The soon-to-expire Work Opportunity Tax Credit has not been working

The Work Opportunity Tax Credit (WOTC) sounds appealing: It rewards companies for hiring people who face barriers to work. The credit is scheduled to expire this year, and policymakers are discussing extending or expanding the credit.

Unfortunately, the best available evidence shows the WOTC is totally ineffective at increasing employment. New research finds the WOTC has no effect on employment for the groups it’s meant to help, despite costing taxpayers about $2 billion per year. The data are clear: It’s time to let the credit expire.

How the WOTC works and what new evidence shows

The WOTC aims to encourage employers to take a chance hiring workers who might otherwise struggle to find jobs. Employers can claim a tax credit of up to $2,400 per worker. That credit covers up to 40% of first-year wages for employees in certain “targeted” groups, including certain disadvantaged veterans, people with felony records, and recipients of certain safety net programs (like the Supplemental Nutrition Assistance Program, Supplemental Security Income, or Temporary Assistance for Needy Families).

There’s no limit on the number of workers for whom a firm can claim the credit, and in some cases, such as certain veterans and long-term welfare recipients, the credit can be even larger.

A new analysis shows that WOTC is ineffective in increasing the employment of these groups. Using administrative data on more than 13 million individuals and over 800,000 WOTC recipients, it finds no measurable effect on hiring, employment, or earnings for any of the targeted groups. The estimates are so precise that they can rule out even very small effects on hiring of less than two-tenths of a percentage point.

Why is the WOTC ineffective—and expensive?

Employers cannot screen applicants for WOTC eligibility in the hiring process. Employers are typically not allowed or are reluctant to ask applicants about criminal records or benefit receipt, since doing so can expose them to discrimination lawsuits. As a result, the credit does not influence who gets hired.

This points to a puzzle: If the credit has no effect on hiring, why is it so expensive? Who is benefitting from $2 billion per year in tax credits?

The answer is that certain large firms—especially in fast food, retail, and temporary staffing—regularly hire lots of workers for low-wage jobs, and in the process, hire WOTC qualifying workers totally by accident. Enactment of the WOTC credit gave them an incentive to comb through the files of these routine hires, collecting the lucrative subsidy after the fact.

As a result, nearly all WOTC benefits (97%) go to corporations for workers who would have been employed even without the credit. And the benefits are highly concentrated: In Wisconsin, half of all credits went to just 48 large corporations, even though those firms accounted for only a small share of total hiring in the state.

In short, the credit does little to expand opportunity. The average WOTC-certified worker earns about $9 an hour, and the median job lasts less than a year. There is no evidence that the credit improves retention, raises wages, or reduces reliance on public benefits. Meanwhile, a handful of firms receive a tax savings worth millions of dollars.

A worthy goal in need of better solutions

Increasing employment of disadvantaged workers is a worthy goal of economic policy. These workers face real barriers to getting hired, including employer bias and limited access to networks that connect them to job opportunities. Unfortunately, decades of research, experience, and new evidence shows that WOTC doesn’t achieve that goal.

Congress could be swayed by the lobbying of corporations that use the plight of disadvantaged workers to justify tax breaks for their shareholders. Or it could let the WOTC to expire and redirect $2 billion per year to policies that more effectively and efficiently improve job opportunities.