-study) programs, public assistance recipients, disabled workers in rehabilitation programs, low-income Vietnam veterans, and low-income ex-convicts. In addition, employers may claim a credit of 85 percent of the first $3,000 earned by low-income youth age 16 or 17 hired for the summer months. Two-thirds of workers claimed for the year-round program are from youth categories.
In its early years, it was widely believed that the program did not alter employers' hiring decisions but, instead, provided primarily windfall benefits for firms. There were two reasons for this belief. First, about half the workers certified for the credit were youth in cooperative education programs--a group that employers were generally willing to hire without the credit as an inducement. Second, two-thirds of other workers claimed for the credit--from economically disadvantaged groups--were certified retroactively. That is, first they were hired and only later did employers determine their eligibility for the credit. In this instance, too, it seems unlikely that the credit shifted hiring preferences.
To increase the effectiveness of the TJTC, the Economic Recovery Tax
Act of 1981 eliminated both eligibility for cooperative education students,
unless they were also economically disadvantaged, and retroactive certification.
Following these changes, certifications declined in 1982 by about 40 percent,
with three-quarters of the decline due to the restriction imposed on eligibility
for cooperative education students. The rest of the decline was due, in
unknown proportions, to the elimination of retroactive certification and
to the recession, which resulted in lower overall demand for workers. By
1983, however, use had returned to its 1981 level of more than 400,000
certifications, reflecting renewed economic growth and greater efforts
by the Employment Service to implement the program. Still, only about 10
percent of employers have used the credit, and employers have claimed the
credit for fewer than 10 percent of the eligible workers they have hired.
EVIDENCE ABOUT THE PROGRAM
There are two major questions about the TJTC in its present form. First, is it effective? That is, does it generate jobs for targeted workers that they would not have had without the subsidy? Second, if it is effective, how can employer participation be increased in order to provide benefits to a greater number of workers?
Is the TJTC Effective?
For a number of reasons, it is very difficult to assess whether the TJTC generates additional employment for targeted workers. For one, the credit is available to all for-profit firms, so that it is impossible to set up a controlled experiment to evaluate employers' responses to the credit. Further, information about the employment of targeted workers is very limited. Data are sufficient for analysis only for the largest of the nine target groups--low-income youth age 18 to 24.
Based on an analysis of the data that are available, it appears that the credit has encouraged hiring of low-income youth. In a 1982 survey, about a third of employers who responded (all of whom had used the credit) said that it significantly influenced their choice of which workers to hire. Another 22 percent said it influenced their choice only slightly. An examination by CBO of employment data for 1980 and 1981 indicated that the proportion of workers who were under age 25 was higher by at least 6 percent, on average, in firms that had used the credit compared to similar firms that had not used it. Targeted youth appeared to gain in employment without adverse effect on employment of nonpoor youth, perhaps because employers structured their hiring practices toward youth in general in response to the credit. Since there was no consistent evidence that the credit increased employment overall, employment gains for youth may have been at the expense of adult workers who were displaced. Even if displacement was substantial, though, the credit may be desirable if it reduces the concentration of unemployment on disadvantaged groups.
How Can Employer Participation Be Increased?
If the Congress chooses to reauthorize the TJTC, the next question is how to increase employers' use of the program. If the 90 percent of firms not now using the credit were contacted by Employment Service personnel, told how the program works, and asked to accept program referrals, CBO estimates that up to a third could be persuaded to do so. Success rates would probably be highest in large firms with a high proportion of low-skill jobs, and lower in small firms or firms with few low-skill jobs.
Even with such efforts, however, a substantial proportion of employers are unlikely ever to use the credit. For example, employers who do not pay taxes--about 30 percent of firms--cannot benefit from the TJTC. Further, employers whose products or services cannot be produced with low-skill labor will not use the credit, since they cannot employ the kind of workers who are eligible for it.
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