**DESCRIPTION OF PRESENT LAW ANDPROPOSALS RELATING TO THEWORK OPPORTUNITY TAX CREDIT**

****Scheduled for a Public Hearing 

Before the

 SUBCOMMITTEE ON OVERSIGHT

of the

HOUSE COMMITTEE ON WAYS AND MEANS

on July 1, 1999

Prepared by the Staff

of the 

JOINT COMMITTEE ON TAXATION

June 29, 1999

JCX-41-99

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**CONTENTS**

**INTRODUCTION**

**I.  SUMMARY**

**II.  DESCRIPTION OF PRESENT LAW**

**III.  ADMINISTRATION AND HOUSE LEGISLATIVE PROPOSALS**1.  Administration Proposal2.  H.R. 81 (Mr. Bilirakis)3.  H.R. 585 (Mr. English)4.  H.R. 671 (Mr. Cardin, Mr. Stark, Mr. Matsui, Mr. Coyne, Mr. Jefferson)5.  H.R. 815 (Mr. Watts, Mr. Weller, Mr. Hulshof, and others)6.  H.R. 998 (Mr. Hayes)7.  H.R. 1084 (Ms. Dunn, Mr. Weller, and others)8.  H.R. 2101 (Mr. Houghton, Mr. Rangel, Mr. Weller, Mr. Lewis  of Georgia, Mrs. Johnson of Connecticut,    Mr. Matsui, Mr. Ramsted, Mr. Hayworth, Mr. Lewis of Kentucky, Mr. Watkins, Mr. Levin, Mr. McNulty,    Mr. Cardin, Mr. Neal of Massachusetts, Ms. Dunn, Mr. English, Mr. Foley, Mr. McInnis, Mrs. Thurman,    Mr. Jefferson, Mr. Coyne, Mr. Becerra, Mr. Stark, Mr. Nussle, and others)

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**INTRODUCTION**

	The Subcommittee on Oversight of the House Committee on Ways and Means hasscheduled a public hearing on July 1, 1999, to review the work opportunity tax credit, which isscheduled to expire after June 30, 1999.

	This document,(1) prepared by the staff of the Joint Committee on Taxation, provides adescription of present law and legislative proposals relating to the work opportunity tax credit.

	Part I of this document is a summary of present law.  Part II describes the present-lawrules for the work opportunity tax credit.  Part III describes the Administration's and the Houselegislative proposals (106th Congress) relating to the work opportunity tax credit.

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**I.  SUMMARY**

**In general**

	The work opportunity tax credit ("WOTC"), which is scheduled to expire after June 30,1999, is available on an elective basis for employers hiring individuals from one or more of eighttargeted groups.  The credit equals 40 percent (25 percent for employment of 400 hours or less)of qualified wages.  Generally, qualified wages are wages attributable to service rendered by amember of a targeted group during the one-year period beginning with the day the individualbegan work for the employer.

	The maximum credit per employee is $2,400 (40 percent of the first $6,000 of qualifiedfirst-year wages).  With respect to qualified summer youth employees, the maximum credit is$1,200 (40 percent of the first $3,000 of qualified first-year wages).

	The employer's deduction for wages is reduced by the amount of the credit.

**Targeted groups eligible for the credit**

	The eight targeted groups are: (1) families eligible to receive benefits under theTemporary Assistance for Needy Families ("TANF") Program; (2) qualified veterans; (3)qualified ex-felons; (4) high-risk youths; (5) vocational rehabilitation referrals; (6) qualifiedsummer youth employees; (7) families receiving food stamps; and (8) persons receiving certainSupplemental Security Income ("SSI") benefits.

**Minimum employment period**

	No credit is allowed for wages paid to employees who work less than 120 hours in thefirst year of employment.

**Expiration date**

	Under present law, the credit is scheduled to expire for wages paid or incurred to anotherwise qualified individual who begins work for an employer on or after July 1, 1999.

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**II.  DESCRIPTION OF PRESENT LAW**

**In general**

	The work opportunity tax credit (sec.51) is available on an elective basis for employershiring individuals from one or more of eight targeted groups.  The credit generally is equal to 40percent (25 percent for employment of 400 hours or less) of qualified wages.  Generally,qualified wages consist of wages attributable to service rendered by a member of a targeted groupduring the one-year period beginning with the day the individual begins work for the employer.

	Generally, no more than $6,000 of wages during the first year of employment is permittedto be taken into account with respect to any individual.  Thus, the maximum credit per individualis $2,400.  With respect to qualified summer youth employees, the maximum credit is $1,200 (40percent of up to $3,000 of qualified first-year wages).

	The deduction for wages is reduced by the amount of the credit.

**Targeted groups eligible for the credit**

          (1) Families receiving benefits under Title IV-A of the Social Security Act (The Temporary Assistance for Needy Families Program ("TANF")

	An eligible recipient is an individual certified by the designated local employment agencyas being a member of a family eligible to receive benefits under (Title IV-A of the SocialSecurity Act) for a period of at least nine months (whether or not consecutive), during the18-month period ending on the hiring date.  For these purposes, members of the family aredefined to include only those individuals taken into account for purposes of  determiningeligibility  for the Title IV-A program.

          (2) Qualified veteran

	A qualified veteran is a veteran who is a member of a family certified as receivingassistance under a food stamp program under the Food Stamp Act of 1977 for a period of at leastthree months part of which is during the 12-month period ending on the hiring date. For thesepurposes, members of a family are defined to include only those individuals taken into accountfor purposes of determining eligibility for a food stamp program under the Food Stamp Act of1977.

	A veteran is an individual who has served on active duty (other than for training) in theArmed Forces for more than 180 days or who has been discharged or released from active duty inthe Armed Forces for a service-connected disability. However, any individual who has served fora period of more than 90 days during which the individual was on active duty (other than fortraining) is not an eligible employee if any of this active duty occurred during the 60-day periodending on the date the individual was hired by the employer. This latter rule is intended toprevent employers who hire current members of the armed services (or those departed fromservice within the last 60 days) from receiving the credit.

          (3) Qualified ex-felon

	A qualified ex-felon is an individual certified as:  (1) having been convicted of a felonyunder any State or Federal law; (2) being a member of a family that had an income during the sixmonths before the earlier of the date of determination or the hiring date which on an annual basisis 70 percent or less of the Bureau of Labor Statistics lower living standard; and (3) having ahiring date within one year of release from prison or date of conviction.

          (4) High-risk youth

	A high-risk youth is an individual certified as being at least 18 but not yet 25 on the hiringdate and as having a principal place of abode within an empowerment zone or enterprisecommunity (as defined under Subchapter U of the Internal Revenue Code).  Qualified wages willnot include wages paid or incurred for services performed after the individual moves outside anempowerment zone or enterprise community.

          (5) Vocational rehabilitation referral

	Vocational rehabilitation referrals are those individuals who have a physical or mentaldisability that constitutes a substantial handicap to employment and who have been referred tothe employer while receiving, or after completing, vocational rehabilitation services under anindividualized, written rehabilitation plan under a State plan approved under the RehabilitationAct of 1973 or under a rehabilitation plan for veterans carried out under Chapter 31 of Title 38,U.S. Code. Certification will be provided by the designated local employment agency uponassurances from the vocational rehabilitation agency that the employee has met the aboveconditions.

          (6) Qualified summer youth employee

	Qualified summer youth employees are individuals: (1) who perform services during any90-day period between May 1 and September 15; (2) who are certified by the designated localagency as being 16 or 17 years of age on the hiring date or if later, May 1st of the calender yearinvolved; (3) who have not been an employee of that employer before; and (4) who are certifiedby the designated local agency as having a principal place of abode within an empowerment zoneor enterprise community (as defined under Subchapter U of the Internal Revenue Code). As withhigh-risk youths, no credit is available on wages paid or incurred for service performed after thequalified summer youth moves outside of an empowerment zone or enterprise community. If,after the end of the 90-day period, the employer continues to employ a youth who was certifiedduring the 90-day period as a member of another targeted group, the limit on qualified first-yearwages will take into account wages paid to the youth while a qualified summer youth employee.

          (7) Families receiving food stamps

	An eligible recipient is an individual aged 18 but not yet 25 on the hiring date certified bya designated local employment agency as being a member of a family receiving assistance undera food stamp program under the Food Stamp Act of 1977 for a period of at least six monthsending on the hiring date. In the case of families that cease to be eligible for food stamps undersection 6(o) of the Food Stamp Act of 1977, the six-month requirement is replaced with arequirement that the family has been receiving food stamps for at least three of the five monthsending on the date of hire. For these purposes, members of the family are defined to include onlythose individuals taken into account for purposes of determining eligibility for a food stampprogram under the Food Stamp Act of 1977.

          (8) Qualified supplemental security income ("SSI") recipients

	An eligible recipient is an individual certified by a designated local agency as receivingsupplemental security income ("SSI") benefits under Title XVI of the Social Security Act(including supplemental security income benefits of the type described in section 1616 of suchAct or section 212 of Public Law 93-66) for any month ending within the 60-day period endingon the hiring date.

**Certification of targeted groups**

	In general, an individual is treated as a member of a targeted group if: (1) on or before theindividual begins work for an employer, the employer receives a certification from a designatedlocal agency that such individual is a member of a targeted group; or (2) on or before theindividual is offered employment with the employer, a pre-screening notice is completed by theemployer and not later than the 21st day after the individual begins work for the employer, theemployer submits such notice to the designated local agency as part of a written request forcertification from such agency.

	If an individual is certified by the designated local agency as a member of a targetedgroup and such certification is incorrect because it was based on false information provided bysuch individual, the certification will be revoked and wages paid to that individual after the dateon which notice of such revocation is received by the employer are not qualified wages forpurposes of the credit.

	If a designated local agency denies a request for certification, the agency should providethe individual with a written explanation of the reasons for the denial. 

**Minimum employment period**

	No credit is allowed for wages paid unless the eligible individual is employed by theemployer for at least 120 hours in the first year of employment.

**Definition of wages**

	In general, wages eligible for the credit are defined by reference to the definition of wagesunder the Federal Unemployment Tax Act (FUTA) in section 3306(b) of the Code, except thatthe dollar limits of that section do not apply.  Because wages paid to certain agricultural andrailroad employees are not FUTA wages, special rules are provided for these wages.

	Wages may be taken into account for purposes of the credit only if more than one-half ofthe wages paid during the taxable year to an employee are for services in the employer's trade orbusiness.  The test as to whether more than one-half of an employee's wages are for services in atrade or business is applied to each separate employer without treating related employers as asingle employer.

**Other rules**

	The amount of the credit (together with the other nonrefundable credits) may be claimedonly to the extent the regular tax exceeds the tentative minimum tax.  In addition, the amount ofthe credit (together with the other nonrefundable credits) may not exceed the sum of the first$25,000 of the taxpayer's regular tax and 75 percent of the remainder of that tax.  Any excesscredit may be carried back one year and forward 20 years.

	All employees of all corporations that are members of a controlled group of corporationsare to be treated as if they were employees of the same corporation for purposes of determiningthe 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 is the same as if the group were asingle company.  A comparable rule is provided in the case of partnerships, sole proprietorships,and other trades or businesses (whether or not incorporated) that are under common control, sothat all employees of such organizations generally are to be treated as if they were employed by asingle person.  The amount of work opportunity tax credit allowable to each member of thecontrolled group is its proportionate share of the wages giving rise to the credit.

	No credit is available for the hiring of certain related individuals (primarily dependents orowners of the taxpayer).  The credit is also not available for wages paid to an individual who wasemployed by the employer at any time during which the individual was not a certified member ofa targeted group.

**Expiration date**

	The credit is effective for wages paid to, or incurred with respect to, a qualified individualwho begins work for an employer after September 30, 1996, and before July 1, 1999.

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**III.  ADMINISTRATION AND HOUSE LEGISLATIVE PROPOSALS**

**1.  Administration Proposal**

	The Administration proposal would extend the work opportunity tax credit for one year(through June 30, 2000).  The proposal would also clarify the coordination of the WOTC and thewelfare-to-work tax credit with respect to an individual whose first year of employment does notcoincide with the employer's taxable year.

**2.  H.R. 81 (Mr. Bilirakis)**

	H.R. 81 would add a new targeted category of displaced homemakers to the credit.  Adisplaced homemaker is defined as an individual who: (1) has not worked in the labor force for atleast five years but rather performed unpaid services in the home for family members; and (2) hasbeen dependent on public assistance or the income of another family member but is no longersupported by that income or is currently receiving public assistance on account of dependentchildren in the home.  The bill would also repeal the expiration of the work opportunity tax creditfor purposes of the displaced homemaker targeted group.  

**3.  H.R. 585 (Mr. English)**

	H.R. 585 would allow the work opportunity tax credit to be claimed against either thetaxpayer's regular tax or alternative minimum tax ("AMT") liability (i.e., repealing the present-law limitations on the credit against the AMT).

**4.  H.R. 671 (Mr. Cardin, Mr. Stark, Mr. Matsui, Mr. Coyne, Mr. Jefferson)**

	In the context of a package of proposals to help foster children make the transition toindependent adults, H.R. 671 would add a new category of qualified foster care recipients to thecredit.  A qualified former foster care recipient is defined as an individual certified by a localdesignated agency as: (1) being at least age 18 but not 25 on the hiring date; and (2) on the daybefore attaining age 18, either being a recipient of foster care maintenance payments under aState plan approved under Title IV-E of the Social Security Act or in foster care under theresponsibility of a State.

**5.  H.R. 815 (Mr. Watts, Mr. Weller, Mr. Hulshof and others)**

	In the context of a package of proposals to designate renewal communities and providetax incentives thereto, H.R. 815 would expand the high-risk youth and qualified summer youthemployee categories to include qualifying individuals with a principal place of abode in renewalcommunities.  The maximum credit for these two categories also would be modified to 15percent of the first $10,000 of qualified first-year wages and 30 percent of the first $10,000 ofqualified second-year wages.

**6.  H.R. 998 (Mr. Hayes)**

	H.R. 998 would add a new category of rural area residents to the credit.  A rural arearesident is defined as any employee of an employer with respect to any period if: (1) substantiallyall the services performed in such period by the employee for the employer are performed withinan area determined by the Secretary of Agriculture to be a rural area; and (2) the principal placeof abode of the employee while performing such services is within such area.

**7.  H.R. 1084 (Ms. Dunn, Mr. Weller and others)**

	In the context of a larger tax relief package, H.R. 1084 would permanently extend thework opportunity tax credit.

**8.  H.R. 2101 (Mr. Houghton, Mr. Rangel, Mr. Weller, Mr. Lewis of Georgia, Mrs. Johnsonof Connecticut, Mr. Matsui, Mr. Ramsted, Mr. Hayworth, Mr. Lewis of Kentucky, Mr.Watkins, Mr. Levin, Mr. McNulty, Mr. Cardin, Mr. Neal of Massachusetts, Ms. Dunn, Mr.English, Mr. Foley, Mr. McInnis, Mrs. Thurman, Mr. Jefferson, Mr. Coyne, Mr. Becerra,Mr. Stark, Mr. Nussle, and others)**

	H.R. 2101 would permanently extend the work opportunity tax credit.  It would alsoconsolidate the work opportunity tax credit with the welfare-to-work tax credit ("WWTC") bymaking three principal changes to the WOTC.  First, the definition of eligible wages for WOTC(i.e. cash wages as defined for Federal Unemployment Tax purposes) would be expanded toinclude the broader wage base allowed under the WWTC.  Thus eligible wages under theconsolidated credit would include cash wages paid to an employee plus amounts paid by theemployer for the following: (1) educational assistance excludable under a section 127 program(or that would be excludable but for the expiration of sec. 127); (2) health plan coverage for theemployee, but not more than the applicable premium defined under section 4980B(f)(4); and (3)dependent care assistance excludable under section 129.  Second, the welfare-to-work targetedcategory would be added to the other targeted categories in the WOTC at a credit rate of 40percent of both first-year wages and second-year wages.  Third, the wage base for purposes of thewelfare-to-work targeted category alone, would be expanded to $10,000 of first-year wages and$10,000 of second-year wages.  The present-law WOTC wage base ($6,000 of first-year wages)would be unchanged for purposes of the other targeted groups.  Finally, H.R. 2101 would extendthe new consolidated credit to eligible tax-exempt employers by allowing the credit againstSocial Security tax liability for them.

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****FOOTNOTES****

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1.   This document may be cited as follows: Joint Committee on Taxation, *Description ofPresent Law and Proposals Relating to the Work Opportunity Tax Credit* (JCX-41-99),June 29, 1999.