Wages were taken into account for purposes of the credit only if more than one-half of the wages paid during the taxable year to an employee were for services in the employer's trade or business. The test as to whether more than one-half of an employee's wages were for services in a trade or business was applied to each separate employer without treating related employers as a single employer. Other rules In order to prevent taxpayers from eliminating all tax liability by reason of the credit, the amount of the credit could not exceed 90 percent of the taxpayer's income tax liability. Furthermore, the credit was allowed only after certain other nonrefundable credits had been taken. If, after applying these other credits, 90 percent of an employer's remaining tax liability for the year was less than the targeted jobs tax credit, the excess credit could be carried back three years and carried forward 15 years. All employees of all corporations that were members of a controlled group of corporations were to be treated as if they were employees of the same corporation for purposes of determining the years of employment of any employee and wages for any employee up to $6,000. Generally, under the controlled group rules, the credit allowed the group was the same as if the group were a single company. A comparable rule was provided in the case of partnerships, sole proprietorships, and other trades or businesses (whether or not incorporated) that were under common control, so that all employees of such organizations generally were to be treated as if they were employed by a single person. The amount of targeted jobs tax credit allowable to each member of the controlled group was its proportionate share of the wages giving rise to the credit. No credit was available for the hiring of certain related individuals (primarily dependents or owners of the taxpayer). The credit was also not available for wages paid to an individual who was employed by the employer at any time during which the individual was not a certified member of a targeted group. No credit was allowed for wages paid unless the eligible individual was either (1) employed by the employer for at least 90 days (14 days in the case of economically disadvantaged summer youth employees) or (2) had completed at least 120 hours (20 hours for summer youth) of services performed for the employer. Legislative Background The targeted jobs tax credit was enacted in the Revenue Act of 1978 as a substitute for the new jobs credit.2 The targeted jobs tax credit, as initially enacted, provided a credit to employers of seven targeted groups. These groups were: (1) vocational rehabilitation referrals; (2) economically disadvantaged youths aged 18 to 25; (3) economically disadvantaged Vietnam-era veterans under the age of 35; (4) SSI recipients (individuals receiving Supplemental Security Income under Title XVI of the Social Security Act, including certain State supplements); (5) general assistance recipients; (6) economically disadvantaged former convicts hired within five years of the later of release from prison or date of conviction; and (7) coopera 2 The new jobs credit was available in 1977 and 1978. tive education students aged 16 to 19 who had not graduated from high school or vocational school. The maximum credit equaled 50 percent of the first $6,000 of qualified first-year wages and 25 percent of the first $6,000 qualified second-year wages paid to a targeted group individual. The employer's deduction for wages was reduced by the amount of the credit. The credit was effective for wages paid or incurred before January 1, 1982. The Economic Recovery Tax Act of 1981 ("ERTA") extended the credit to individuals who began work for the employer before January 1, 1983. Because of the two-year nature of the credit, it applied to wages paid in 1983 and 1984. ERTA also added new categories of individuals whose employment qualified for the credit: (1) involuntarily terminated Comprehensive Employment and Training Act ("CETA") workers, (2) WIN registrants, and (3) AFDC recipients. Other major changes made in ERTA were limiting the credit to economically disadvantaged cooperative education students rather than all such students meeting the age requirements and the repeal of the age limit for Vietnam-era veterans. The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) extended the credit to individuals who began work for the employer before January 1, 1985, and applied to wages paid through 1986. TEFRA also deleted CETA workers as a targeted group and added a new targeted group of economically disadvantaged summer youths aged 16 or 17. Employers of economically disadvantaged summer youths were eligible for a maximum credit of 85 percent of the first $3,000 of qualified wages. The Deficit Reduction Act of 1984 ("DEFRA") extended the credit to individuals who began work for the employer before January 1, 1986. The Tax Reform Act of 1986 ("1986 Act") extended the credit to wages paid to targeted group individuals who began work for an employer after December 31, 1985 and before January 1, 1989. Major changes enacted in the 1986 Act included the elimination of the credit for second-year wages and a reduction in the first-year credit to 40 percent of the first $6,000 of qualified wages. The Technical and Miscellaneous Revenue Act of 1988 ("1988 Act") extended the credit to eligible individuals who began work for an employer between January 1, 1989, and December 31, 1989. Major changes enacted in the 1988 Act were: (1) a reduction in the age limit for economically disadvantaged youth to ages 18-22 rather than 18-25 and (2) a reduction in the maximum amount of the credit for economically disadvantaged summer youth from 85 percent to 40 percent of the first $3,000 of qualified wages. The Omnibus Budget Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1990, and the Tax Extension Act of 1991 extended the credit to eligible individuals who began work for the employer before October 1, 1990, January 1, 1992 and June 30, 1992, respectively. Most recently, the Omnibus Budget Reconciliation Act of 1993 extended the credit to eligible individuals who began work for the employer before January 1, 1995. Analysis Overview The targeted jobs tax credit ("TJTC") was intended to increase the employment and earnings of target group members. The credit was made available to employers as an incentive to hire members of the target groups. To the extent the value of the credit was passed on from employers to employees, the wages of target group employees were higher than they would have been in the absence of the credit.3 The basic rationale for the TJTC was that employers do not hire certain individuals without a subsidy, because either the individuals are stigmatized (e.g., convicted felons) or the current productivity of the individuals is below the prevailing wage rate. Where particular groups of individuals suffer reduced evaluations of work potential because of membership in one of the targeted groups, the credit may have provided employers with a monetary offset for the lower perceived work potential. In these cases, employers may have been encouraged to hire individuals from the targeted groups and then make an evaluation of the individual's work potential in the context of the work environment, rather than from the job application. Where the current productivity of individuals was below the prevailing wage rate, on-the-job-training may have provided individuals with skills that enhanced their productivity. In these situations, the TJTC provided employers with a monetary incentive to bear the costs of training members of targeted groups and providing them with job-related skills that may have increased the chances of these individuals later being hired in unsubsidized jobs. Both situations encouraged employment of members of the targeted groups, and may have acted to increase wages for those hired as a result of the credit. As discussed below, the evidence is mixed on whether the rationales for the credit were supported by economic data. The information presented is intended to provide a structured way to determine if employers and employees responded to the existence of the credit in the desired manner. Efficiency of the credit The credit provided employers with a substantial subsidy for hiring members of targeted groups. For example, assume that a worker eligible for the credit was paid an hourly wage of w and worked 2,000 hours during the year. Ignoring payroll taxes (Social Security, Medicare, unemployment) and fringe benefits, the pre-tax cost to the employer for hiring this individual was (2,000) (w) dollars. Since the worker was eligible for the full credit (40 percent of the first $6,000 of wages), the firm would have reduced its deduction for wages paid by $2,400 and received the full $2,400 credit against its income taxes. Assuming the firm faced a marginal corporate income tax rate of 35 percent, the after-tax cost of hiring this worker was ((2,000) (w) -2,400)(1 - .35) dollars. This amount was lower than 3 For individuals with productivity to employers lower than the minimum wage, the credit may have resulted in these individuals being hired and paid the minimum wage. For these cases, it was clear that the credit resulted in the worker receiving a higher wage from that employee than in the absence of the credit (e.g., zero). the cost of hiring a credit-ineligible worker for 2,000 hours at the same hourly wage w by 2,400(1.35) = $1,560 dollars. This $1,560 figure was constant for all workers unless the wage (w) changed in response to whether or not the individual was a member of a targeted group. If the wage rate did not change in response to credit eligibility, the TJTC subsidy was larger in percentage terms for lower-wage workers. If w rose in response to the credit, it is uncertain how much of the subsidy remained with the employer, and therefore the size of the TJTC subsidy to employers was uncertain. To the extent the TJTC subsidy flowed through to the workers eligible for the credit in the form of higher wages, the incentive for eligible individuals to enter the paid labor market may have increased. Since many members of the targeted groups receive governmental assistance (AFDC or Medicaid), and these benefits were phased out as income increased, these individuals potentially faced a very high marginal tax rate on additional earnings.4 Increased wages resulting from the TJTC may have been viewed as a partial offset to these high marginal tax rates. In addition, it may be the case that even if the credit had little effect on observed wages, credit-eligible individuals may have had increased earnings due to increased employment.5 The structure of the TJTC (the 40-percent credit rate for the first $6,000 of qualified wages) appeared to encourage employers to churn employees who are eligible for the credit. This could be accomplished by firing employees after they earn $6,000 in wages and replacing them with other TJTC-eligible employees. If training costs were high relative to the size of the credit, it may not have been in the interest of an employer to churn such employees in order to maximize the amount of credit claimed. Empirical research in this area has not found an explicit connection between employee turnover and utilization of the TJTC.6 Data on TJTC certifications and vouchers Table 1 presents data on the number of TJTC certifications and vouchers for the years 1980-1990. Both certifications and vouchers are indications that individuals are members of targeted groups and that wages paid to these people may have qualified for the credit. The table indicates that the number of certified individuals fluctuated over time, with a slight downward trend. It is possible that this decline reflected less intensive use of the TJTC by employers. Since certification took place after the hiring decision had been made, the observed decline could have reflected an increased emphasis on determining eligibility for the TJTC prior to employment through the use of vouchers. The data also indicate a decline in the use of vouchers by TJTCeligible individuals. Vouchers were used to indicate to an employer that an individual was eligible for the TJTC. In particular, vouch 4 From this vantage point, the phaseout of benefits was analogous to unchanged benefits coupled with an increase in the tax rate faced by the individual on their earnings. Examples of how large marginal tax rates can be for persons receiving transfer payments are contained in Gordon Lewis and Richard Morrison, Income Transfer Analysis, Urban Institute Press, Washington, DC, 1989. 5 This argument is made in Edward Lorenz, The Targeted Jobs Tax Credit in Maryland and Missouri: 1982-1987, National Commission for Employment Policy, Washington, DC, 1988. See, for example, Macro Systems, Inc., Final Report of the Effect of the Targeted Jobs Tax Credit Program on Employers, U.S. Department of Labor, 1986. ers may have increased the efficiency of the TJTC by permitting employers to base the employment decision on whether or not the TJTC subsidy would be available for a specific worker. Some analysts argued, however, that the vouchers may have reduced the efficiency of the TJTC by stigmatizing the workers of the targeted group. In the absence of the credit, the employer might not have become aware that the prospective employee was a member of a disadvantaged group. The credit would thus have advertised the individual's status and would have helped reinforce the disadvantage rather than combat it.8 Table 1.-Number of Targeted Jobs Tax Credit 1Figures for 1980-1985 are for fiscal years; those for 1986-1990 are for calendar years. The TJTC program lapsed between January and October 1986, accounting for the decline in certification in 1986. Source: U.S. Department of Labor tabulations for various years. Certain empirical regularities exhibit themselves in the data on certifications. Generally, about half of the certifications were made for economically disadvantaged youth. The next largest group, AFDC recipients, represented nearly one-quarter of the total certifications. The third largest group, approximately one-tenth of the total, was made up of handicapped individuals. The three States that issue the largest number of certifications (California, New York, and Texas) generally accounted for nearly one-quarter of the total certifications. Job creation The number of jobs created by the TJTC was certainly less than the number of certifications. The first reason was that some of the workers receiving the TJTC certification would have been hired even in the absence of the program. In these cases, the credit re 7 Gary Burtless, "Are Targeted Wage Subsidies Harmful? Evidence from a Wage Voucher Experiment," Industrial and Labor Relations Review, vol. 39, no. 1, October 1985, pp. 105-114. 8 One empirical study found some evidence that TJTC-eligible individuals were stigmatized by the credit. Employers who knew of an individual's eligibility for the TJTC prior to hiring either (1) offered lower wages, on average, to the TJTC-eligible individuals or (2) ended up with workers of better than average productivity. The latter was taken as evidence of a stigma effect in that the employers appeared to be more selective in hiring TJTC-eligible individuals. John H. Bishop, "Toward More Valid Evaluations of Training Programs Serving the Disadvantaged," Journal of Policy Analysis and Management, vol. 8, no.2, 1989, pp. 209–228. |