The Use of Tax Subsidies 

for Employment 

A Report to Congress by the 

Departments of Labor 

and Treasury 

May 1986 
The Use of Tax Subsidies 

for Employntent 

A Report to Congress by the 

Departments of Labor 

and Treasury 

May 1986 

For ule by the Superintendent of Doeum~nc., U.S, ~mment Print.lna Office 

WuhincWn, D.C. 20402 
THE SECRETARY OF THE TREASURY 

WASHINGTON 

Hay 29, 1986 

Dear Mr. Chairman: 

Section 554 of Public Law 95-600, the Revenue Act of 1978, 

provides that "the Secretary of the Treasury and the Secretary of 

Labor shall jointly submit to the Committee on Ways and Means of 

the House of Representatives and to the Committee on Finance 

of the Senate a report on - 1) the effectiveness of the targeted 

jobs credit ..• in improving the employment situation of the 

targeted groups, and 2) the types of employers claiming such 

credit. The report .•. shall also include an evaluation of l) the 

effectiveness of the general jobs credit ••• in stimulating 

employment and enhancing economic growth and 2) the types of 

employers claiming such credit." 

Pursuant to that section, we hereby submit the "Report to 

Congress on the Use of Tax Subsidies for Employment." 

We are sending a similar letter to Senator Bob Packwood, Chairman 

of the Committee on Finance. 

Sincerely, 

W1ll1am 

;;4£.P~ E. Brock 

Secretary of Labor 

The Honorable Dan Rostenkowski 

Chairman 

Committee on Ways and Means 

House of Representatives 

Washington, D.C. 20515 

Enclosure 
THE SECRETARY OF THE TREASURY 

WASHINGTON 

!a y 29, 1986 

Dear Mr. Chairman: 

Section 554 of Public Law 95-600, the Revenue Act of 1978, 

provides that "the Secretary of the Treasury and the Secretary of 

Labor shall jointly submit to the Committee on Ways and Means of 

the House of Representatives and to the Committee on Finance 

of the Senate a report on - l) the effectiveness of the targeted 

jobs credit ... in improving the employment situation of the 

targeted groups, and 2) the types of employers claiming such 

credit. The report ... shall also include an evaluation of 

l) the effectiveness of the general jobs credit ... in stimulating 

employment and enhancing economic growth and 2) the types of 

employers c la imi ng such credit .. " 

Pursuant to that section, we hereby submit the "Report to 

Congress on the Use of Tax Subsidies for Employment." 

We are sending a similar letter to Representative 

Dan Rostenkowski , Chairman of the Committee on Ways and 

Means . 

Sincerely, 

~:. ?4~ Wlll1am E. Brock 

Secretary of Labor 

The Honorable Bob Packwood 

Chairman 

Committee on Finance 

United Sta tes SenQte 

Washington, D. C. 20510 

Enclosure 
TABLE OF CONTENTS 

THE USE OF TAX SUBSIDIES FOR EMPLOYMENT 

Page 

Chapter 1 - - I NTRODUCTION AND SUMMARY................. . ... 1 

I. Background of the Study....................... .. . 1 

II. Overview of th~ Report and its Pr incipal 

Findings.......... . ............ . ........ .. .... ... 1 

A. Objectives and Limitations of Employment 

Subsidies.......................... . ... .. . . . 1 

B. Legislative Histori es of the Jobs Tax 

Credits.... . . . ... ..... ......... .. ......... . .. 2 

C. Evaluation of the New Jobs Tax Credit........ 4 

D. Evaluation o f the Ini t ial Targeted Jobs 

Tax Credit (1979- June 1981 ).. ............ . . . . 5 

Chapter 2 -- OBJECTIVES AND LIMITATIONS OF EMPLOYMENT 

INCENTIVE POLICIES . ....... . ............ . .... 8 

I. Alternative Employment Incentive Designs..... . ... 8 

I I. The Effects of Employment Subsidies.. . . . . . . . . . . . . 9 

A. Permanent, Non-I ncremental, and 

Non-Targeted Subsidies . . ... ........ . .... ... . 9 

B. Temporary Subsidies......... . ................ 11 

c. Incremental Subsidies...... . ................. 12 

D. Targeted Subs idies........... . . . ..... . ..... . . 14 

E. The Design of Employment Subsidies... . ..... .. 14 

Chapter 3 --LEGISLATIVE HISTORY OF JOBS TAX CREDITS.... . 17 

I. The WIN/Welfare Tax Credit....................... 17 

II. The New Jobs Tax Credit . . . ....................... 19 

A. Purpose of the Legislation................... 19 

B. Legislative History of the New Jobs 

Tax Credit....... .. .......... . .. . ............ 19 

1. The Administration' s Proposal......... .. . 19 

2. The House Bill . . . . . . . . . . . . . . . . . . . . . . . . . . 19 

3. The Sena te Bill.......................... 21 

4 . Conference Committee............. . ....... 21 

c . Description of Final Legislation. . ........... 22 

( i ) 
Page 

III. The Targeted Jobs Tax Credit................... .. 22 

A. Purpose of the Legislation..... ... ....... .. .. 22 

B. Legislative History of the Targeted Jobs 

Tax Credit . ..... .... ......................... 22 

1 . The Administration's Proposal........... . 22 

2. The House Bill........................... 23 

3. The Senate Bill.......................... 24 

4. Conference Committee....... . ............. 25 

c. Description of Final Legislation............. 25 

D. The 1981 Amendments to the Targeted Jobs 

Tax Credit......................... . ......... 26 

E. The 1982 Amendments to the Targeted Jobs 

Tax Credit....... . ........................... 27 

F. The 1984 Amendments to the Targeted Jobs 

Tax Credit................................... 28 

Chapter 4 --THE NEW JOBS TAX CREDIT... . .. . .............. 29 

I. Administrative Aspects of the New Jobs 

Tax Credit (NJTC) Program........................ 29 

A. Defining the Credit's Base...... . ............ 29 

B. Efforts to Limit Artificial Expansions 

of the Credit Base. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 

1. Regulations Covering Controlled 

Groups of Businesses..................... 31 

2. Rules for New Businesses................. 32 

3. Credit Pass-Through Provisions........... 32 

C. Informing Taxpayers of the Credit............ 33 

II. Statistical Summary.............................. 33 

A. Utilization of the Credit............ .. ...... 33 

B. Impact of Cred i t Limitations................. 37 

1. The New Business Limit........... .. ...... 40 

2. The Wage Bill Limit...................... 40 

3. The Small Business Limit................. 41 

4. The Tax Liability Limit.................. 42 

c. Differential Impact of the Credit by 

Industry and Firm Size..... . ................. 45 

D. The Budget Cost of the Credit................ 48 

III. Evaluation of Effectiveness.. . ................... 48 

A. Effect on Employment......................... SO 

1. An Incremental Employment Incentive...... SO 

a . Problems of Defining the Base of 

an Incremental Employment Incentive.. 50 

b. Implications of the New Jobs Tax 

Credit Base.......................... 51 

( i i ) 
Page 

2. Value of the Credit for Expanding 

Employment. . .... . .. . . . . . . . . . . . . . . . . . . . . . . 51 

3. Evaluation of the NJTC as an 

Employment Incentive.... . ......... . .. . ... 55 

a. The Impact of the Credit Limits, 

Qualification Requirements, and 

Imperfect Knowledge of the Credit.... 55 

b. Labor Department Studies.............. 57 

B. Effects of the New Jobs Tax Credit on 

Small Business........ . ...................... 59 

C. Assistance to the Handicapped................ 61 

D. Summary..... . .. .. ................ . ........... 61 

Chapter 5 --THE TARGETED JOBS TAX CREDIT..... . ... . ...... 63 

I. Administrative Aspects of the TJTC Program.... . . 63 

A. The TJTC Certification System................ 63 

1. The Certification System For Groups 

Other Than Cooperative Education Students 64 

2. The Certification System for Cooperative 

Education Students . ...................... 65 

B. Major Factors Shaping Administration of 

the Credit.... . .......... ...................... 66 

1. Establishment of Certification Targets... 66 

2. Provisions for Verifying the Eligibility 

of Economically Disadvantaged Individuals 66 

3. Retroactive Certifications............... 67 

4. Funding for Administration............... 68 

C. Other Aspects of TJTC Program Administration. 69 

1. Promotion and Information................ 69 

2. Treasury Regulations..................... 69 

II. Statistical Summary.. . ........................... 70 

A. Certification Data........................... 70 

1. The Initial TJTC Program................. 70 

2. Voucheri ng and Certification Activity 

Since the 1981 Amendments................ 74 

B. Employer Income Tax Return Data.............. 79 

1. Description of the Data.................. 79 

2 . Limitations of the Data.................. 79 

3. The Results.............................. 80 

a. Use of the Targeted Jobs Tax Credit.. 80 

b. Patterns of TJTC Use.... . ............ 82 

c. Impact of the TJTC Limitations....... 86 

( i i i ) 
Page 

III . Evaluation o f Effe c tivene ss ... . . .. . .......... . .. . 89 

A. Utilization of the Targeted Jobs Tax Credit.. 89 

1. The TJTC Penetration Rate................ 90 

2. The TJTC Take Up Rate : A DOL Employer 

Surve y.. ... ... . . . .............. . ... . ..... 91 

3 . Reasons for the Low Penetration and 

Take-up Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 

a. Knowledge of the Credit.............. 92 

b . Insufficient Value of the Credit... . . 95 

c. Low Level of Administrative Activity. 96 

d . Acceptance and Knowledge of TJTC 

by the Certifying Agencies........ . .. 97 

e. Search Costs......................... 99 

f . Disadvantages of the Tax Credit 

Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 

g. Negative Stereotyping of TJTC 

Eligible s ..... .. . ... ..... .. ....... . .. 100 

h. Fe~r of Violati ng Fair Hiring or Pr~ acy Laws... . ..................... 102 

I v . 5 umma r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . • • . . . . . . . . . . . . 1 0 2 

A. The Targeted Jobs Tax Credit as an Employment 

Incenti v e. . .... . . .. ..... .. ...... .. .. . ... . ... . 103 

1 . The Effect of the TJTC on Targeted 

Employment... ... ..... .. ..... . . . ... . ..... . 103 

2. The Budget Cost o f the TJTC...... . . . ...... 105 

B. Other Effects of the Targeted Jobs Tax Credit 106 

1. Effect on Employment of Noneligib1e 

Wor kers and on Total Employment.... ..... . 106 

2 . Effect on Target Group Wages...... . . . .... 106 

3. Effect on Hours and Tenure.......... ... .. 108 

c. Conclusi on. ... . . .. . . .. ... ... ........ ... . ... .. 109 

Appendix A -- NEW JOBS TAX CREDIT DATA 110 

I. Descripti on df the Data... . .. .. .................. 110 

A. Limitat i ons of Data...... .. .......... ...... .. 110 

B. Corporate Income Tax Return samples..... . .... 110 

C. Estimat i ng FUTA Base Growth Rates. . . .. . . ..... 111 

Appendix B - - TARGETED JOBS TAX CREDIT DATA 112 

I . Desc r iption of TJTC Employer Income Tax Return 

II. 

I I I. 

IV. 

Data . . ...... ... ....... .. ... .. ............ .. ..... . 

Adjustment for Potential Transcription Errors . . .. Summaries of Evaluations of TJTC Implementation .. Desc r ipt ion o f t h e Penetr a t i on Rate Calcula t ions. 

( i v ) 

112 

112 

113 

118 
LIST OF TABLES 

Page 

4.1 Measured Employment Growth versus Incremental 

Employment Growth... . . .. .. . ...... . .... ......... ... . 30 

4.2 Distribution of Firms and Employment by FUTA Base 

Growth and Wage Bill Growth Between 1976 and 1977.. 35 

4.3 Use of New Jobs Tax Credit by Industry- 1977.. .... 36 

4.4 Use of the New Jpbs Tax credit By Size of Firm1977.................. ........... .................. 38 

4.5 Impact of the New Jobs Tax Credit Limits - 1977 and 

1978.............................. . .... ........ .... 39 

4.6 Impact of the New Jobs Tax Credit Limits Including 

the Tax Liability Limit -1977 and 1978........ . .... 43 

4.7 Employment Growth in Corporations by the Value 

of Credit Received- 1977.... ..... .. . .............. 44 

4.8 New Jobs Tax Credit Claimed by Size of Firm1977 and 1978 ............... : ...................... 46 

4.9 Corporate Claims for the New Jobs Tax Credit, 

by Industry- 1977 and 1978... .. . . ................. 47 

4.10 New Jobs Tax Credit as a Proportion of Business 

Receipts by Industry- 1977.......... . .. .. . . . . . . .. . 49 

4.11 Impact of the Small Business Limit By Size of Firm - 1977..................... . ....................... 60 

5.1 Targeted Jobs Tax Credit Vouchers and Certifications 

Issued by Target Group.............................. 71 

5.2 Certifications for Target Groups Per Quarter Through September 30, 1981............ . ... ......... .... ..... 72 

5.3 Demographic Characteristics of Cer tified Individuals 73 

5.4 Occupations of Certified Individuals.. ........ ...... 75 

( v ) 
Page 

5 . 5 Starting Wage Rates for Certified Individuals....... 76 

5.6 Certifications by Target Group Before and After 

the 1981 Amendments to the TJTC. . . . . . . . . . . . . . . . . . . . . 77 

5.7 Number of Corporations with Early Income Tax Returns 

Claiming the Targeted Jobs Tax Credit, by Industry - 1979.. . ..... .. ... .. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 81 

5.8 Number of Corporations with Early Income Tax Returns 

Claiming the Targeted Jobs Tax Credit, by Size of 

Firm- 1979.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 

5.9 Number of Credits Claimed by Industry by Size of 

Firm - 1979.... . ...... ... ...... . ....... . . . .......... 84 

5 . 10 Number and Percentage Distribution of Credits 

Claimed and Certifications- 1979.... .. .. . . ......... 85 

5.11 Type of Targeted worker Hired Within Industries - 1979.......... . ..... .. .... .. ... . .... . ... .. .. . ....... 87 

5.12 Percentage Distribution of Credits Claimed by Industry, for Each Targeted Group- 1979.... . . ... ... 88 

5.13 Estimated Penetration Rates, for Selected TJTC 

Targeted Groups, Fiscal Year 1981........... . ...... . 90 

5.14 Comparison of Hourly Wage Rate Distribution of 

TJTC Workers and Employment Service Placements - Fiscal Year 1980... . ....... ... . . .................... 107 

(vi ) 
Chapter 1 

INTRODUCTION AND SUMMARY 

I. Background of the Study 

This report has been prepared to comply with Section 554 of 

Public Law 95-600 (The Revenue Act of 1978), which directed the 

Department of the Treasury and the Department of Labor to prepare 

a report evaluating two provisions of the Internal Revenue Code: 

(1) The New Jobs Tax Credit (NJTC), which was enacted 

on May 23, 1977, as part of The Tax Reduction and 

Simplification Act of 1977; and 

(2) The Targeted Jobs Tax Credit (TJTC), which was enacted 

on November 6, 1978, as part of The Revenue Act of 1978. 

The statute required the report to cover the following 

topics: the types of employers claiming the credits; the effectiveness of the TJTC in increasing employment of the targeted 

groups; and the effectiveness of the NJTC in stimulating employment and enhancing economic growth, .. . . ' -.. ~.;t_ •. 

The Targeted Jobs Tax Credi~ ha-s been amended three times 

during the preparation of this report. Although the report 

includes some discussion of the amended versions of the TJTC, the 

analysis in the report focuses on the initial version. In light 

of changes in the credit's provisions, this report's findings will not necessarily apply to the current version of the Targeted 

Jobs Tax Credit. 

I I. Overview of the Re'port and its Principal Findings 

To provide perspective for the evaluations of the NJTC and 

the TJTC, Chapter 2 contains a general discussion of employment 

subsidies. 

A. Objectives and Limitations of Employment Subsidies 

All employment subsidies have the objective of increasing employment, at least for certain target groups, if not aggregate 

employment. A general result which emerges from the discussion 

in Chapter 2 is that employment subsidies may also reduce employment for certain firms and workers. An employment subsidy may 

tend to favor certain workers or firms, even when the subsidy 

is not formally targeted. The workers or firms which are not 

favored are placed at a competitive disadvantage, which may result in job losses. Adverse employment effects may also result 

from government financing of the subsidy. On the other hand, 

employment subsidies may increase the employment of workers who 

are complementary to subsidized labor. 
-2-

Temporary employment subsidies may cause changes in the time 

pattern of employment. Employment gains while the subsidy is in 

effect may come partly at the expense of future employment since 

a temporary subsidy provides an incentive to move planned produc- tion and maintenance activities forward. However, the employment 

gains due to a temporary subsidy are not necessarily confined to 

the period during which the subsidy is in effect due to fixed 

costs, such as training costs, associated with hiring the 

subsidized employees. 

A general employment subsidy can be claimed against all of a 

firm's employment--both employment induced by the subsidy and 

employment that would have occurred in the absence of the 

subsidy. In contrast, an incremental employment subsidy attempts 

to limit payment of the subsidy to employment that was induced by 

the subsidy. In actual practice, induced employment can be 

estimated only with considerable error. Consequently, some firms 

are effectively made ineligible for an incremental subsidy, while 

others will receive payment for some employment that would have 

existed in the absence of the subsidy. Ineligible firms are 

placed at a competitive disadvantage . 

B. Legislative Histories of the Jobs Tax Credits 

Chapter 3 presents legislative histories of the NJTC, the 

TJTC, and an earlier employment tax credit, the Work Incentive 

Program (WIN)jWelfare credit. In addition to being temporary, 

the NJTC and TJTC shared several other features: 

(1) both had ceilings on subsidized wages per employee which 

encouraged employers to substitute low-wage labor for 

high-wage labor; 

(2) tax-exempt and nonbusiness employers were ineligible for 

both credits; and 

(3) employers' tax deductions for wages paid were reduced by 

the amount of the credit received. 

Otherwise the two credits differed fundamentally in their design. The NJTC was intended to be an incremental credit for any worker 

hired; the TJTC could be earned only for workers belonging to 

certain targeted population groups and was not intended to be 

incremental. 

The New Jobs Tax Credit. The NJTC was enacted on May 23, 

1977, and expired at the end of 1978 . Subject to the limitations 

noted below, the NJTC entitled employers to a credit equal to 

50 percent of the excess of the firm's Federal Unemployment Tax 

Act (FUTA) base in the current year over 102 percent of the 

firm's FUTA base in the previous year. For purposes of computing 

NJTC credits, the firm's FUTA base was defined as the first 

$4,200 of annual wages paid to each individual employee, summed 
-3-

across all employees who were on the payroll at any point in the 

year. Since most jobs have annual wages that exceed $4,200, 

growth in the firm's FUTA base and growth in its employment were 

assumed to be closely correlated. The threshold level of the 

current year FUTA base--102 percent of the previous year FUTA 

base--gave the NJTC its incremental feature. 

In enacting the credit, Congress also placed various 

restrictions on the NJTC to limit its cost and to preserve its 

incremental nature. These were: (1} the new business limit, 

which was intended to reduce the special labor cost advantages 

that new businesses would receive from the credit; (2) the wage 

bill limit, which reduced the incentive for employers to increase 

their credit base by substituting part-time workers for full-time 

workers or by increasing labor turnover; and (3} the small 

business limit, a $100,000 ceiling on the amount of credit that 

an employer could earn in any one year. Amounts of New Jobs 

Credits in excess of a firm's current year tax liability could be 

used to offset the firm's tax liabilities in the preceding three 

years or in the following seven years. 

The Targeted Jobs Tax Credit. The initial TJTC legislation 

distinguished seven groups whose members' wages were eligible 

for credits: (1} economically disadvantaged ex-convicts; (2) 

economically disadvantaged youth from 18 through 24 years old; 

(3} economically disadvantaged Vietnam-era veterans under age 35; 

(4} handicapped vocational rehabilitation referrals; (5} youth, 

aged 16 through 19, in cooperative education programs; (6) 

general assistance recipients; and (7) Supplemental Security 

Income (SSI} recipients. In selecting these target groups, the 

intent of Congress was to improve the employability of individuals likely to have difficulty obtaining employment. 

As initially enacted, the TJTC could be claimed for wages 

paid or incurred during calendar years 1979-81 for employees who 

were hired after September 27, 1978, and whose eligibility was 

certified by a designated local agency. The TJTC provided a 

credit to employers equal to 50 percent of the first $6,000 of 

wages paid to each eligible worker in the first year of employment and 25 percent in the second year of employment. The amount 

of the credit was limited to 90 percent of current year tax 

liability, except that amounts in excess of the limit could be 

carried back three years or carried forward seven years. To 

limit layoffs of workers who were ineligible for the credit, the 

amount of subsidized wages was limited to 30 percent of the 

employer's FUTA base . 

Amendments made to the TJTC in 1981, 1982, and 1984 extended 

the life of the credit. The amendments to the TJTC changed the 

target groups that were eligible for the credit and restricted 

the extent to which credits could be claimed for workers who were 

certified after the date of hire. 
-4-

c. Evaluation of the New Jobs Tax Credit 

Chapter 4 evaluates the experience with the New Jobs Tax 

Credit. The first section focuses on the administrative problems 

connected with the credit. The second section presents information on the types of employers who used the credit, estimates of 

the credit's cost, and other information. The final section 

evaluates the effectiveness of the NJTC in stimulating additional 

employment. Chapter 5, which evaluates the TJTC, has a similar 

format. 

A problem in designing an incremental employment subsidy is 

the measurement of incremental employment. The New Jobs Tax 

Credit used the FUTA base growth above 102 percent of the 

previous year FUTA base as an imperfect proxy for induced employment growth. Since in the credit's absence firms would have 

varying rates of employment growth, using a proxy and the 

arbitrary 102 percent requirement results in an equity problem 

across labor markets. Some firms would be eligible even though 

their employment growth rate would have substantially exceeded 

2 percent without the credit, while other firms deciding to 

replace attrition in a depressed market would not be eligible 

for the credit. 

Corporate tax returns from 1977 and 1978 were used to examine 

employers' use of the NJTC and the impact of the credit's various 

limitations. Approximately one-half of the employment in the 

corporate sector was in firms that were eligible for the NJTC. 

The percentage of corporations eligible for the credit that 

actually claimed it--the take-up rate--was an estimated 31 percent in 1977 and probably much higher in 1978. Both the eligibility rate and the take-up rate were lower for small companies. 

Corporations which were affected by the limitations on the 

amount of credit earned--the wage bill, small business, and new 

business limits--accounted for 70 percent of employment growth in 

corporations claiming the NJTC. Approximately 50 percent of 

employment growth in corporations claiming the credit occurred in 

firms affected by the small business limit, 10-12 percent in 

firms affected by the new business limit, and 6-8 percent in 

firms affected by the wage bill limit. Approximately one-third 

of all corporations claiming the credit were affected by at least 

one of these limitations. 

The tax liability limit affected over one-half of all 

corporations claiming the NJTC. Only about one-half of the 

credits earned by corporations could be claimed against current 

year tax liability . The value of each dollar of the remaining 

credits was typically less than one dollar, since most were 

either never received or were claimed in some future year. 
- 5-

The amount of NJTC claimed was greater for large than for 

small companies. Due to the small business limit, however, the 

credit claimed as a percent of labor cost was higher for small 

firms. The benefits from the NJTC were unevenly distributed 

across industries. The industry distribution of NJTC claimed is 

markedly different from the industry distribution of business 

receipts. 

The available evidence is not sufficient to measure the 

NJTC's impact on the growth of aggregate employment and output. 

Due to the credit's eligibility requirements and limitations, 

only an estimated 30 percent of the employment growth in taxable 

firms occurred in firms for which the NJTC provided an employment incentive. For these firms, the credit typically reduced the 

first-year compensation costs of eligible additional workers by 

26 percent in 1977 and 20 percent in 1978. The fact that the 

credit only subsidized the first year of an eligible worker's 

wages limited its employment incentive, especially for firms 

where hiring and training costs accounted for a large part of 

total labor costs. The credit's employment incentive was also 

limited by its complexity, which made many employers uncertain 

about the relationship between their employment decisions and the 

amount of the credit that they would earn . 

Evidence from two studies indicates that the New Jobs Tax 

Credit increased employment in certain firms and industries such 

as construction in 1977-78. However, these employment gains may 

have been offset by employment losses in other firms and 

industries. Therefore, it cannot be concluded from these studies 

that the NJTC increased aggregate employment. 

The estimated total budgetary cost of the two-year (1977-78} 

NJTC was $9.7 billion. 

D. Evaluation of the Initial Targeted Jobs Tax Credit 

{1979-June 1981) 

To ensure that the credit was claimed only for eligible employees, the statutory provisions of the TJTC required that 

eligibility be certified by a designated local agency. The Labor 

Department was given official responsibility for administering the certification system. 

The Internal Revenue Service was responsible for auditing tax 

returns to ensure that the amount of credit taken was correct. 

Both departments shared responsibility for informing taxpayers of 

the program's existence. 

The actual implementation of the Targeted Jobs Tax Credit by local administering agencies did not meet initial expectations, 

due in part to the limited funding for this purpose. In many 

areas, the local administering agencies were slow to establish 

certification procedures. 
- 6-

The Department of Labor certification records show that the 

credit was claimed most often for the two targeted youth groups. Of the 605,000 certifi cations issued through June 1981 (prior 

to the 1981 TJTC amendments), 45 percent were for cooperative education students and 39 percent were for economically disadvantaged youth. Among target groups other than cooperative education students, three- quarters of the workers certified in fiscal 

year (FY) 1980 earned initial wage rates of $4.00 or less. Among these same target groups, nearly two-thirds of the workers certified during the first three quarters of FY 1981 were certified at 

least 15 days after their date of hire. 

An early sample of 1979 corporate income tax returns was used 

to exami ne which employers were using the credit. Manufacturing 

and retail trade firms claimed the TJTC most often, but less than 

2 percent of these firms claimed the credit. The take - up rate 

among all corporations was less than 1 percent.!/ "Industrial" 

firms, such as those engaged in manufacturing, construction, and 

mining, claimed the TJTC primarily for economically disadvantaged individuals and individuals eligible for welfare programs. "Commercial" firms, such as those engaged in retail trade, 

finance, and services, claimed the credit primarily for cooper- ative education students. 

The TJTC penetration rate--defined as the percent of 

eligible hires for which the TJTC was claimed--was estimated 

to be 21-23 percent among cooperative education students during FY 1981. For no other target group was the estimated penetration 

rate greater than 10 percent. 

No single explanation can be cited for the credit's low 

penetration rate. A key factor was the cost to the employer of 

identifying eligible workers. In addition to the direct costs of 

screening job applicants for TJTC eligibility, risks of violating fair hiring or privacy laws were also perceived to be costs. For 

many employers, the value of the credit was reduced by the tax 

liability limit. Other factors contributing to the low penetra- tion rates include: .i nadequate implementation of the credit by 

the administering agencies; disadvantages of administering a 

subsidy through the tax system; and a negative stereotyping of 

TJTC eligibles by empl oyers. 

It is clear from the low penetration rates that the TJTC had 

a small impact on target group employment. It is not known how 

this impact compares to the employment that was subsidized by the 

credit. The evidence on this question that comes from employer 

! I Total TJTC certifications increased from 202 ,261 in fiscal 

year 1982 to 563,381 in fiscal year 1984. These figures 

exclude cooperative education students. It is known that 

fewer than 8,400 certifications were issued for cooperative education students in fiscal year 1984. 
- 7-

surveys is inconclusive. For many certified workers, the 

eligibility determination was made well after the date of hire. 

In many such cases, the hiring dec ision could not have been 

influenced by the credit because the employer was unaware of the 

worker's eligibility at the time the hiring decision was made. 

The evidence from two experiments suggests that workers who 

advertised their TJTC eligibility to prospective employers may 

not have improved their chances of being hired. 

The TJTC penetration rate was highest for cooperative 

education students. On the basis of interviews with cooperative 

education staff, a Labor Department study concluded that the TJTC 

attracted few additional employers to cooperative education 

programs during the 1979 academic year. 

The direct budgetary cost of the TJTC was $73 0 million during 

fiscal years 1979-81. 
-8 -

Chapter 2 

OBJECTIVES AND LIMITATIONS OF EMPLOYMENT INCENTIVE POLICIES 

This chapter discusses considerations relevant for analyzing 

the employment impact of government programs that subsidize labor 

costs. The main purpose of these programs is to provide 

employers with incentives to increase employment of eligible 

members of the labor force. The effectiveness of such programs depends both on their design and on the characteristics of the 

labor market . 

I. Alternative Employment Incentive Designs 

During the past 10 years, Federal employment incentives have 

had two objectives. "Targeted" employment incentives have been 

enacted to increase the employment of eligible members of the 

labor force by reducing employers' costs of using these workers 

relative to the costs of using other productive resources. Other 

employment incentive policies have been intended to increase the 

total employment in the economy. 

Hiring incentive programs can provide direct cash payments, 

such as the on-the-job training grants to reimburse employers for 

the costs of hiring and training eligible workers under the Jobs 

Training Partnership Act. Alternatively, such payments can be 

made by reducing firms' tax liabilities--the tax credit approach 

taken by Congress in enacting the NJTC and the TJTC. 

Employment subsidies can be made available for all labor 

costs. Such subsidies are "general" subsidies because they are 

available to defray some fraction of the costs of employing all 

eligible workers. ''Incremental" subsidies have also been used. 

"Incremental" wage subsidies are only available if some measure 

of eligible employment grows beyond a certain threshold. 

Permanent subsidies will clearly have greater long-run 

employment impacts than temporary subsidies. The impact of a 

short-lived subsidy may consist largely of affecting the timing of hiring decisions already made. However, employment subsidies 

with different durations also have different costs and may serve 

different purposes. Such factors should figure in evaluations of 

employment incentive programs. 

The New Jobs Tax Credit (NJTC) and the Targeted Jobs Tax 

Credit (TJTC) have a number of elements in common. 

o Both credits were temporary . 

o Both credits. were specifically designed to encourage 

the substitution of labor for capital in the production 

process. 
-9-

o Both credits provided greater incentives to u se low-wage 

labo r rather than high-wage labor. 

o Tax-e xempt and nonbusiness employers were ineligible for 

both credits. 

o A number of limitations were placed on bo th the NJTC and 

the TJTC to limi t their costs, to focus the credits on 

particular employers or employees, and to preserve the 

value of the credits as hiring incen tive s. 

The credjts are disti nguished mainly by differences in 

coverage . The TJTC could be earned for each worke r hired from 

certain population subgroups . By contrast, the NJTC was available for any worker hired, but on ly to the extent that total 

employment in the firm increased beyond a certain l e vel. 

II. The Effects of Employment Subsidies 

The analysis of the NJTC and the TJTC wil l be facilitated by 

first considering how a permanent, nonincremen ta l and nontargeted 

labor subsidy affects employment. Subsequently, the additional 

considerations relevant to analyzing temporary, incremental, and 

targeted subsidies are presented. Finally, the effect of particular design features, including the· provisions for administering 

and publicizing the subsidy, are dis cussed. 

A. Permanent, Nonincremental, and Nontargeted Subsidies 

The employment effec t of labor subsidy will depend on: 

1)· the technological s ubstitutability of labor for other 

factors of production--capital, ene rgy, etc.--in production 

processes; 2) labor's share of total production costs; 3) the 

substitutability of labor-intensive products for other products 

in consumers' budgets; 4) the res ponsi veness of the supply of 

labor to changes in the wage rate; 5) how the subsidy is 

financed; and 6) the design of the subsidy, including the provisions for administering and publicizing it. 

The individual firm, with a given production process, is 

a convenient point of reference for analyzing the incentive 

effects of an employment subsidy. First, by reducing the cost 

of employing labor, the s ubsidy encourages the employer to adopt 

production processes that utilize more labor in place of other 

productive factors to produce any given level of output. This 

is the subsidy's factor substitution effect . Second, it is 

necessary to account for the employment effects of all changes in output induced by the subsi dy . Changes in a firm's employment 

due to changes in the amount of output it produces is ca lled the 

subsidy's scale effect. 
- 10-

For a firm receiving the subsidy, the substitution and scale 

effects can normally be expected to increase the employment of 

labor. However, to evaluate the economy-wide effect of a 

subsidy, the effect on prices and outputs in all nonrecipient 

firms as well as in ~11 other recipient firms' must be considered. When these market factors are considered, the subsidy's 

net impact on employment may be negative for some firms, due to: 

(l) the output effects of the financing of the subsidy, and (2) the substitution between products which require different 

relative amounts of labor, which arises because the subsidy 

affects the prices of such goods differently. 

The net impact of an employment subsidy among firms will 

be shaped by how it is financed and upon the reaction of the 

monetary authorities to the method of finance. The budget 

cost of the subsidy must be financed by decreases in government 

expenditures, increases in government borrowing, or increases 

in taxes. As a result of these associated fiscal changes, the 

subsidy's net impact on output may be negative for many firms. 

In general, the subsidy's net impact on output is most likely 

to be negative for the least labor-intensive firms, since the 

subsidy's net cost reduction would be relatively low for such 

firms. Given that the subsidy may induce only a slight 

substitution of labor for other factors in many firms, the 

possibility of a negative net impact on a firm's output implies 

that the subsidy's net impact on employment could be negative. 

The method of financing the subsidy may also affect the cost of 

labor relative to other factors. 

The degree to which buyers are willing to purchase more 

labor-intensive products as their relative prices decrease will 

be one of the determinants of the subsidy's impact on total 

employment. An employment subsidy will tend to reduce the prices 

of labor-intensive products relative to the prices of non-laborintensive products. The change in relative product prices may be 

accompanied by an overall decline in the output of some nonlabor-intensive products. Buyers may shift their purchases 

toward the now cheaper products, away from the non-laborintensive products. However, the subsidy could have a positive 

net impact on the output of non-labor-intensive products which 

are complements of labor-intensive products. 

The effect of a labor subsidy on employment also depends on 

the responsiveness of labor supply to wages. In general, the 

employment effects of a wage subs idy will be greater, the more 
-11-

the quantity of labor supplied responds to an increase in wage 

rates.l; Furthermore, a subsidy will generally increase the 

wages received by workers and reduce the net cost of labor. 

Employment can increase if either the number of employees or 

the number of hours worked per employee increase. The impact of 

a labor subsidy on these two dimensions of labor input will be 

determined by whether the subsidy applies to all wages or is paid 

per employee. In the case of a pure wage subsidy, employers will 

have an incentive to substitute more hours per worker for fewer 

employees, since a wage subsidy will not reduce whatever fixed 

hiring and training costs are associated with each new worker on 

an employer's payroll. A subsidy per employee will encourage 

employers to favor part-time workers over full-time workers. 

B. Temporary Subsidies 

Additional considerations are relevant when an employment 

subsidy is temporary. The amount of factor substitution induced 

by a short-term subsidy will be limited by any fixed costs 

associated with employing capital and labor. Fixed costs reflect 

the costs of adjusting factor quantities--of selecting and 

training new workers, of installing or removing machinery. Due 

to these costs, most capital acquisition decisions and many 

employment decisions are long-run decisions.~/ 

A short-lived subsidy will be more likely to influence the 

timing of factor use. For example, while the subsidy is in 

effect, a firm could substitute labor for capital by postponing a 

planned capital acquisition until after the subsidy lapses. A 

/ 

If there is substantial structural unemployment in a labor 

market, labor supply will tend to be highly responsive to 

wage rates. It is frequently contended that structural 

unemployment is caused by market wages which are above the 

market-clearing level because of legal or institutional 

constraints. 

A simple example can illustrate this point. Suppose that a 

firm had planned to keep its production and input levels 

unchanged for several years. An employment subsidy is then 

introduced which reduces the annual cost of an additional 

worker from $10,000 to $8,000 during the one year in which 

the subsidy is in effect. Without any change in output, the 

additional worker could substitute for one machine which 

costs $9,000 annually. If there were no adjustment costs, 

then the firm would replace the machine with the additional 

worker. If, on the other hand, it costs $2,000 to remove or 

install the machine, the firm would not make the substitution. Equivalently, the firm would not make the substitution if there were a $1,500 training and hiring cost per 

worker. 
- 12-

short-lived subsidy could also increase employment without 

increasing output in some firms by inducing decreases in the 

rate of utilization of the capital stock. 

The costs of adjusting the stock of capital and the costs 

of selecting and training employees also tend to limit the 

scale effect of a temporary employment subsidy. Nevertheless, 

a temporary subsidy may induce some firms to accelerate the 

implementation of expansion plans. In any case, the costs of 

adjusting the capital stock to accomodate temporary increases 

in output will tend to be lower if the utilization of capital 

inputs can be temporarily increased. 

Part of any increase in output induced by a subsidy may 

simply represent a rescheduling of production, which could occur 

by accumulation of an inventory. To the extent this occurs, 

decreases in output and employment will occur after the subsidy 

expires. Similarly, an employment subsidy could result in a 

rescheduling of when labor inputs are utilized . Employers 

generally have some discretion when to schedule workers for 

activities like building and equipment maintenance . Employers 

clearly would have an incentive t o schedule these activities for 

the period when the subsidy was in effect. Again, this implies 

that increases in employment that are induced by a temporary 

subsidy may be offset by subsequent decreases in employment. 

Substitution of labor used in one period for labor used in 

subsequent periods should not necessarily be viewed as defeating 

the purpose of a temporary subsidy since the policy objective may 

have been to alter the time path of employment. 

Despite the possibilities for rescheduling production and 

labor usage, the employment effect of a temporary wage subsidy 

will not necessarily be confined to the duration of the subsidy. 

After the subsidy ends, an employer may temporarily retain some 

of the additional workers. But the employer would not replace 

any workers that quit as long as his employment level is greater 

than what it would have been in the absence of the subsidy. 

Finally, like a permanent wage subsidy, a temporary wage 

subsidy will encourage employers to substitute more hours for 

existing workers in place of hiring additional workers . Indeed 

this effect will be more pronounced, because any hiring and 

training costs that result from increasing the number of workers 

must be recouped over a shorter period for temporary workers. 

C. Incremental Subsidies 

General employment subsidies inevitably subsidize much 

employment that would have existed even without the subsidy. 

Some of the subsidized firms may make no adjustments in their 
-13-

employment decisions . Incremental employment subsidies, like the 

NJTC, are intended to limit the extent of such windfalls and to 

thereby maximize the employment gain per dollar of subsidy. 

An incremental subsi dy would ideally be paid only for the 

wage costs of the increase in eligible employment due to the 

subsidy, that is, the ''incremental" employment. No payments would be made to employers who simply maintain their pre-subsidy 

employment levels, or who would have hired additional workers 

without the subsidy. 

As a practical matter, there is no sure way of identifying 

true incremental employment. Feasible procedures for estimating incremental employment are bound to be subject to large errors. 

If the normal employment level used to define incremental employment is overestimated for some firm, the employment incentive of 

the subsidy is reduced. If it is underestimated, the firm can 

reap windfalls. Policymakers are, of course, faced with a tradeoff between accuracy and administrative feasibility in devising procedures for estimating incremental employment. More accurate 

procedures can be expected to entail substantial costs for the 

government and employers. 

One procedure for estimating incremental employment simply 

assumes that in the absence of the credit all firms would 

experience the same employment growth rate. Each firm's employment in some base period is then pro jected into the future, using the predicted value of the aggregate employment growth rate . A 

subsidy which uses this procedure would put firms that have 

below-average employment growth rates at a competitive disadvantage. As a resu l t, employment in these firms may decline, 

offsetting the gains i n employment in the firms receiving the 

subsidy. For the NJTC, a special case of the above procedure was 

used in which the base period employment was defined as the 

measured employment in the firm in the previous year. The base 

period employment for a firm could therefore change as the credit 

entered its second year .l / 

ll Labor subsidies with this type of "floating" base period may give some firms an incentive which will work against the 

goal of maximizing the job gains per dollar of subsidy. 

Lower employment g rowth in one year will reduce the base for 

the following year. Hence, a firm which would otherwise not 

be increasing its workforce fast enough to claim the subsidy in any year may be able to capture the subsidy by deferring employment growth in one year until the next. Through this 

stratagem, the fi rm would delay employment growth in order to 

qualify fo r the subsidy in the second year. The firm could 

thus receive the subsidy without increasing its average employment level over the subsidy's lifetime. 
- 14-

D. Targeted Subsidies 

When an employment subsidy is targeted to a narrowly defined 

group of workers, for whom there are close substitute workers, 

the factor substitution effect between eligible and ineligible labor will far exceed that between eligible labor and other 

factors. In this ca~e, targeted subsidies could increase 

eligible employment without increasing total employment or 

output.i/ 

A wage subsidy could reduce employment for ineligible workers 

if it results in: 1) direct replacement of these workers by eligible workers in subsidized firms or 2) shifts in output (and employment) to subsidized firms from nonsubsidized firms. 

The subsidy could increase the employment of some ineligible workers whose labor is complementary with eligible labor or who 

are employed in making products that are complementary with the 

eligible labor-intensive products. While a targeted employment subsidy can increas~ eligible employment without increasing 

aggregate employment, this outcome does not necessarily indicate 

that the goal of the subsidy--more employment for the targeted 

groups--was not achieved. 

Essentially the same considerations are relevant to 

employment subsidies which are a vailable only to certain types of employers. The NJTC and TJTC were, for example, limited to 

taxable businesses. Similarly, the NJTC was limited to taxable 

firms with FUTA base growth in excess of 2 percent. Subsidies 

targeted to certain employers could reduce employment among 

ineligible employers as a result of greater product competition from eligible employers or higher wage costs. 

E. The Design of Employment Subsidies 

Several elements of the design of employment subsidies 

require particular attention. First, employers must be aware of 

the subsidy to benefit from it, and employer awareness may be 

! I A positive net impact on aggregate employment is more likely 

to occur in the case of a subsidy targeted to individuals 

with relatively elastic labor supplies. If the supply of 

the factors which bear the burden of financing the subsidy is generally less elastic, then the decline in their use 

may be relatively slight compared to the increase in 

targeted employment. 
-15-

influenced by efforts to publicize the subsidy and by the 

duration of the subsidy.5/ The time required for information 

to be disseminated may limit the utilization of short- lived 

subsidies. Second, the addition of a ceiling on the amount of 

subsidy that a firm can receive (such as the small business 

limitation in the NJTC) may considerably reduce the subsidy's 

employment incentive for hiring additional workers. Third, 

a wage subsidy will be claimed only if the employer perceives 

that the value of the subsidy exceeds the costs entailed in 

claiming the subsidy. 

Administration of an employment incentive involves resource 

costs distinct from the direct costs of the subsidy provided to 

participating employers. The administration of an employment 

incentive requires publicizing the program and a means of 

identifying eligible individuals. If administrative funding 

is not available, some of the administrative functions will be 

shifted to other groups or will not be done at all. For example, 

if eligible individuals cannot be easily identified and are not 

identified by the administering agency, a participating employer 

must bear some of the cost of identifying the eligible individuals. This reduces the net benefit of the subsidy to employers 

and thus, the employment effect for eligible individuals. 

For effective program implementation, the program's goals 

should also be consistent with the function of the agency 

designated to administer the program and its costs should be 

reflected in the agency's budget. An agency evaluated on the 

number of its direct job placements may give low priority to 

an employment incentive that does not require its placement s~rvices . The incentive to administer a subsidy program 

~/ Since the focus of this report is on the NJTC and the TJTC, 

the theoretical discussion in this chapter presumes that the 

labor subsidy is given to employers rather than to workers. 

Simple models of perfectly competitive labor markets would 

suggest that a labor subsidy paid to workers will have the 

same overall effec~s as an otherwise equivalent subsidy paid 

to employers. However, if the subsidy applies to a labor 

market which is effectively constrained by a legal minimum 

wage (or some other wage floor) , this equivalence does not 

hold. A subsidy paid to employers may have the desired 

effect of increasing employment, while a subsidy paid to 

workers may only exacerbate unemployment. For a fuller 

discussion of this issue see Robert I. Lerman, "A Comparison 

of Employer and Worker Wage Subsidies," in Jobs for Disadvantaged Workers, Robert H. Haveman and John L. Palmer, editors, 

Washington, DC: The Brookings Institution, 1982 . 
;

-16-

effectively may also be greater if the program's costs appear directly in the budget of the administering agency. If the 

subsidy is provided as a tax credit, however, the costs of the 

subsidy will show up primarily in reduced revenues with little, 

if any, impact on the administering agency's budget. 

The connection between a firm's employment decisions and the 

costs and benefits of an employment subsidy may frequently not be 

known with certainty at the time the hiring decisions are made. 

Uncertainty is apt to be especially great for subsidies, such as 

the NJTC, which have complex provisions. The fixed costs of 

claiming a subsidy may also be uncertain . Employers may, for 

example, believe that claiming an employment tax credit will 

increase their risk of a tax audit. In general, the existence of 

uncertainty can be expected to dilute the employment and output incentives of employment subsidies. 

Increased efforts to inform eligible employers of an 

employment subsidy may significantly enhance its effectiveness. 

When ignorance of the subsidy or its provisions is widespread, the subsidy may cause only a negligible increase in eligible employment. Under some circumstances, the subsidy could even 

cause eligible employment to decrease. 
-17-

Chapter 3 

LEGISLATIVE HISTORY OF JOBS TAX CREDITS 

The United States has had experience with three employment 

tax credits during the past ten years, the WIN/Welfare Tax 

Credit, the New Jobs Tax Credit, and the Targeted Jobs Tax 

Credit. A legislative history of the three jobs credits will 

help to provide a context for evaluating the latter two 

employment tax credits. The legislative histories show the 

intent of Congress in enacting these credits and the rationales 

for specific provisions in the final legislation. 

I. The WIN/Welfare Tax Credit 

The Work Incentive (WIN) Program was designed to expand 

employment opportunities for Aid to Families with Dependent 

Children (AFDC) recipients by providing them with job training 

and other benefits. 

Although AFDC appl{cants and recipients may register in WIN 

voluntarily, most registration (about 85 percent) is not by 

choice. All AFDC applicants or recipients must register in the 

WIN program unless they are exempt due to the need to care for 

children under age 6, illness, resi de nce in an area too remote 

from a WIN program center, etc. WIN registrants are required to 

take jobs offered them subject to federal standards regarding 

suitability which allow considerably fewer grounds for rejecting 

an offer than do the conditions applicable to unemployment 

insurance. 

The Revenue Act of 1971 contained a WIN tax credit for 

employers that hired welfare recipients enrolled in the Work 

Incentive (WIN) program. The WIN credit was intended to increase 

employment of welfare recipients in trades or businesses. The 

WIN credit has been available since 1971. 

As enacted, tax credits of 20 percent of first-year wages 

were provided to employers who hired WIN registrants. In any 

year, the total WIN credits claimed by an employer could not 

exceed one hundred percent of the first $25,000 of tax liability 

plus 50 percent of the tax liability in excess of $25,000. 

Employees for whom the credit was claimed had to be WIN 

registrants at the time of hire and to remain employed for a 

period of at least two years. The credit could be disallowed--

and recaptured--if the period of employment was shorter, unless 

the employee became disabled, was fired for misconduct, or quit. 

The WIN credit could only be claimed by trade or business 

employers. 
-18-

The welfare recipient credit was authorized by the Tax 

Reduction Act of 1975. The legislation essentially extenaed the 

WIN credit to individuals who had been recipients of AFDC for at 

least 90 days before being hired. The welfare credit, however, 

differed from the WIN credit in two respects: (1) the credit was 

available for employees who worked the equivalent of full-time 

for at least 30 days and (2) nonbusiness employers were permitted 

to claim welfare tax credits on up to $5,000 in wages. Only one 

tax credit--either the WIN or the Welfare Tax credit--was allowable to an employer for the wages paid to an eligible individual. 

The Welfare Tax Credit had a sunset provision of July 1, 1976. 

In the Tax Reform Act of 1976, Congress liberalized 

several provisions of each credit in order to increase use of 

the credits. The limit on the credits claimed was increased to 

100 percent of the first $50,000 of tax liability plus SO percent 

of the tax liability over $50,000. The required employee retention period for WIN credit was reduced to 180 days, and another 

exception to the recapture rule was added (for layoffs due to 

large reductions in business). The expiration date for the 

welfare credit was extended to January 1, 1980. 

Congress made further changes in these tax credit programs 

under the Revenue Act of 1978. These changes were made because 

the House and Senate Committees believed that the utilization of 

the credits was low due to insufficient publicity, complexity, 

and the low value of the credits. The legislation increased the 

WIN/Welfare credit to 50 percent of first-year wages up to $6,000 

per covered employee and 25 percent of the second year wages up 

to the same limit per employee. Nonbusiness employers could 

receive a credit of ·35 percent of the first $6,000 in wages per 

employee (only in the first year) up to a limit of $12,000 in 

wages for all eligible employees. The wage deduction for 

business employers was reduced by the amount of the credit, and 

the credit could be taken against one hundred percent of tax 

liability. The credit recapture rule under the WIN credit was 

repealed. The WIN and Welfare tax credits could be earned only 

for eligible individuals who worked at least 30 days on a 

substantially full-time basis. Finally, the credit's sunset date 

of January 1, 1980 ~as removed. 

At the beginning of 1982 the WIN/Welfare credit was subsumed 

under the Targeted Jobs Tax Credit; WIN/Welfare credit eligibles 

were made one of the TJTC target groups. Tax credits could no 

longer be claimed for employment with nonbusiness employers. 

Throughout its 11-year history, use of the WIN/Welfare Credit 

has been modest. The 1978 liberalization increased its use from 

about 35,000 credits annually, or 13 percent of total WIN jobs 

entries, to 53,000 credits in FY 1980, representing 19 percent 
- 19-

of WIN job entries. Measured against different bases, the WIN/ 

Welfare tax credit takes on less significance. In 1980, WIN/ 

Welfare tax credits were claimed for less than 10 percent of all 

new WIN registrants. The annual revenue loss attributable to the 

WIN/Welfare credit was $60 million in FY 1981. 

II. The New Jobs Tax Credits 

A. Purpose of the Legislation 

The Tax Reduction and Simplification Act of 1977 contained 

a New Jobs Tax Credit provision, which granted tax credits to 

certain employers whose labor costs had increased. In enacting 

the credit, Congress was principally trying to provide countercyclical fiscal stimulus by encouraging employment, particularly 

in small businesses. Another purpose of the credit was to help handicapped persons find employment. 

B. Legislative History of the New Jobs Tax Credit 

An employment tax credit was initially proposed as part of 

President Carter's January 31, 1977, proposal to stimulate the 

economy. The provision was substantially changed by the Congress 

and eventually enacted on May 23, 1977. 

1. The Administration's Proposal 

Originally, the Carter Adm1nistration recommended that 

businesses be given a choice of: (a) receiving a credit against 

income tax of 4 percent of Social Security payroll taxes paid by 

the employer or (b) an increase in the investment credit for 

machinery and equipment investments made in 1977. This choice of 

credits constituted the business portion of a package that also 

recommended tax cuts for individuals. Overall, the Treasury 

estimated that the business tax proposals would reduce tax 

liabilities by about $2.6 billion. 

2. The House Bill 

The Ways and Means Committee showed little enthusiasm for the 

proposed choice between an additional investment tax credit and 

the social security tax credit. The House committee members 

also regarded the employment tax credit proposed by the President 

as being too small to be meaningful; it would have had the effect 

of reducing the payroll tax rate by less than one-quarter of 

1 percentage point (4 percent of the employer ' s social security 

tax rate of 5.85 percent). In addition, the President's proposal 

was criticized because it would compensate employers regardless 

of whether or not they made an attempt to expand employment 

because of the credit. Committee members argued that the credit 

would stimulate employment more if it were made incremental. 

With an incremental c r edit, firms would receive a subsidy only 

if they expanded employment. 
- 20-

In des1gning an administrative ly f e as 1ble i nc remental credit, 

t he Committee wa s fac ed wi t h two major i ssues: (1) defining 

i ncremental employme nt a nd (2) dete rmi ni ng an appropriate measure 

of employment. The Committee reso l ved t he first issue by 

defining i ncrementai employment as only t hat employment which 

exceeded a certain threshold leve l. l / I n general, the threshold 

level would depend on employmen t growth in the p r evi ous year. 

The Commi ttee resolved the second issue by s ettling on an 

indirec t measure of employment . Not a l l f irms could be expected 

to have informati on on the number of empl oyees.2/ However, firms 

would have information on the wages they wer e required to pay tax 

on under the Federa l Unemployment Tax Act {FUTA ) . I n 1977, the 

FUTA base for each firm consisted of the f irst $4 ,2 00 of wages it 

paid to e ach employee . The Commi tte e staff suggested that, since 

growth i n a firm's FUTA base corres ponded r oughly to growth in 

the numbe r of its employee s, a firm 's FUTA base growth could be 

used a s an a pp roxima te mea s ure of i t s employmen t growth. The 

Committee decided to follow this sugges tion. 

Several features of the House bill ar e wo rth noting. First, 

the cred i t would ha ve been limited to 40 per c ent of the amount by 

which the credit base {de fined as the first $4,200 of FUTA wages 

paid to ea ch employee) in t he current ye a r exceeded 103 percent 

of the credit base i n the previous yea r . Second, since the 

Committee was interested in prov i di ng s peci al assistance to 

handicapped employees, it p r ovided an additional 10 percent 

credit for f i rms which hire d such employee s. Third, to focus 

relief on s mall businesse s, the Ho use decided to limit the credit 

available to $40 , 000 for a ny one f i rm. 

It was recognized that a firm migh t be able to expand its 

FUTA base , but not necessarily employment me asu r ed in total work 

hours, by r epl aci ng full-time employe es with pa r t-time employees. 

For e xampl e , by replac ing a full-time wor ke r ma king $8,400 with 

two pa r t-time workers earning $4,200 , a fi rm c ould double its 

credit base. In an attempt to prevent th i s response, the House 

commit t e e added a p rov i sion making the amount of c redit available 

t o an e~ployer dependent upon total wages, not j ust on the growth 

I 

The difficulties posed by these problems and the Committee's 

solutions to them are discussed more tho roughly in sections 

IA and IIIA of Chapter 4. 

Actu al l y, there are no reliable data on emp loyment in each 

fi r m i n the economy. Even if data on the number of employees 

we re available, another problem with an inc remental employment credit is whethe r an employer t ha t a dds a full-time 

worker shou ld receive more credi t t han an employe r that adds 

a pa r t - time worker . 
-21-

of the FUTA wage base. Specifically, the credit would only be 

available if current wages exceeded 103 percent of the total 

wages paid by an employer in the previous year. The rationale 

for this provision is as follows: Because of normal wage growth, 

a firm's wages might grow by 3 percent a year even with no growth in actual employment. Making the credit contingent on wages exceeding this ''no growth" limit would reduce the possibilities for increasing the credit base without increasing employment. Another feature of the House bill was that employers would not 

have been required to reduce the deduction for wages paid by the 

amount of credits received. 

3. The Senate Bill 

The Senate Finance Committee made a number of changes to the 

House bill: (1) the deduction for wages paid was reduced by the 

amount of the credit; (2) the $40,000 cap on the employment tax 

credit was removed to allow large employers to benefit from the 

credit by hiring additional employees; (3) the extra credit for 

hiring the handicapped was eliminated; (4) the Administration's 

approach of requiring firms to choose between an extra 2 percent 

investment tax credit and the new employment tax credit was 

reinstated. The committee recognized that new businesses with 

no wages in the previous year would always exceed a credit base 

growth threshold of zero. To reduce the advantages that new 

businesses would have, the committee limited the amount of wages 

eligible for the credit to 50 percent of the current year's unemployment insurance wages. Finally, to reduce the revenue 

loss resulting from its changes, the committee decided to reduce 

the rate of the credit from 40 percent to 25 percent. 

More changes were made when the legislation reached the 

Senate floor. First, the rate of the credit was increased from 

25 to 50 percent. Second, the Senate reinstituted a cap of 

$100,000 on the amount of credit a firm could earn in one year. 

An additional 10 percent tax credit was added for employers who 

hired certain disadvantaged individuals and the definition of 

these workers was broadened. The threshold eligibility requirement for credit base growth was lowered to 101 percent for 

employers in states with unemployment rates higher than 

7.5 percent. Finally, the full Senate eliminated the optional increase in the investment tax credit. 

4. Conference Committee 

The Conference Committee generally decided to follow the 

provisions adopted in the Senate passed bill. There were a 

few exceptions, however. The 103 percent credit base growth threshold was lowered to 102 percent. The lower threshold for 

high unemployment states was eliminated and the definition of 

disadvantaged workers eligible for the extra 10 percent credit 

was restricted to the handicapped as in the House bill. 
- 22-

C. Description of Final Legislation 

The New Jobs Tax Credit (NJTC) enacted by Congress on May 23, 

1977, provided a c redit for 50 percent of the difference between 

each employe r's cur r ent credit base--the first $4,200 of FUTA 

wages paid per employee--and 102 percent of the credit base for 

the prev i ous year. Empl oyers received an additional 10 percent 

credit on the first $4 , 200 of FUTA wages paid to handicapped 

people whose first such wages f rom the employer were paid in 1977 

or 1978. The credit claimed in any year could not exceed (1) 

50 percent of the difference between an employer's total wages in 

the year and 105 percent of total wages paid by the employer in 

the previous year; (2) 25 percent of the current year's unemployment insurance wage base; (3 ) $100,000; or (4) the employer's tax 

liability for the year.3/ Credits earned that exceeded the tax 

liability for a year could be carried back for three years and 

forward for seven years . In addition, the income tax deduction 

for wages and salaries had to be reduced by the amount of the 

credit. The NJTC l egislation had an expiration date of the end 

of 1978. 

III. The Targeted Jobs Tax Credit 

A. Purpose of the Legislation 

The Revenue Act of 1978 contained a Targeted Jobs Tax Credit 

provision, which granted tax credits to employers hiring certain 

types of targeted workers. The credit was intended to increase 

the employment of certain segments of the population which had 

relatively high ra t es of unemployment, and to increase participation in certain e duca tional programs . 

B. Legislative History of the Targeted Jobs Tax Credit 

1. The Admin i stration's Proposal 

In April 1978, Presi dent Ca rter proposed the Targeted Jobs 

Tax Cr edit (TJTC) a s part of his Urban Initiatives program. This 

provision was to replace t he existing, New Jobs Tax Credit (NJTC) which rewarded employers for increases in total employment. The 

11 The $100,00 0 limit could be exce ed ed if handicapped workers 

were hir ed. Special add itional r ul e s were provided for 

agricultura l ~n d r a ilroad employees not covered by FUTA 

unemployment 1nsurance. Mo r e ove r, all employees of corporations that wer e membe rs of the same c on t rolled group of 

corporations were treated as employees of a single employer, 

and special adjustmen t s had to be made for corporate 

acquisitions or disposi t i ons . 
-23-

credit, as proposed, was to be focused on young people from 

low-income families, who as a group were experiencing high rates 

of unemployment. Special employment incentives were believed to 

be necessary for this group even when the national unemployment 

rate is low. In addition, the proposed legislation would 

continue to provide a special tax incentive for retaining the 

handicapped, a provision of the NJTC. 

In recent years, the average unemployment rate among 

disadvantaged youth (ages 18-24) has been several times the 

average rate for the labor force as a whole. In addi tion, there 

was evidence that employment of minorities within this group had 

not responded to the overall decline in unemployment in the 

1976-1978 recovery as rapidly as was forecast from previous 

recoveries. The TJTC, used in addition to a program of overall 

fiscal stimulus, was meant to reduce this structural unemployment problem. 

The rationale for the TJTC was that it would increase the 

employment of the targeted groups by lowering the relative cost 

of hiring these workers. Because the target population is a 

small part of the labor force and some displacement of ineligible workers would occur, the credit was not expected to significantly reduce the overall unemployment rate. 

The proposal focused the employment incentive on 

disadvantaged young people, defined as individuals aged 18-24 

from households with total family income less than 70 percent of 

the regional lower living standard. This income standard was 

taken from the existing CETA legislation. 

The same incentive was to be available for hiring handicapped 

individuals who were referred from vocational rehabilitation 

programs. These handicapped individuals had been eligible for 

an additional credit of 10 percent of FUTA wages under the NJTC. 

2. The House Bill 

The legislation that emerged from the House of 

Representatives closely resembled the Carter Administration's 

proposal. The House bill contained no provision for extendi ng the NJTC and, instead, focused the tax incentives on specific labor groups. It also incorporated the existing WIN credit into 

the new proposal. 

The House legislation expanded the Carter Administration's 

proposal by increasing the amount of the credit and by making 

more workers eligible for the program. The House bill increased 

the rate of subsidy in the first year from one-third of qualified 

wages to one-half, but reduced the rate of subsidy for the second 
-24-

year of employment from 25 percent to 16-2/ 3 percent. The 

minimum length of employment was dropped, the limitation on 

qualified wages was raised to 30 percent of aggregate FUTA wages, and the limitation of the credit was raised to 100 percent of the 

current-year tax liability. The House bill included economically 

disadvantaged youth and handicapped individuals, but also added 

five other target groups. Four of these new groups were defined 

by federal and state programs for the needy: (1) Supplemental 

Security Income (SSI) recipients, (2) general assistance 

recipients, (3) Work Incentive (WIN) program registrants, and 

(4) Vietnam Veterans on Food Stamps. It was argued that 

increased employmene among these groups would lower program 

outlays. In addition, cooperative education students were 

included in order to encourage employers to participate in an 

educational program deemed to be valuable. 

The criterion for economically disadvantaged youth was 

changed from CETA definition to one that specified members of 

a household receiving food stamps. The Food Stamp program was 

chosen as a screen to identify needy youth because it already 

served a high proportion of needy youth with what was believed 

to be a well-suited definition of economically disadvantaged and 

a relatively reliable eligibility test of an applicant's income 

and assets. 

The House bill was estimated to have a revenue cost of 

$900 million in calendar year 1979 and budget outlays were to be 

reduced by $875 million the same year. In addition, the House 

bill would have terminated the separate WIN/Welfare credit at the 

end of 1978. 

3. The Senate Bill 

The Senate bill . provided for a three-year Targeted Jobs Tax 

Credit. The maximum credit was to be $3,000 per employee for the 

first year of employment, $2,000 for the second year, and $1,500 

for the third year . The Senate bill contained the Carter Administration's proposals of a 75-day minimum employment requirement, 

the 20 percent aggregate FUTA wage limitation, and the 90 percent of current year tax liability limitation. 

The Senate bill also provided for several additional target 

groups. As compared to the Carter proposal, the targeted groups 

were expanded to include disabled SSI recipients, general assistance recipients, economically disadvantaged Vietnam 

veterans, and economically disadvantaged ex-convicts. 

The Senate modifi ed the WIN/Welfare credit, but kept it 

separate from the targeted jobs credit . The Senate provided for 

a WIN/Welfare credit of 75 percent of wages up to $6,000 for the 
-25-

first year of employment, 65 percent in the second year and 55 

percent in the third year. For years of employment beginning in 

1981, the amount of the qualified wages was to be increased to 

$7,000. The provisions authorizing credits for employment other 

than in a trade or business were also liberalized. 

The Senate bill also set a sunset provision of the end of 

1981 for the targeted jobs credit. The WIN/Welfare credit change 

was to be permanent. The Senate Finance Committee believed that 

the WIN/Welfare credit "should be separate from the new, experi- mental targeted jobs credit program."_!/ 

On the Senate floor, the revenue bill was amended to extend 

the New Jobs Tax Credit (NJTC) for two years with several 

changes. The amount of the NJTC would be equal to 35 percent of 

up to $6,000 of wages per additional employee--a maximum credit 

of $2,100, as before. The total amount of the NJTC would no 

longer be limited to a percentage of the increase in an 

employer's total wages over total wages in the previous year. The targeted credit was to be adopted in addition to the extended 

NJTC. 

4. Conference Committee 

The Conference Committee dropped the Senate floor amendment 

for extension of the NVTC. Under the Conference agreement, the 

targeted jobs credit was limited to two years with the rate of 

subsidy equal to 50 percent of qualified wages in the first year 

of employment and 25 percent in the second year--up to $3,000 and 

$1,500 per worker, respectively. The targeted groups eventually included seven categories of eligible workers. No minimum 

employment requirement was included and a sunset provision was 

set for January 1, 1982. A drafting error setting this date 

as December 31, 1980, was later corrected in the Technical 

Corrections Act of 1979 . The WIN/Welfare credit was kept 

separate but was structured like the targeted jobs credit. 

C. Description of Final Legislation 

The Targeted Jobs Tax Credit was enacted by Congress 

on November 6, 1978, as part of the Revenue Act of 1978 

(P.L. 95-600).~/ It provided for a tax credit equal to 

.?_I 

U.S. Senate, Committee on Finance, Report on the Revenue Act 

of 1978, No. 95-1263, p. 134. 

A number of technical corrections in the TJTC provisions, 

were made in the Technical Corrections Act of 1979 (P.L. 

96-222), April 1980, including raising the age limit for 

cooperative education students to 19. 
- 26 -

SO percent of the firs t $6,000 of an e ligible employee's wages in 

the first year of employment and 25 percent in the second year. Seven groups were eligible: 

o economically disadvantaged youth aged 18-24; 

o economica lly disadvantaged Vie tnam veterans under age 35; 

o economically disadvantaged ex-convicts hired within 

5 years o f prison release or date of conviction; 

o recipients of Supplemental Security Income; 

o recipients of general assistance; 

o students in qualified cooperative education programs age 

16-19; and 

o handicapped participants (or ex-participants) in 

vocational rehabilitation programs. 

The Targeted Jobs Ta x Credit could be claimed for wages paid 

during calendar years 1979-1981 to employees who were hired after 

September 26, 1978, and whose e ligibility was certified by the 

local agency designated by the Secretary of the Treasury and the 

Secretary of Labor. The credit could not be claimed for 

employees for whom the employer received payments from CETA onthe-job training contracts or claimed the WIN tax credit. A 

firm's qualified wages could not exceed 30 percent of its 

aggregate FUTA payroll. The credit was limited to 90 percent of 

the current year tax liability after other nonrefundable credits 

were claimed, except that credits that exceeded this limit could 

be carried back for three years or forward for seven years. The 

deduction for wages and salaries had to be reduced by the amount 

of the credit. 

The New Jobs Tax Credit was allowed to expire at the end of 

1978 while the WIN/Welfare c redit sunset provision was removed. 

D. The 1961 Amendments to the Targeted Jobs Tax Credit 

The Ec onomic Recover¥ Tax Act of 1981 extended the Targeted 

Jobs Ta x Credit for elig1ble individuals hired before the end 

of 1982. Several changes were made to improve the credit's 

effectiveness. It was required that certifications of eligibility be issued or requested before the day the eligible individual began work, which limited the extent to which 

certifications could be retroactive.~/ Vouchers for members 

This requirement was phased in and did not become fully 

effective until September 27, 1981 . 
- 27 -

of economically disadvantaged fam ili es were made valid for 

45 days after issuance. The ceiling on a firm's qualified wages 

(30 percent of its aggregate FUTA payroll) was removed. The 

legislation also authorized appropriati ons of $30 million for 

program administration, including $5 million for systematically 

testing the validity of TJTC certifications. While $30 million 

were authorized for program administration, actual appropriations 

were $20 million in FY 1982. 

In addition, the WIN credit was terminated as a separate 

program, effective January 1, 1982, with AFDC recipients and WIN 

participants becoming TJTC target groups. The age limitation for 

Vietnam veterans (under age 35) was eliminated and eligible 

cooperative education students were limited to those who are 

economically disadvantaged. One additional target group was made 

eligible for a job credit--employees laid off from public service 

employment funded by the Comprehensive Employment and Training 

Act ( CETA) . 

E. The 1982 Changes in the Targeted Jobs Tax Credit 

The Tax Equity and Fiscal Responsibility Act of 1982, 

extended the TJTC for two years, making the credit available for 

persons newly hired on or before December 31, 1984. This law 

also modified TJTC, as follows: 

o A new target group was added: "qualified summer youth 

employees," economically disadvantaged youth 16 or 17 

years old on the date of hire . The ir employers are 

entitled to an enriched credit equal to 85 percent of 

wages up to $3,000 per qualified employee paid for work 

performed in any 90-day period between May 1 and 

September 15. [Credits may be claimed for former 

"qualified summer youth" rehired by t he same firm if they 

qualified as members of another targeted group.) 

o The "involuntarily terminated CETA employees" target 

group was dropped, effective January 1, 1983. 

o The definition of qualified general assistance programs 

was broadened to include programs providing assistance 

through 11 voucher or script." 

o Certifications must now be obtained or requested in 

writing no later than the day on which t he individual 

starts work. 

o "Such sums as may be necessary" are authorized for TJTC 

administration during FY 1983 and FY 1984 . 
-28-

o Beginning in calendar year 1982, the Secretary of Labor 

shall provide to the tax-writing committees of the 

Congress an annual report on the results of tests of the 

accuracy of TJTC certifications mandated by the 1981 TJTC 

amendments . 

F. The 1984 Changes in the Targeted Jobs Tax Credit 

The Deficit Reduction Act of 1984 extended the TJTC for one 

year, making the credit available for individuals who begin work 

for the employer before January 1, 1986. The law also extended 

the authorization for administrative funds through fiscal year 

1985. several minor technical changes were also made. 
-29-

Chapter 4 

THE NEW JOBS TAXS CREDIT 

This chapter evaluates the experience with the New Jobs Tax 

Credit. The first section focuses on the administrative aspects of the credit. The second section presents information on the 

type of employers that claimed the credit, the credit's cost, 

and other quantitative data on the credit. The final section 

evaluates the success of the program in achieving its objectives. The credit's history and provisions are described in Section II, 

Chapter 3. 

I. Administrative Aspects of the New Jobs Tax Credit (NJTC) 

Program 

The NJTC was enacted to provide incentives for employers 

to add workers to their payrolls during 1977 or 1978. Congress 

wanted to subsidize only the additional--or incremental--jobs created by the credit. The attempt to achieve this objective 

produced a complicated credit. Experience with the NJTC 

illustrates the administrative difficulties connected with 

incremental employment tax credits, that is, tax credits based 

on additional employment. 

A. Defining the Credit's Base 

The main problem in administering an incremental credit is 

determining what incremental employment is for each firm in the 

economy. Incremental employment is defined as the difference 

between: (1) the firm's employment and (2) what the firm's 

employment would have been had there been no credit. 

With enough resources, it might be possible to obtain 

reasonably accurate measures of employment in each firm in the 

economy after an employment tax credit was enacted. However, 

in general, there is no way of measuring what employment in a 

firm would have been if there had been no credit. This is 

because employment in different firms will grow at quite different rates in the absence of the credit. Table 4.1 

illustrates the problem. 
-30-

Table 4.1 

Measured Employment Growth Versus 

Incremental Employment Growth 

Firm A 

Firm B 

Firm C 

Measured 

Employment 

Growth 

( 1 ) 

10% 

5% 

25% 

: Employment 

:Growth with- : 

out Credit 

( 2 ) 

8 % 

0% 

24% 

Incremental 

Employment 

Growth 

( 3 ) 

2% 

5% 

1 % 

The first column of the table shows measured employment 

growth during the year, the second shows what employment in each 

firm would have been without the credit . Incremental employment 

growth is the difference between columns one and two. The 

administrative problem is that the information in column 2 can 

only be roughly estimated . One administratively feasible design 

for an incremental employment credit would have incremental 

employment defined as employment growth in excess of some 

arbitrary fraction of the previous year's employment. For 

example, if the proportion were 5 percent, this rule would deny 

Firm B any credits for expanding employment even though it might 

have increased employment most because of the credit, whereas 

Firm C could have received the highest credit even though it 

might have inc reased employment least because of the credit. 

Even when incremental employment is defined by the above 

arbitrary rule, there is the additional administrative difficulty 

that firms do not have records that accurately reflect the 

average number of worke rs that they employ each year. At best, 

only approximate measures of employment growth are available at 

the enterprise level. Ideally the measure adopted should be a 

good proxy fo r employment; it should impose mi nimal additiona l 

costs on users of the credit and the administe r ing agency; and 

it s hould not be ca pable of being artificially manipulated. 

The New Jobs Tax Credit used the taxable wage base under 

the Federal Unemployment Tax Act (FUTA) as a proxy for employ- ment. At the time the NJTC was ena c ted, the FUTA base was 

defined as the f i rst $4 , 20 0 of wages that the firm pa id to 

each of its workers . Since each $4, 200 of a f irm's FUTA base 

c o rresponded roughly to one employee, changes in this base were 

used to measure emp~oyment growt h. The value of the NJTC wa s 
- 31-

determined by FUTA base growth in excess of 102 percent of the 

FUTA base in the previous year . Throughout this chapter, the 

term "credit base growth" will mean FUTA base growth. 

It needs to be emphasized that the relationship between 

a firm's credit base and its average annual employment is 

imperfect. If the annual wages associated with a job slot were 

less than $4,200, then the job's contribution to the FUTA credit 

base would necessarily be less than $4,200. On the other hand, 

for job slots with annual wages above $4,200, FUTA wages could 

also exceed $4,200, because of employee turnover. For example, 

a job slot with annual wages of $12,000 would generate $8,400 

in FUTA wages if it were filled by two different employees in 

succession, each working six months. This effect is reflected 

in the fact that FUTA wages per covered employee averaged over 

$4,500 in 1977. This is greater than the total FUTA wages for 

a single employee working for one employer for the entire year. 

Because FUTA wages were not effectively capped by the $4,200 

limit for low-wage workers and for workers changing jobs, FUTA 

wages rise with inflation. Between 1976 and 1977, the average 

FUTA wage per employee rose 1.87 percent.!/ 

B. Efforts to Limit Artificial Expansions of the Credit 

Base 

Both Congress and the IRS imposed restrictions on the NJTC to 

prevent artificial expansions of the credit's base.~/ These also 

complicated the credit and made it more difficult to use. 

1. Regulations Covering Controlled Groups of Businesses 

Regulations were written to prevent transfers of employees 

within a controlled group of businesses from generating any 

credits. The rule simply required commonly owned establishments 

to aggregate FUTA wages . Other rules were added to establish 

FUTA bases for businesses that were purchased and sold during 

the year. 

l/ 

I 

Each month employers paying FUTA taxes report the number 

of individuals on their payroll at any point during the pay 

period which includes the twelfth day of the month. This 

information provides a measure of aggregate FUTA covered 

employment in a given month. The aggregate ratio for each 

month of annualized rUTA wages to covered employment averaged $4,431 in 1976 and $4,514 in 1977. 

For example, this was one rationale for the NJTC's wage bill 

limit. See the discussion of the NJTC's legislative history 

in Chapter 3. 
-32-

The regulations required that when an individual purchased a 

business, the employment credit must be computed on the basis of 

the FUTA wages and total wages paid by the seller in the previous 

year. Thus, if A paid FUTA wages of $100,000 in 1976 and sold 

the business toBin 1977, B would be ineligible for the credit 

unless B paid at least $102,000 (102 percent for 100,000) of FUTA 

wages in 1977 . 

Since purchasers of businesses had to use the wage base 

information of previous owners to compute their credit eligibility, the regulations allowed sellers of a business to reduce 

their wage base in the previous year by the amount of wage base 

transferred to purchasers. Otherwise, taxpayers could be denied 

credits for transactions that increased both employment and the 

FUTA base. 

2. Rules for New Businesses 

While the rules on sales of businesses would prevent persons 

from qualifying for credits by exchanging business ownership, 

other avenues were available for capturing the credit without 

actually increasing employment. One possibility was to dissolve 

a corporation and incorporate it under a different name. In the 

absence of legislation, the only thing preventing individuals 

from exercising this strategy was the cost associated with 

changing the legal status of corporations. 

Congress realized that new businesses with zero FUTA bases in 

the previous year would have clear advantages in generating FUTA 

base growth. Accordingly, a special feature was added to the l~gislation which limited the credit to 25 percent of FUTA wages 

in the current year. Under this provision, if a new company had 

FUTA wages of $100,p00, its credit would be reduced from the 

normal $50,000 to $25,000. 

To further restrict the credit, Congress added a provision 

which prohibited self-employed individuals from designating 

themselves as employees to qualify for the credit. Congress also 

considered, but rejected, provisions that would ban conversions 

of contract workers to employees and disallow the credit to 

employers that fired some workers and hired others to earn the 

credit. These were regarded as too difficult for the IRS to 

administer. 

3. Credit Pass-Through Provisions 

Two separate tax liability computations were required of 

employers who received jobs credits from subchapter S corporations, partnerships, and trusts. Such taxpayers first had to 

compute, on a pro-rata basis, the share of their total tax 

liability attributable to the entity generating the credit. 

The amount of the c~edit that a taxpayer could receive from 
-33-

such outside sources of income could not exceed these separately 

computed tax liability limits even if employers had tax liability 

as a result of their own business activities. Employers could, 

however, use any tax liability generated in their own businesses 

to claim credits for their employees. 

The purpose of the dual tax liability limit was to limit the 

extent to which the NJTC subsidized transactions that did not 

increase employment. Without this limitation, individuals could 

form partnerships and make other legal arrangements to obtain the 

NJTC earned by entities with insufficient tax liability. For 

example, suppose that Firm A earned $50,000 of credits, but the 

firm had only $5,000 of tax liability. In the absence of rules 

on credit pass-throughs, a firm with $45,000 of tax liability 

could have obtained Firm A's unused credits by becoming its 

partner. With the special rules, there would be no payoffs to 

such tax-induced mergers since the credit available to both 

partners would be limited to $5,000. 

A complex tax form, Form 5884, was developed to lead 

taxpayers through the sequence of calculations and comparisons 

necessary to compute the credit they could receive. A copy of 

the 1978 version of this form and its accompanying instructions 

are attached as exhibits in Appendix A . 

. C. Informing Taxpayers of the Credit 

As noted in Chapter 2, a credit will not be effective if 

taxpayers are unaware of its existence. To spread awareness of 

the credit among employers, the Internal Revenue Service and the 

Department of Labor issued news releases, prepared brochures, and 

distributed other material. 

II. Statistical Summary 

This section presents quantitative information on the New 

Jobs Tax Credit. The data presented here are based on samples 

of corporate tax returns filed in 1977 and 1978 and a sample 

of firms from the Business Master File (BMF) matched with Social 

Security payroll data. The data samples are described more fully in Appendix A. 

A. Utilization of the Credit 

The New Jobs Tax Credit legislation established three 

eligibility criteria for earning the credit. First, employers 

had to be in a trade or business. Second, an employer's credit 
-34-

base had to exceed the previous year's credit base by at least 

2 percent.3/ Third, the employer's total wage bill had to exceed 

the previous year's total wage bill by at least 5 percent. 

It is estimated that 176,500 corporations claimed the NJTC 

in 1977 and 356,900 corporations claimed the NJTC in 1978. These 

represented 9 . 8 percent and 18.9 percent, respectively of all 

corporations (other than DISC and Subchapter s corporations) 

filing tax returns.i/ 

Some firms wer~ i neligible for the credit because they did 

not have credit base growth greate r than the 2 percent threshold 

and/ or annual wage bi ll growth greater than the 5 percent threshold. Table 4.2 shows the distribution of corporations and the 

distribution of employment by the 1976-77 growth rate in FUTA 

wages and total wages. The distribution of FUTA wages can be 

used to approximate the distribution of employment. From Table 

4.2, it can then be estimated that 64 percent of 1977 employment 

was in firms which had credit base growth exceeding 2 percent and 

that 72 percent of total 1977 employment was in firms which had 

wage bill growth rate exceeding 5 percent. Firms that met both 

eligibility criteria are estimated to have amounted to 32 percent 

of all firms and to have had 52 percent of total 1977 employment. 

Using credit base growth as a measure of employment growth, an 

estimated 70 percent of the employment growth in firms with 

employment growth occurred in firms satisfying both eligibility 

criteria. 

Table 4.3 shows utilization of the NJTC in 1977 by industry 

classification . "Industrial" corporations, such as manufacturing, mining, and construction corporations, were more likely to 

file for credits than "commercial'' corpo rations, such as retail 

trade, finance, and service industry corporations. 

For the purposes of this chapter, the term credit base is 

defined as the first $4,200 or less of wages that a business 

employer paid to each of its employees during the year, 

summed across all employees. 

i l A Domestic International Sales Corporation (DISC) is a 

corporation whose income is predomi nantly (95 percent) derived from export sales. DISCs are allowed to defer 

paying taxes on a portion o f the income deri ved from export sales. J obs credits could not be earned by DISCs. Shareholders in Subchapter s corporations pay personal taxes on 

the distributed and undistributed income of the business. 

Subchapter S co rporations were excluded from eligible corporations becaus~ New Jobs Tax Credits could not be claimed on 

these corporate returns, a lthough they could be claimed on 

the individual returns of the owners of these corporations. 
Percent of 

Firms 

Percent of 

-35-

Table 4.2 

Distribution of Firms and Employment by ~ Base Growth 

and Wage Bill Growth Between 1976 and 1977 

Percentage Change in FUTA Base ~/ 

:Less . . : 

:than :0.0- :1.0- :2.0- :3.0- :4.0- :5.0- :7.5- :10% or 

: 0% :0.9% :1.9% :2.9% :3.9% :4.9% :7.4% :9.9%: more . :Total 

33.5 25.6 1.5 1.5 1.5 1.4 3.3 3.0 28.7 100.0 

Employment~/ 27.1 6.0 2.6 2.6 4.4 3.3 6.5 9. 4 38.1 100.0 

Percentage Change in Wage Bill 

:Less . . . · • 

:than :0.0- :1.0- :2.0- :3.0- :4.0- :5.0- :7.5- :10% or 

: 0% :0.9% :1.9% :2.9% :3.9% :4.9% :7.4% :9.9% more . :Total 

Percent of 

Firms 31.4 17.8 1.4 1.5 1.5 1.6 3.8 3.7 37.7 100.0 

Percent of 

Employment 22.4 4.1 1.7 1.7 1.9 2.7 10.3 6.2 49.0 100.0 

/ FUTA wage base ( $4,200 per worker in 1977) was the credit base for each 

firm. 

~/ The FUTA base is a proxy for employment. 

Source: Department of the Treasury. 
-36-

Table 4.3 

Use of New Jobs Tax Credit by Industry - 1977 .!1 

Take-up Percent 

Rates of all 

Nwnber Percent Returns Among Corporaof Eligible Estimated with Eligible tions 

Corporate for Eligible Credit Corpora- Claiming 

Classification Returns Credit 21 Returns Claimed tions 41: Credit 

(1) ( 2) (3) ( 4) ( 5) (6) 

Agricul ture 45 , 300 9% 4,100 2,700 66% 6% 

Mini ng 15,900 35 5,600 1,700 30 11 

Construction 165,200 35 57,800 20,000 36 13 

Manufacturing 193,300 40 771300 32,600 42 17 

Transportation, 

Communication, 

and Utili ties 66,100 34 23, 100 5,900 26 9 

Wholesale Trade 189, 500 34 64,400 24,200 38 13 

Retail Trade 329, 400 33 108,700 37,400 34 11 

Finance 381,500 28 106,800 19,100 17 5 

Services 416 , 900 32 133 ,400 32 , 000 24 8 

Other 3, 800 25 1,000 100 10 3 

Total 1,807 , 100 ]I 32 578,200 ]I 176,500 ]I 31 10 

!I Does not include DISC and Subchapter s returns. 

I Percent of firms with FUtA growth exceeding 2 percent and total wage growth 

exceeding 5 percent. 

11 May not add to total due to rounding. In addition to rounding, column (3) numbers may not add due to differences between the industrial distributions 

of the two fi l es used to estimate eligible returns. 

I The take-up rate is the percent of eligi ble corporations that claims the 

credit. 

Source: Department of the Treasury . 
-37-

Table 4.3 shows that an estimated 578,200 trade and business 

corporations were eligible for the NJTC in 1977, meeting both 

eligibility criteria. Of these, 31 percent earned and filed for 

the credit. Column 3 of the table shows the number of corporations that earned the c~edit, i.e., that had FUTA wage growth 

exceeding 2 percent and total wage growth exceeding 5 percent. 

Column 5 shows the estimated number of firms that claimed the 

credit, i.e., the number of firms which both earned the credit 

and claimed positive amounts of credit. An estimate of the 

number of corporations eligible for the credit in 1978 was not 

derived. The number of corporate returns with the credit claimed 

increased from 176,500 in 1977 to 356,900 in 1978. The percent 

of eligible firms filing for the credit would be higher in 1978 

than in 1977. The info~mation on the number of firms filing for 

the credit is derived from first-year tax returns and does not 

include amended tax returns. 

Table 4.4 presents information on the use of the NJTC in 1977 

by the size of the corporation. In general, small companies were 

less likely to participate in the program than larger firms. 

Approximately 6.6 percent of the companies with total receipts 

under $1 million had credits in 1977 compared with 26.7 percent 

of those with total receipts of $1 million or more. This difference results from smaller companies having both a lower likelihood of eligibility than larger firms and a lower probability of 

claiming the credit if eligible. 

B. Impact of Credit Limitations 

Data from an early sample of corporate tax returns were used 

to evaluate the impact of the various limitations on the NJTC . The information presented in this section is considered to be 

representative of qualitative experience with the credit limitations. However, the estimates based on this sample understate 

the total amount of credits claimed. 

Even if a firm qualified for and claimed the NJTC, its credit 

could be less than the maximum tentative credit (50 percent of 

FUTA wage growth in excess of the 2 percent threshold) because of 

three other limits that were placed on the amount of credit that 

could be earned. As indicated in Table 4.5, these additional 

constraints on the credit were: (1) the new business limit, (2) 

the wage bill limit, and (3) the small business limit. In order 

to claim a credit, the firm was required to calculate a dollar 

value for each of these limits. Regardless of its credit base 

growth, the credit available to a firm could not exceed the least 

of these three limits.5/ In addition, the amount of credit 

claimed could not exceed the firm's current tax liability--the 

tax liability limit . 

/ However, Congress granted extra credits for employers that 

met the threshold credit base growth requirement and hired 

certain disabled workers. 
-38-

Table 4.4 

Use of the New Jobs Tax Credit by Size of Firm - 1977 / 

Total Receipts 

( $000) 

0 - 25 

25 - so 

50 - 100 

100 - 500 

500 - 1,000 

1,000 - 10,000 

10,000 - 50,000 

50,000 - 100,000 

100,000 or more 

Number 

of 

:Corporate 

Returns 

( 1). 

368,900 

151,600 

207,200 

616,100 

178,700 

253,600 

25,300 

2,600 

3,100 

Percent 

Eligible 

for 

:Credit 2/ 

( 2) 

23 . 8 

27.1 

31.5 

38.1 

45.3 

53.6 

58.1 

61.0 

52.2 

:Estimated 

Eligible 

Returns 

( 3) 

87,800 

41,100 

65,300 

243,700 

81,000 

135,900 

14,700 

1,600 

1,600 

Returns 

with 

Credit 

:Claimed 

( 4) 

1,200 

2,500 

8,400 

56,500 

31,200 

65,100 

9,400 

100 

1,300 

: Take-up : Percent 

Rates : of all 

: Among !Corpora- :Eligible tions 

:Corpora- :Claiming 

tions 4/ : Credit 

(5) (6) 

1.4 0.3 

6.1 1.6 

12.9 4.1 

23.2 9.2 

38.5 17.5 

47.9 25.7 

63 .9 37.2 

6.3 38.5 

81.3 41.9 

Total 1,807,100 / 31.9 576,500 ~/ 176,500 / 30.6 9.8 

I Does not include DISC and Subchapter s returns. 

/ Percent of finms with FUTA growth exceeding 2 percent and total wage growth 

exceeding 5 percent. 

~/ May not add to total due to rounding. 

il Column may not add to total due to rounding and differences in the 

distributions of total receipts in the two files used to estimate eligi ble 

returns. 

Source: Department of the Treasury. 
- 39-

Table 4.5 

Impact of the New Jobs Tax Credit Limits - 1977 and 1978 

1977 

Percent of Corporations 

Affected by Limit 

Share of Total Employment 

Growth _!/ 

1978 

Percent of Corporations 

Affected by Limit 

Share of Total Employment 

Growth _!/ 

Provisions Limiting Credits Claimed 

: Wage : small New 

: Bill :Business :Business 

None :Limit Limit Limit Total 

(1) (2) (3) (4) (5) 

68.2% 11.1% 2.6% 18.1% 100.0% 

30.8 6.1 52.8 10.4 100.0 

62.1% 13.3% 1.9% 22.7% 100.0% 

27.4 7.7 52.6 12.3 100.0 

/ As measured by credit base growth. Entries represented the credit 

growth by companies in each column as a percent of the total credit 

base growth in all companies earning credits. 

Note : The information presented in this table is based on an early 

sample of tax returns. Although it understates the number of 

corporations and the t otal credit amount of credit taken, the 

relationships illustrated are expected to be representative 

of experience with the credit. 

Source: Department of the Treasury. 
-40-

The first column of Table 4.5 indicates that 68.2 percent of 

the corporations that claimed credits in 1977 were unaffected by 

the limits on credits claimed. These corporations were able to 

claim the maximum credit for credit base growth beyond the 

2 percent threshold. The remaining 31.8 percent of corporations that claimed the credit received less than the maximum credit. 

While over two-thirds of the corporations claimed the maximum 

credit, they accounted for less than 31 percent of the employment 

growth that took place in the corporations claiming the credit. 

1. The New Business Limit 

Under a rule that the credit available would equal SO percent 

of credit base growth beyond the threshold level, a new business 

could claim the credit for any wages subject to FUTA withholding. 

The purpose of the new business limit was to reduce the advantages that new businesses would have in earning credits. Specifically, this provision limited the credit available to 25 percent 

of FUTA wages paid in the current year. If a new employer had 

FUTA wages of $100,000, the new business limit reduced the credit 

available from $50,000 to $25,000. However, the new business 

limit also reduced credits for established businesses.6/ For 

example, a firm with $25,000 of FUTA wages in 1976 whose FUTA 

wages grew to $100,000 in 1977 had threshold wages of $25,500 - (102% X 25,000). FUTA wage growth beyond the threshold was 

$74,500 = ($100,000- $25,500). Although 50 percent of FUTA base 

growth beyond the threshold was $37,250, the new business limit 

reduced the credit available to $25,000 = (25% x $100,000). 

Table 4.5 shows th~t 18.1 percent of the corporations claiming the credit in 1977--approximately 32,000 corporations--were 

affected by the new business limit. These companies were 

responsible for -less than 11 percent of the employment growth that occurred in the corporations that earned credits in 1977. 

2. The Wage Bill Limit 

The wage bill limit was designed to reduce the extent to 

which employers could increase their credit bases--and their 

ability to earn credits--without increasing their employment measured in man-hours. Without any limitation, employers could 

have earned credits by replacing full-time workers with part-time 

workers. Alternatively, employers could have increased employee 

turnover by substituting part-year workers for full-year workers. 

~/ In fact, many of the companies limited by this provision 

were not new businesses. Over 46 percent of the corpora- tions subject to the new business limit in 1977 had paid 

FUTA wages in 1976. In 1978, 87 percent of these corporations had paid wages in the previous year. 
-41-

This provision did not entirely prevent exploitation of the 

NJTC through the substitution of part-time (part-year) workers 

for full-time (full-year) workers. Firms for which the total 

wage bill would ordinarily grow at an annual rate greater than 

5 percent were still in a position to claim the NJTC without 

increasing the growth rate of employment measured in man-hours. 

More generally, many of· those firms that increased man-hours as a 

result of the credit could have earned more credits by making the 

substitutions that the wage bill limit was meant to discourage. 

The wage bill limit failed to prevent another type of 

windfall gain that did not even require any changes in the firm's 

employment policy. A windfall could have been realized by firms 

in which a large proportion of the positions paid annual wages of 

less than $4,200 as long as their total wage bill increased by 

more than 5 percent ann~ally. For example, a firm in which 

annual wages for each job were $3,500 in 1977 and $3,850 in 1978 

(a 10 percent increase) but whose total employment was unchanged 

at 100 workers in both years would have qualified for $14,000 in 

tax credits. 

Although it reduced total credits, the wage bill limit 

increased the credit for hiring an additional worker over the 

range of employment where it was binding and total credits were 

non-zero. The credit over this range equaled one-half the wage 

cost of the additional position, which would normally exceed 

one-half the associated FUTA wages for any position paying more 

than $4,200 annually. The range of employment over which this 

could occur depended inversely on the rate of growth of average 

per employee wages and on the wage cost of additional positions r~lative to the FUTA wages generated by additional positions. 

The wage bill limit was typically not binding if the firm's 

average wage increased by over 3 percent per year. 

Table 4.5 shows that the wage bill limit affected 

11.1 percent of the 176,500 corporations which claimed the 

NJTC in 1977. The companies whose credits were reduced by the 

wage bill limit had 6.1 percent of the employment growth in the 

'companies that earned the credit . 

3. The Small Business Limit 

To direct relatively more NJTC benefits to small business, 

the amount of credit tha t could be claimed by any employer was 

limited to $100,000.7/ As Table 4.5 shows, this provision limited the credit fo r 2.6 percent of the 176,500 corporations that claimed the credit in 1977. While relatively few companies had credit reductions because of this lim{t, 52.8 percent of the 

employment growth occurred in these companies (Table 4.6). Once 

the $100,000 limit was reached, the NJTC provided no incentive to 

a firm for hiring additional workers. 

11 If handicapped workers were hired, the small business limit 

could be up to 20 per cent higher. 
-42-

4. Tax Liability Limit 

The three limits just described affected the total NJTC 

earned. The amount of credit claimed in any one year could not 

exceed the firm's current tax liability after all the other 

credits available to it were exhausted. Credits limited by 

current tax liability could, however, be used to offset taxes in 

other years. Because of the carryback feature, credits earned 

that could not be "used" because of inadequate current tax 

liability could be claimed if the taxpayer had "unused" tax 

liability in any of three previous years. If the credits earned 

could still not be claimed, they could be used to offset tax 

liabilities incurred during any of the subsequent seven years. 

The second line of Table 4.6 shows that 54 percent of the 

corporations that claimed the NJTC in 1977 had insufficient tax 

liability to use all the credits they earned in the current year. 

Over one-half of these corporations would have been unaffected by 

any other limit. Companies limited by the new business limit 

were the most likely to be constrained by the tax liability 

limit. 

With the information available from the sample of tax 

returns, it is not possible to determine how many of these 

corporations had enough tax liability in the three previous years 

to use all the credits earned. However, based on experience with 

other credits, it is estimated that tax liability from prior 

years was used to take only about 6 percent of the credits that 

could not otherwise be taken currently. Thus most of the 

corporations that lacked sufficient tax liability to claim their 

credits probably had their credits delayed. Like any future 

payments, delayed credit payments have a lower value than current 

payments of an equal amount. An estimate of the expected value 

of unused credits received in later years is described in the 

following section. · 

The impact of the limitation provisions on credits earned and 

claimed in 1977 is summarized in Table 4.7. The impact was very similar in 1978, as shown in Table 4.5 and 4.6. The share ·of 

employment growth in firms affected by the limits was much larger for the small business limit than for either the new business 

limit or the wage bill limit . The impacts of the limits are 

summarized as follows: 

(1) At least one of the various limitations applied to 60 

percent of the companies claiming the credit. These 

companies accounted for over 80 percent of the employment 

growth among companies claiming the credit.~/ 

! I See Table 4.7. 
-43-

Table 4.6 

Impact of the New Jobs Tax Credit Limits Including the 

Tax Liability Limit - 1977 and 1978 / 

1977 

Percent of Corporations Affected by Limit 

Percent with Insufficient 

Tax Liability to Claim 

Total Credits Earned 

Average Credits Earned 

($000) 

Average Credits Claimed 

($000) 

Credits Claimed as a 

Percent of Credits Earned 

1978 

--

Percent of Corporations 

Affected by Limit 

Percent with Insufficient 

CUrrent Tax Liability 

Average Credits Earned 

($000) 

Average Credits Claimed 

($000) 

Credits Claimed as a Percent 

of Credits Earned 

Provisions 

wage 

Bill 

None Limit 

(1) (2) 

68.2% 11.1% 

54.0 57.7 

9.8 7.3 

5.8 3.8 

59.2 52.1 

62.1% 13.3% 

56.0 61.7 

9.4 6.5 

5.8 3.4 

61.7 52.3 

: Sma 1 : New : 

Business Business 

Limit Limit Total 

(3) (4) (5) 

2.6% 18.1% 100.0% 

46.2 81.8 59.2 

100.0 9.4 11.7 

63.0 3.0 6.5 

63.0 31.9 55.6 

1.9% 22.7% 100.0% 

47 . 4 38.3 60.2 

100.0 8.5 11.5 

65.6 2.9 6.0 

65.6 34.1 52.2 

l l Does not include DISC and Subchapter S corporate returns. Data may 

not add to total because of rounding. 

Note: See note to Table 4.5 

Source: Department of the Treasury 
- 44-

Table 4. 7 

Employment Growth in Coqporations by the Value of 

Credits Received - 1977 / 

Percent of 

Corporations 

Share of Employment 

Growth / 

Full Credit 

No 

Limits 

37.9 

16.1 

Partial Credit 

Tax 

Liability 

Limit 

only 

36.9 

16 . 3 

Small 

Business 

Limit 

2.6 

52.8 

Other 

Limits 

22.7 

14.9 

Total 

100.0 

100.0 

11 Does not include DISC and Subchapter S corporate returns. Data may not 

add to total because of rounding. 

/ As measured by credit base growth. 

Note: See note to Table 4.5 . 

Source: Department of the Treasury 
-45-

(2) Over 20 percent of the companies had their credits 

reduced by the new business limit. These firms had 10-12 

percent of the employment growth among companies claiming the credit. 

(3) Approximately 15 percent of corporations earning the 

credit were affected by the wage bill limit. These firms 

had 6-8 percent of the employment growth among companies claiming the credit. 

(4) Less than 3 percent had reduced credits because of the 

small business limit, but more than one-half of the 

employment growth occurred in companies subject to this 

limit. 

(5) Over one-half of the corporations which earned and 

filed for the credit were affected by the tax liability 

limit. 

C. Differential Impact of the Credit by Industry and Firm 

size 

This section presents data on the distribution of credits 

among corporations of various sizes in different industries. 

The question of whether the New Jobs Tax Credit favored some 

industries, possibly at the expense of others, is addressed. 

Table 4.8 shows information on the average NJTC taken for 

different size companies . In both years, the average credit 

taken tends to rise with the size of the corporation. For e~ample, the average credit taken was less than $3,100 for the 

smallest corporations in each year, whereas it exceeded $67,000 

for the largest corporations. The average credit taken fell from 

$9,600 in 1977 to $8,700 in 1978, reflecting the relatively 

greater use of the credit by smaller corporations in 1978. 

To obtain the credit, companies had to report information on 

the total wages they paid. Table 4.8 shows credits claimed as a 

percent of total wages for the corporations that claimed credits. 

The NJTC reduced the wage bill of the average corporation 

claiming the credit by less than 2.5 percent in both years. In 

contrast to the positive relationship between the average credit 

claimed and firm size, columns (3) and (6) show that the credit 

generally reduced the average labor costs of small companies more 

than it reduced the labor costs of larger companies. 

Table 4.9 shows the average credit claimed and the credit as 

a proportion of total labor costs by industry. The average 

credit claimed by a manufacturing company was $17,100 in 1977, 

more than three times the average credit claimed by an agricultural corporation. Table 4.10 shows that the NJTC amounted to a 
-46-

Table 4.8 

New Jobs Tax Credit Claimed by Size of Firm - 1977 and 1978 .!I 

1977 I97B . . . : NJTC as : NJTC as 

:Average : Percent :Average : Percent 

Total Credit :of wages Total Credit :of Wages 

: Credit Per :of Firms :Credit Per :of Firms 

Total Assets :Claimed Return :Claiming :Claimed Return :Claiming ($000's) ($000) ($000) Credit : ($000) ($000) Credit 

( 1) (2) ( 3) (4) ( 5) (6) 

0 - 250 $ 250,400 $ 3.0 10.7\ $ 519,500 $ 2.8 12.0\ 

250 - 1,000 402,700 8.0 8.8 783,500 8.1 9.9 

1,000 - 5,000 536,400 19.0 6.5 943,400 19.7 7.3 

5,000 - 10,000 159,900 31.2 4.6 281,600 35.8 5.2 

10,000 - 25,000 129,700 29.4 3.4 218,900 33.6 3.7 

25,000 - 50,000 66,900 25.6 1.9 106,300 29.9 2.2 

50,000 - 100,000 47,600 28.7 1.2 76,800 34.0 1.3 

100,000 - 250,000 43,100 38.2 0.7 62,900 41.7 0.7 

250,000 or more 67,100 67.0 0 .1 100,800 70.1 0.2 

All Corporations $1,703,800 $ 9.7 2.0\ $3,093,900 $ 8.7 2.5\ 

.!I Does not include DISC and Subchapter S returns. Figures may not add 

to total because of rounding. 

Source: Department of the Treasury 
-47-

Table 4.9 

Corporate Claims for the New Jobs Tax Credit, 

by Industry - 1977 and 1978 l l 

Agriculture 

Mining 

Construction 

Manufacturing 

Transportation, 

Cormrunications, 

and Utilities 

Wholesale trade 

Retail Trade 

Finance, 

Insurance, 

Real Estate 

Services 

Other 

All Industries 

1977 

:Average Total : Credit 

: Credit : Per 

:Claimed :Return 

( $000 ) : ( $000) 

$ 12,800 $ 4.8 

27,100 16.4 

238 1100 11, 4 

558,800 17 .1 

70,700 12.0 

183,800 7.6 

290,700 7.8 

126,800 6.6 

193,200 6.0 

1,200 18.8 

$1,703,800 $ 9.7 

: NJTC as 

: Percent 

:of Wages :of Firms 

:Claiming 

Credit 

Total 

Credit 

:Claimed 

($000) 

1978 

:Average 

:Credit 

Per 

:Return 

($000) 

30 . 0% $ 31,100 $ 6.1 

10.5 

26.4 

1.9 

4.0 

2.0 

1.0 

1.0 

8.5 

8.6 

44.100 

481,300 

956,200 

123,800 

345,300 

515,600 

204,200 

386,000 

6,100 

14.4 

10.4 

16.3 

11.2 

7.0 

7.0 

6.4 

5.0 

5.8 

2.0% $3,093,900 $ 8.7 

: NJTC as 

: Percent 

:of Wages :of Firms 

:Claiming 

Credit 

14.6% 

13.4 

30.8 

2.5 

4.2 

2.4 

1.3 

1.0 

10.5 

5.1 

2.5\ 

l/ Does not include Subchapter s and DISC returns. Figures may not add - to total because of rounding. 

Source: Department of the Treasury 
-48-

subsidy of about $0.18 per $1,000 of total industry sales in 

transportation compared with about $0.03 per $1,000 of construction sales. The subsidy to sales ratios were undoubtedly higher 

in 1978 since the total amount of the credit claimed by corpora- tions increased by 81 percent from 1977 to 1978. Column 5 of 

Table 4.10 shows that for those corporations that were able to 

claim the credit, the subsidy was no greater than $.59 per $1,000 

of sales, or less than 0.6 percent. 

D. The Budget Cost of the Credit 

Tax return information for 1977, the first year of the New 

Jobs Tax Credit, shows a total amount of credits earned by 

corporations and individuals of $3.75 billion. In 1978, $6.38 

billion of credits were earned. The total revenue cost over the 

life of the credit, including the costs of carryovers continuing 

for several years w~s at least $5.7 billion. The revenue cost 

estimate is based on the amount of credits earned on returns 

filed in 1977 and 1978. This estimate does not include credits 

reported on late or amended returns. 

The estimated cost of the NJTC in reduced tax revenues may 

appear to be considerably smaller than the estimated cost of 

providing a direct subsidy with the same actual cost, i.e., the 

credits actually earned and claimed. The amounts that employers 

claimed for the NJTC were taxable, since employers were required 

to subtract these amounts from their deductions for wages and 

salaries. The additional tax receipts resulting from this 

requirement were counted in estimating the credit's net revenue 

cost. A direct subsidy which is taxable has similar effects on 

tax revenues, but cost estimates of direct expenditure programs 

take no account of these effects. The inconsistent accounting 

procedures make government programs operated through the tax 

system appear to cost less than otherwise identical direct 

expenditure programs. For example, it is estimated that the NJTC 

reduced income tax ~evenues by at least $5.7 billion; if funded 

as a direct expenditure program, its gross cost would have been 

estimated to be at least $9.7 billion. The difference arises 

because a direct wage subsidy program similar to the NJTC would 

have increased employer tax liability by about $4 billion. 

III. Evaluation of Effectiveness 

This section examines how well the New Jobs Tax credit 

achieved its objectives. The credit had several goals. The NJTC 

was to increase total employment by reducing the wage costs of 

only the new jobs created as a result of the program. It also 

was intended to provide special assistance to small business and 

to help handicapped persons find employment. 

The limited information which this section provides should 

be viewed in relation to the general economic climate of the 

time. Recovery from the severe recession of the mid-1970's was 
-49 

Table 4.10 

New Jobs Tax Credit as a Proportion of Business 

Receipts by Industry - 1977 / 

New Jobs Business 

Credits Receipts 

Claimed of CorporaTotal Total as a tions 

NJTC Business Percent Claiming 

Claimed Receipts of Total Credits 

Industry ( $000, s) : ($000 ' s) Receipts ($000's) 

Agriculture $12,800 30,482,600 .04% 3,997,700 

Mining 21,100 93,718,600 .03 54,905,900 

Construction 238,700 163,620,800 .15 45,071,300 

Manufacturing 558,800 1,632,112,900 .03 745,471,700 

Transportation, 

Communications, 

and Utilities 70,700 323,946,300 .02 118,789,200 

Wholesale Trade 183,800 576,126,200 .03 181,312,400 

Retail Trade 290,700 551,652,200 .05 245,779,000 

Finance, 

Insurance, 

Real Estate 126,800 399,725,200 . 03 181,484,900 

Services 193,100 164,257,900 .12 46,137,300 

Others 12,000 2,962,600 .04 208,100 

Total 1,703,800 3,937,605,200 .04 162,315,400 

1/ Excludes Subchapter s and DISC 

because of rounding . returns. Figures may not add to 

Note: See note to Table 4.5 

Source: Department of the Treasury 

Credit as a 

Percent of 

Business 

Receipts 

of Corporations 

Claiming 

Credits 

.32% 

.OS 

.53 

. 07 

. 06 

.10 

.12 

.07 

.12 

.04 

.10 

totals 
- 50-

well underway when the NJTC was enacted in May 1977. During both 

1976 and 1977, real GNP grew by over 5 percent annually. Private 

nonagricultural employment grew by 3.6 percent in 1976 and by 4.4 

percent in 1977. The seasonally adjusted unemployment rate 

declined during the two years preceding the NJTC's enactment, 

from 9.0 percent in May 1975 to 7 .1 percent in May 1977. Nevertheless, the unemployment rate remained far above its prerecessionary level. The unemployment rate (seasonally adjusted) 

declined while the NJTC was in effect, from 7.1 in May 1977 to 

5.9 in December 1978. It is not known what, if any, role the 

NJTC played in producing this decline. During the year following 

the end of the NJTC, 1979, the unemployment rate remained 

relatively steady at just under 6 percent. 

A. Effect on Employment 

1. An Incremental Employment Incentive 

The NJTC was intended to stimulate employment by lowering 

the wage costs of employers. The credits were also designed to 

be incremental. That is, they were supposed to subsidize only the additional, or incremental, jobs created by the policy. A 

major problem with designing an incremental employment credit is 

to determine how many workers would have been hired in the 

absence of the credit, (i.e., the "ideal" base for an incremental 

credit). ----

a. Problems of Defining the Base of an Incremental 

Employment Incentive 

The NJTC subsidized only employment growth beyond a 

threshold level. As a practical matter, true "incremental" 

employment, i.e., only the employment that would occur because 

the subsidy was available, cannot be accurately measured. The 

reason for this is that firms' employment plans vary greatly, due 

to factors totally unrelated to the subsidy. For example, 

one-third of all employers may have suffered a setback in 

production and employment from the previous year. Another third 

may experience a "normal" growth of two percent in employment, 

and another third may plan a 10 percent expansion in employment. The first group would be virtually precluded from earning the 

NJTC unless they were to raise employment above the previous 

year's level. The second group would earn some NJTC only if they responded to the incentive. The last group would earn the NJTC 

whether or not they responded to the incentive. Thus, any chosen 

threshold will restrict access to the subsidy and/ or dilute its 

incentive effect unless it can be accurately established for each 

individual firm. As shown in Table 4.2, an estimated 36 percent 

of business employment was excluded by the two precent credit 

base growth threshold i n 1977. 
-51-

An imperfect threshold for an i ncreme ntal credi t will affect 

certain firms and industries differently. Cyclically sensitive 

industries would be the least likely to qualify for the credit in 

a business cycle downturn , and they would be most likely to 

qualify in a business cycle upturn, such as oc curred in 1977 and 

1978. 

b. Implications of the New Jobs Tax Credit Base 

To qual i fy fo r the NJTC, a firm' s l evel o f employment had to 

exceed a threshold level equal to 102 pe rcent of its prev ious 

year's employment. The small busi ness limit created a cap level 

of employment above which the amount o f the credit did not 

increase as additional workers are hired. Since t he small 

business limit placed a $100,000 ceiling on the credit and the 

subsidy for each worker above the threshold was $2,100, the cap 

level of subsidized employment above the threshold was 48 workers.~/ 

For firms that would have had employment above the cap level 

i n the absence of the NJTC, the credit provided no employment 

incentive. For these . f i rms the credit provided a windfall gain of $100,000 without induc ing any increase in employment. Firms 

that had planned on a l e vel of employment between the threshold 

and cap levels were the most likely to increase employment as a 

result of the credit. For these firms, the cost of employing an 

additional worker up to the cap level of employment was reduced 

by $2,100. Firms that had planned on a level of employment below 

the threshold were less likely to increase employment in response 

to the credit. For the s e firms, the credit reduced the cost of 

an additional worker only a fter employment was beyond the 

threshold. · 

Firms which expected 1977 and 1978 employment levels not to 

exceed the threshold level may have pushed 1978 employment beyond 

the threshold level by deferring some of the planned 1977 hiring 

until 1978. These firms may have earned credits without 

necessarily having increased their average level of employment 

over the entire period when t he c redit was in effect. 

2. Value of -the Credit for Expanding Employment 

The NJTC prov ided some employers with an incentive to expand 

employment by reducing the first- year wage cost of certain 

workers hired during 1977 or 1978. In this section, the 

/ In th i s discussion, it is assumed that none of the credit 

limits other than the small business limit a pply . It is 

also assumed that each job slot generates $4,200 in FUTA 

wages per year. 
-52-

percentage reduction in first-year wage cost of additional 

workers is estimated for 1978. An estimate is also made of the 

percentage reduction in wage costs during the 1977 period that 

followed the enactment of the NJTC. It should be cautioned that 

the employment incentive of the NJTC cannot be gauged simply on 

the basis of these estimates. Given the existence of hiring, 

training, and separation costs, employers do not base their 

hiring decisions solely on the first-year wage costs. For some 

employers, even a large percentage reduction in the first-year 

wage costs may give rise to only a small increase in their 

employment. 

To examine the credit's effect on the cost of additional 

labor in 1978, consider the case of a worker hired by a firm at 

the start of the year and who remained employed with the firm for 

the entire year. If the firm was unaffected by any of the credit 

limits (and was eligibl e for and aware of the credit), the 

additional worker would have generated a tax credit equal to 

one-half of the worker's salary, up to a maximum credit of 

$2,100. Thus, the credit reduced the first-year wage cost of 

additional workers earning less than $4,200 by 50 percent. For 

additional workers earning above $4,200, the percentage 

reduction was less. For workers earning the average annual 

compensation of $12,000, (including fringe benefits and legally 

required supplements) for all private sector, nonfarm, full-time 

workers, the NJTC reduced the first-year hiring cost by 17 

percent. 

The reduction in calendar-year labor costs also depended 

upon when in the year any new positions were created, because the 

credit was not pro-rata for part-year positions. The average 

production worker employed continuously from the beginning of 

June 1977 through the end of the year earned wages of approximately $5,855; using the BLS data on compensation this 

corresponded to total compensation of $6,930. For hiring this 

worker to fill a new .position, the employer would have received a 

credit of $2,100, reducing the 1977 calender-year cost of the new 

position by 30 percent. As noted earlier, for a given employment 

level FUTA wages and NJTCs increase with turnover. Adjusting for 

labor turnover would yield a somewhat higher estimate. 

The employment incentive of the NJTC in 1977 was somewhat 

limited by the effect of increases in that year's employment on 

the amount of potential NJTCs earned in 1978. Increases in 1977 

employment raised the 1977 FUTA base used to determine the amount 

of the credit in 1978. For a given level of employment, the 

credit in 1978 was reduced by increases in 1977 employment. As a 

result of this linkage, the NJTC provided few employers with an 

incentive to add temporary positions lasting only through 1977. 

On the other hand, the linkage only slightly dampened the 

incentive to establish a position in 1977 lasting at least 
-53-

1978. For an employer unaffected by any of the credit 

limits, a $4,200 increase in the 1977 FUTA base carried over into 

1978 reduced the potential 1978 credit by $42.!Q/ 

The tax liability limit significantly reduced the value of 

the NJTC to many firms. For example, those companies whose 

credits were restricted solely by the tax liability constraint 

could, on the average, claim only about 26 percent of the credits 

earned against their current tax liabili ties. Of the remaining 

"unused" credits only a fraction are ever received, and most of 

those are carried over to future years. On the average, each 

dollar of credit that cannot be claimed against current tax 

liability is worth only sixty cents. Hence, for firms affected 

only by the tax liability constraint, the expected present value 

of each $1 of credit was earned about 70 cents.l!/ 

Considering the entire group of corporations without 

restrictions on credits earned, 59 percent of the NJTC earned in 

1977 could be claimed against current year tax liability; for 

1978, the corresponding figure was 62 percent. (Table 4.5). For 

these corporations as a whole, therefore, the present value of 

each $1 of NJTC earned in 1977 was 84 cents; a dollar credit 

earned in 1978 was worth 85 cents. Adjusting the previous 

estimates of the cost impact of the credit accordingly, the 

credit appears to have yielded roughly a 25 percent reduction in 

the 1977 cost of an additional worker hired in June 1977 by an 

eligible firm that was unaffected by the three limitations. The 

corresponding reduction in 1978 costs was 14 percent. 

10/ 

g ; 

Any 1977 change in employment would increase the FUTA base 

threshold by 2 percent so a $4,200 FUTA increase in 1978 

would be worth $84 less than if there had been no change in 

1977 employment. With a 50% credit on FUTA wage growth in 

excess of the threshold, the $84 increase in the threshold 

would cost $42 in credits. 

Based upon the average time patterns over which delayed 

credits are claimed, it is possible to calculate how delays 

reduce the value of "unused" credits. It is estimated that 

about 6 percent of "unused" credits can be obtained 

immediately with ·carrybacks, 45 percent are obtained within 

two years after they are earned, and another 13 percent are 

received between 2 and 7 years after they are earned. 

Based on this pattern, unused credits are 50 percent less 

valuable at a 20 percent interest rate, and 40 percent less 

valuable at a 10 percent interest rate. Thus a typical firm 

limited only by tax liability would only be able to claim 26 

percent of its credits currently and the remaining 74 

percent would be reduced in value by 40 percent because of 

delays, making the typical credit worth only 70 percent E 

(0.70 • 0.26 + 0.74 x 0.60) of the credit actually 

earned. 
-54-

The NJTC reduced the first-year cost of an additional worker 

hired in 1977 or 1978 by 50 percent for all firms affected only by the wage bill limit. Among firms affected by this limit, the 

ratio of credits claimed against current-year tax liability to 

credits earned was 52 percent in both 1977 and 1978. Adjusting 

for the tax liability limit and for non-wage compensation in the 

same manner as before, the NJTC reduced the first (calendar)-year 

cost of an additional worker by an estimated 37 percent for hires 

made in 1977 or 1978 ·by firms affected by the wage bill limit. 

With a similar adjustment for the tax liability limit, the 

NJTC reduced the first year cost of an additional position by an 

estimated 14 percent in 1977 and 8 percent in 1978 for firms 

affected by the new business limit. 

The NJTC provided no incentive to hire additional workers 

for firms limited by the $100,000 credit cap. 

Among firms unaffected by the small business limit, the 

proportion of employment growth that occurred in firms affected 

by the wage bill limit was 20 percent in 1977 and 28 percent 

in 1978 (see Table 4.5 ). For the new business limit, the 

corresponding proporti on was 22 percent in 1977 and 26 percent 

in 1978 (Table 4.5). These proportions may be used to weight the 

three sets of estimates of reductions in marginal labor cost 

among firms unaffected by the small business limit--those for 

firms unaffected by any of the limits on credits earned, those 

for firms that were affected by the wage bill limit, and those 

for firms affected by the new business limit. Overall, for NJTC 

claimants that were not constrained by the small business limit, 

the NJTC reduced the 1977 cost of an additional position 

established in June 1977 by 26 percent; for an additional 

position established at the beginning of 1978, the reduction in 

first-year costs was 20 percent. 

The discussion in this section has thus far focused on 

changes in the cost af an additional position. The changes in 

the average labor costs of firms claiming the credit are also 

relevant. For instance, the availability of the credit may have 

been responsible for some firms staying in business or starting business. Nevertheless, it is unlikely that much of the credit's 

employment stimulus was channelled through firm entry and exit 

decisions. For most NJTC claimants the credit reduced average 

labor cost by less than one percent (see the last column of Table 

4.8), due to the credit's incremental feature and the several 

credit limitations. Furthermore, the incremental feature 

effectively precluded most financially ailing firms from 

receiving any credits. 

The NJTC could have provided some potential entrepreneurs 

with a small incentive to start a new business. A new business 

affected only by the new business limit would have been entitled 

to a credit equal to 25 percent of its FUTA wage bill. For a new 
-55-

business starting at the beginning of 1978, a credit of this 

amount corresponds to about a 10 percent reduction in first year 

wage costs, since in the aggregate the FUTA wage bill was roughly 

40 percent of the total wage bill. The incentive provided to new 

companies was in most cases reduced by the tax liability limit--

in 1977, 82 percent of the corporations affected by the new 

business limit were also affected by the tax liability limit. In 

addition, new businesses tend to be relatively small and, as is 

pointed out in the next section, small businesses were unlikely 

to know of the credit . 

3. Evaluation of the NJTC as an Employment Incentive 

Chapter 1 developed the theoretical framework necessary to 

evaluate temporary and incremental credits such as the NJTC. 

This section analyzes the evidence that pertains to two 

questions: 

(1) What portion of 1977 and 1978 employment growth 

in the private for-profit sector occurred in firms for 

which the credit could have offered an incentive? 

(2) Did the credit produce any increases in employment 

in at least certain types of firms or industries? 

The discussion of the former question combines the evidence 

from the tax returns of corporations claiming the credit and from 

an employer survey of use of the credit. Data from the employer 

survey were used in two studies funded by the Labor Department 

which provide evidence pertaining to the second question. 

a. The Impact of the Credit Limits, Qualification 

Requirements, and Imper(ect Knowledge of the 

Credit 

To evaluate employer reaction to the NJTC, the Bureau of 

Census conducted a mail-survey of employers in February 1978 for 

the Department of Labor. The survey was sent to a stratified 

random sample of business employers. A partially successful 

attempt was made to exclude non-profit employers. The response 

rate was about 71 percent; approximately 2,500 useable responses 

were obtained. In presenting the results of the survey, the 

Census Bureau gave firms their appropriate sampling weights. 

Firms that were no longer in business at the time of the survey 

were not represented and there was also some underrepresentation of firms that started business in 1977. 

Employers knowledgeable of the credit in February 1978 

comprised only about one-third of all respondents, but they 

accounted for 77 percent of employees and 72 percent of 1976-1977 

employment growth. "Employment growth" as used here and in the 

following discussion is defined in the gross sense--i.e., 

employment growth in those firms actually experiencing increases 

in employment (not counting negative growth in firms experiencing 
----------------- - -

-56-

employment declines.) The proportion of employers who knew of 

the credit rose sharply with employment size, from 31 percent of 

firms with fewer than 10 employees to 89 percent of those with at 

least 500 employees. The survey asked employers, "Does your firm 

qualify for the New Jobs Tax Credit?" Since the time period to 

which this question relates is unspecified, a firm could have 

answered "yes'' if it had qualified for the credit on its 1977 

return or if it expected to qualify for the credit on its 1978 

return. Twenty percent of the respondents reported both knowing 

of the credit and qualifying for it; these firms had 58 percent 

of employment and 64 percent of employment growth. 

Few of the respondents to the Census survey--2.4 percent--

answered that they had made a conscious effort to increase 

employment as a result of the credit; these respondents accounted 

for approximately 7 percent of the employment growth reported 

by all respondents. Comparable information is available from 

a sample of the membership of the National Federation of 

Independent Businesses (NFIB). In comparison with the 

respondents to the Census survey, the NFIB firms were more aware 

of the credit's existence, but apparently no more likely to 

respond that the credit induced them to increase employment. In 

January 1978, 1.4 percent of the NFIB firms reported that the 

credit had caused them to increase employment. In April 1978, 

the survey showed 2 ." 4 percent of respondents claiming to have 

increased employment in response to the credit; the average 

increase among these employers was 2.3 employees. Unfortunately, information was not available on the size of the 

respondent firms in the NFIB survey. Therefore, it is impossible 

to say whether this constitutes a relatively large or small 

employment effect. By July 1978, 4.1 percent reported increasing 

employment as a result of the credit. 

An estimated 53 percent of the employment growth in 

corporations claiming the NJTC occurred in corporations for which 

the small business limit was binding (Table 4.5). Corporations 

affected by the small business limit were not eligible to earn 

more credits if they employed more workers than they actually 

employed. Consequently, with few exceptions, the NJTC could not 

have induced these corporations to increase employment. Thus the 

NJTC could have been a contributing factor in about 47 percent of 

the employment growth among corporations claiming the credit. 

The corresponding percentage for all NJTC claimants--both 

corporate and non-corporate--may be higher because unincorporated 

firms are typically much smaller than corporations. The 
-57-

difference is probably small, however, since the non-corporate 

sector accoun t ed for a small proportion of employment growth 

among NJTC claimants.l2/ 

Together, the evidence from corporate returns and the Census 

survey yield a rough estimate that 30 percent of aggregate 

employment growth among private for-profit firms with some 

employment growth occurred in firms for which the NJTC offered an 

employment incentive. This estimate is obtained by multiplying 

two estimates together: 

(1) The esti mate of the proportion of employment growth 

among NJTC claimants that occurred in firms for which the 

credit could have offered an employment incentive (47 

percent); and 

(2) The estimate of the proportion of employment growth 

that occurred in firms which knew of and qualified for 

the NJTC (64 percent). 

The estimate of the proportion of employment growth 

occurring in firms for which the NJTC provided an employment 

incentive should by no means be construed as an estimate of the 

proportion of employment growth which was caused by the credit. 

b. Labor Department Studies 

Two studies sponsored by the Department of Labor attempted 

to estimate the impact of the NJTC on employment.l3/ Both use 

information obtained from the Census survey. --

Perloff and Wachter used the data from the Census survey to 

estimate the effect of knowledge of the NJTC on firms' 1976-77 

employment growth rate. The employment levels were those that 

12; Corporations produced about 89 percent of the 1976-77 

employment growth reported by respondents to the 

Census survey who said that they knew of and qualified for the NJTC. Thus, even if none of the unincorporated 

claimants were affected by the small business limit, this 

estimate wou ld imply that only 53 percent of the employment 

growth among all claimants occurred in firms for which the 

small business limit was not effective . 

.!11 Perloff, J.r-t. and Michael L . Wachter, "The New Jobs Tax 

Credit: An Evaluation of the 1977-78 Wage Subsidy Program," American Economic Association Proceedin s, Vol. 69, No. 2, 

May 7 , 7 - 79. A onger unpu 1s e version is "A 

Re-evalua tion of the New Jobs Tax Credit," November 1979. 

Bishop, J., "Employment in Construction and Distribution 

Industries : The Impact of the New Jobs Tax Credit," 

Institute for Research on Poverty Discussion Paper, April 

1980. 
-58-

firms reported to be their average levels for 1976 and 1977. In 

the comparison between firms which knew of the NJTC and other 

firms, firm employment size, industry, type of tax form, region, and growth rate in sales were held constant. The growth rate of 

employment was found to be substantially higher for knowledgeable firms. The authors caution that this difference cannot 

necessarily be viewed as having been caused by the NJTC: 

"It is possible that a variable such as entrepreneurial skill is 

responsible for both knowing about the program and rapid growth." 

The likelihood of spurious correlation between knowledge of the 

credit and the employment growth rate is suggested by two considerations.l4/ First, only 7 percent of respondents to the 

Census survey-who knew of the credit answered that the credit had 

caused them to increase employment. Second, since the NJTC was 

not enacted until May 1977, there is reason to doubt that it 

could have had a very large effect on the firm's average level of 

employment in 1977. 

A study by Bishop relates growth in knowledge about the NJTC 

to employment growth in the construction and distribution 

(retailing and wholesaling) industries. Bishop estimates that 

the NJTC was responsible for a significant share of the increase 

in employment in these industries that occurred between mid-1977 

and mid-1978. Since knowledge of the NJTC grew steadily over 

this period, however, it is possible that the increase in 

employment that Bishop attributes to the credit reflected a shift 

in the trend rate of growth that was due to other factors.lS/ 

The credit's impact on aggregate employment cannot be 

inferred from either the Perloff-Wachter or Bishop studies. Any 

employment gains induced by the credit in eligible firms may have 

been offset by slower rates of growth (or declines) in employment 

in other firms. Thus, the Perloff-Wachter study "could not 

conclude that the NJTC expanded total employment" although the 

credit "had a clear impact in expanding employment in some firms 

14; Additional causes of bias which are cited by Perloff and 

Wachter are specification error and the limited nature of 

the dependent variable. 

15/ There are othe~ problems in the interpretation of Bishop's 

results. Bishop estimated employment demand equations with 

contemporaneous and lagged values of measures of factor 

prices, output, and the variable measuring knowledge of 

NJTC. To be consistent with a finding that knowledge of the 

NJTC had a positive impact on employment in some industry, 

the estimated employment impact of increases in the wage 

rate would have to be significantly negative. This 

consistency test cannot be made, however, since Bishop did 

not perform tests of significance for the coefficients of 

the wage measures. Bishop's results are also rendered 

suspect by his finding that for many industries an increase 

in the cost of capital results in a decrease in relative 

employment, which counters the general presumption that 

capital and labor are substitutes. 
- 59-

relative to others. " Simila r ly, Bishop's study does ~ot rule out 

the possibility that any induced employment growth in the 

industries he studied was offset by reduced employment growth in 

other industries. 

Another unknown is the extent to which employers exploited 

the credit through increases in employee turnover and/ or 

decreases in weekly hours per worker. These responses would have 

enabled employers to increase their credits earned without 

accompanying increases in the total number of manhours employed. 

Such windfall gains would have reduced any net gain in aggregate 

manhours per dollar of subsidy. In addition , a NJTC-induced 

increase in turnover would have entailed higher training, hiring, 

and separation costs (such as unemployment insurance payments). 

The hypothesis that the NJ TC caused increases in employee 

turnover rates was supported by anecdotal evidence that 

Tannenwald obtained from a small-scale 1979 employer survey.l6/ 

Tannenwald attempted to corroborate this finding through an -- econometric analysis of the variation in turnover rates among the 

firms in his sample. Using the ratio of the firm's annual FUTA 

wage bill to its average employment level over the year as a 

proxy for turnover, Tannenwald found that turnover was positively 

related to measures of the firm's responsiveness to the NJTC. 

The correlation may be partly spurious, however, since the 

reduction in the cost of new eligible positions due to the credit 

varied directly with the turnover rate . 

B. Effects of the New Jobs Tax Credit on Small Businesses 

The New Jobs Tax Credit was intended to assist small 

businesses in particular. This was to be accomplished by the 

annual $100,000 limit on the amount of credit that could be 

claimed by employers. This small business limit targeted the 

credit's employment incentive to smaller businesses. Large 

employers who reached the $100,000 limit obtained no additional 

credits for expanding employment. In this respect, the credit 

discriminated in favor of small employers. Table 4.11 shows that 

the small business feature of the credit worked as expected. The 

percentage of corporations whose credit was reduced by this 

provision in 1977 incLeased with asset size. For example, only 

0.4 percent of the smallest companies were affected by this limit 

in 1977, whereas 65 percent of the largest companies were 

affected. 

The proportion of respondents to the Census su r vey who 

reported knowing of and qualifying for the credit increased 

steadily with firm size , from 4. 4 percent of firms with fewer 

Tannenwald, R., "The Economic Impact of the Federal New Jobs 

Tax Credit" report prepa r ed for the Employment and Training 

Administration, U.S . Department o f Labo r , 1982. The survey 

universe was limited to single-e stablishment firms within 20 

selected 3-digit industries in Wis consin. 
-60-

Table 4.11 

Impact of Small Business Limit by Size of Firm -1977 

Total Assets 

($000) 

0 - 250 

250 - 1,000 

1,000 - 5,000 

5,000 - 10,000 

10,000 - 25,000 

25,000 - 50,000 

50,000 - 100,000 

100,000 - 250 , 000 

250,000 or more 

All Corporations 

Percent of Corporations 

Affected by the 

Small Business Limit 

0.4% 

0.9 

4.8 

15.5 

18.6 

18.5 

24.0 

34 .6 

65 .1 

2.6 

!/ Does not include Subchapter s and DISC 

corporations. Figures may not add to total 

because of rounding. 

Note: See note to Table 4.5 

Source: Department of the Treasury. 
-61-

than 10 employers to 47.8 percent of firms with at l east 500 

employees. From Table 4.2 it can be seen that the proportion of 

corporations that were eli gible for the credit increased from 24 

percent of those with 1977 receipts of under $1 million to 54 

percent of those with 1977 receipts of $1 million or more. 

The available evidence suggests that the NJTC provided the 

smallest employment incentive for very small and very large firms 

and the largest incent~ve for medium size firms . Very small 

firms were less likely to know of and qualify for the credit, 

while the small business limit removed any employment incentive 

for large firms. 

C. Assistance to the Handicapped 

A secondary objective of the New Jobs Tax Credit was to 

provide a special incentive to hire disabled workers. Employers 

could claim extra credits of up to 10 percent of the FUTA wages 

paid to such workers. Corporations claimed the extra credit on 

about $4.2 million of FUTA wages paid to disabled workers . Assuming a one to one correspondence between the number of 

employees and each $4,200 of FUTA wages, corporations claimed the 

extra credit for about 1,000 disabled workers in 1977. 

D. Summary 

The available evidence has not been sufficient to measure 

the impact of the New Jobs Tax Credit on the growth of aggregate 

employment and output. Due to the credit's eligibility 

requirements and limitations, 30 percent of the for-profit 

business employment growth that took place during the credit's 

lifetime occurred in firms for which the credit provided an 

incentive to increase employment. Among these firms, the 1977 

wage cost of creating a new job at the beginning of June 

1977--just after the credit's enactment--was typically reduced by 

26 percent; for a new job created at the beginning of 1978, the 

typical reduction in the first-year cost was approximately 20 

percent . The employment response elicited by these incentives is 

unknown. The fact that it subsidized only the first year wage 

cost of a new position limited its employment incentive, 

especially for firms where hiring and training costs account for 

a relatively large portion of total labor costs. 

The complexity of the NJTC probably limited its employment 

impact. At the time hiring decisions were made, many employers 

were u ncertain whether they would ultimately qualify for a full 

credit, a partial credit, or no credit. 

Two studies sponsored by the Labor Department provide 

support for the hypothesis that the NJTC stimulated employment 

growth among certain firms or industries. The first study found 

that among surveyed employers, 2.4 percent reported having made a 

conscious effort to increase employment as a result of the NJTC, 
- 62-

and that employers which knew of the credit had substantially higher 1976-77 employment growth rates than otherwise similar 

employers. The other study found that over the credit's 

duration, employment growth in the construction and distribution 

industries was positively related to growth in knowledge of the 

NJTC. 

The results of these studies do not imply that the NJTC 

increased aggregate employment. While it was in effect, the 

credit could have reduced the workforce of ineligible employers 

(or of employers for whom the credit's employment incentive was 

relatively small). The employment losses could have resulted 

from: (1) consumer substitution away from products made by these 

employers toward products of employers for whom the credit's 

direct employment stimulus was greatest, (2) increased wage 

costs, or (3) the cost of financing the subsidy. Similarly, it 

cannot be concluded that the NJTC stimulated growth in aggregate 

output. 

As designed, the NJTC directed a disproportionate share of 

t he benefits to small businesses. However, very small firms were 

less likely to know of or qualify for the credit. 

Finally, the additional credit available for hiring 

handicapped workers was rarely used. Only 1,000 claims of the 

additional credit were made for hiring handicapped workers. 
-63-

Chapter 5 

THE TARGETED JOBS TAX CREDIT 

This chapter deals with the administration and effectiveness 

of the Targeted Jobs Tax Credit, during its initial phase 

(January 1979-September 1981). The credit was intended as an 

incentive for employers to hire members of seven targeted groups. 

The chapter is divided into three sections . The fi rst section 

describes the actual administration and operation of the tax 

credit program. The second section presents statistical data on 

the use of the TJTC by the eligible individuals and employers. 

The final section evaluates the effectiveness of the TJTC. The 

legislative history and description of the credit are in Chapter 

3, Section III. 

I. Administrative Aspects of the TJTC Program 

The design of TJTC was similar to an expenditure program, 

with administration of the program assigned to the Department of 

Labor. The actual implementation of the TJTC program differed 

from the intended operation due to several factors described in 

this section, including a lack of funding for administration, the 

slow start-up of the certification process, and retroactive 

certifications. 

A. The TJTC Certification System 

An administrative system was required to certify that TJTC 

credits were taken only for wages paid to qualified workers . The 

Revenue Act of 1978 required the Department of Treasury and the 

Department of Labor to specify local agencies that would be 

responsible for certifying eligible individuals. An administrative decision was made to give the Department of Labor official 

responsibility for managing the certification system. The State 

Employment Security Agencies (SESAs) were designated as the local 

administering agencies. The IRS was responsible for auditing tax 

returns to ensure that correct amounts of credit were taken and 

for issuing income tax regulations to enable taxpayers to 

understand the conditions under which the credit could be 

claimed. Both Departments shared responsibility for informing 

taxpayers of the program's existence. 

The House and Senate Committee Reports on their respective 

TJTC bills presen t a cqmmon description of the intended operati on 

of the certification system. The basic reason for having an 

agency certify eligible individuals was to encourage employers to 

participate by relieving them of "responsibility for proving to 

the Internal Revenue Service that an individual is a member of a 

target group". A certification of eligibility from the Secretary 
-64-

of Labor was also thought to be more likely to assist an 

individual job seeker than one identifying the worker as a 

welfare or food stamp recipient. 

The Congress envisioned that there would be a single 

designated employment agency which would issue the certifications in each locality. This was expected to strengthen the 

agency's labor market information exchange role, and to relieve 

other agencies (which were in a position to verify an 

individual's eligibility) of the burden of inquiries from 

employers. Thus, the Committees believed that the credit would 

be used both by public employment agencies in their attempts to 

place target group members, and by targeted individuals in their 

own job search. Further they believed that aggressive promotion 

by the Department of Labor and local employment and training 

agencies was essential to the success of the credit. Both 

Committee reports state "The Committee believes that only through 

such publicity, and through the resulting interchange between 

employers and public employment agencies, will the intended 

results be achieved."!/ 

1. The Certification System - For Groups Other Than 

Cooperative Education Students 

The State Employment Service Agencies (SESAs) of the 

Department of Labor were given primary responsibility for 

certifying TJTC eligibility for target group members other than 

cooperative education students. For eligible persons other than 

cooperative education students, a two-stage certification system 

was adopted. In the first stage, called "vouchering", the c~rtifying agency would determine whether individuals were 

members of targeted groups and issue vouchers to employers who 

hired eligible individuals. Alternatively, the voucher could be 

issued directly to target group members for use in their search 

for employment. 

The second stage, called "certification", would be initiated 

when an employer signed the voucher form and sent it to the SESA 

office. By signing the form, the employer indicated that the 

vourchered individual either had been hired or would be hired. 

Certification would be concluded after SESA personnel reviewed 

the voucher and issued a certificate to the employer that could 

be used to substantiate TJTCs claimed on the tax return. If the 

vouchers were in order, the SESA offices were required by the 

Department of Labor to issue certificates within 72 hours after 

receiving the vouchers. 

l! U.S. House of Representatives, Committee on Ways and Means, 

Revenue Act of 1978, Report No. 95-1445, p. 92. u.s. 

Senate, Comm1t~ee on Finance, Revenue Act of 1978, Report 

No. 95-1263. 
-65-

The two-stage certification system was based on a similar 

system developed in Cal'ifornia for administering the WIN-Welfare 

Tax Credit. The system was chosen to enable eligible individuals 

to use TJTC vouchers in their job searches. The SESAs were 

responsible for the certifications, but due to lack of administrative funding, other agencies were permitted to voucher their 

client populations. The other agencies involved included the 

Comprehensive Employment and Training Act (CETA) prime 

sponsors2/ which vouchered only the three economically disadvantaged groups), vocational rehabilitation agencies, Social 

Security offices, Vete~ans Administration offices, ex-offender 

agencies, and state and local welfare agencies. Many of these 

agencies were reluctant to enter into "cooperative agreements" 

with the SESAs to issue vouchers because no additional funding 

was provided for this work. 

Through September 30, 1981, nearly 1,030,000 vouchers were 

issued to TJTC eligibles other than cooperative education 

students. Sixty-two percent were issued by the SESA's, 25 

percent by CETA prime sponsors, and another 12 percent by 

vocational rehabilitation and state and local welfare agencies 

combined. 

2. The Certification System for Cooperative Education 

Students 

The Revenue Act of 1978 required the cooperative education 

schools to operate the certification system for cooperative 

education students. Since cooperative education students must be 

placed in specific jobs in order to participate in a "qualified'' 

cooperative education program, only one form is used for this 

group and it serves the purposes of both a voucher and a certificate. Certifications are provided for these students by the 

schools rather than the SESAs. Through September 30, 1981, 

317,000 cooperative education students were certified. 

The eligibility of cooperative education students is 

documented by a single form, IRS Form 6199, which is signed by 

the student, the employer, and a representative of the school. 

This form serves as a certificate for employers of cooperative education students. 

/ CETA prime sponsors are defined as state governments and 

other political jurisdictions with populations of 100,000 or 

more persons. CETA prime sponsors were eligible for direct 

CETA grants. 
-66-

B. Major Factors Shaping Administration of the Credit 

1. Establishment of Certification Targets 

Initially, TJTC certifications proceeded at a slower rate 

than expected. By August 1979, Department of Labor reports 

indicated that about 58,000 persons had been vouchered for the 

TJTC, and 23,000 certified. An in-house Employment and Training 

Administration (ETA) evaluation of the TJTC certification system 

at nine sites found that one reason for the slow start was a 

reluctance on the part of vouchering agency staff to promote the 

credit. The reluctance on the part of the administering agency staff was cited as being due to a staff perception that employers 

were skeptical about the TJTC program. The evaluation concluded, 

however, that much of the staff attitude stemmed from personal 

assumptions rather than actual TJTC experience.i/ 

To help give direction to the TJTC effort and to increase 

use of the credit, ETA established certification goals in late 

1979. The national goals were 250,000 certifications from the 

beginning of the program through the end of September 1980, and 

an additional 300,000 certifications during FY 1981. These goals 

were apportioned among the states by a formula based on estimates 

of the size of the resident target population . 

2. Provisions 

Econom1ca 

of 

Of the seven target groups, vouchering the three 

economically disadvantaged groups required the greatest 

administrative effort. According to the TJTC statute, an 

individual is economically disadvantaged if his annualized family 

income during the six-months immediately preceeding the month in 

which he was hired was less than 70 percent of the Bureau of 

Labor Statistics lower living standard. The determination that 

an individual is economically disadvantaged involves a timeconsuming examination of various income records. In addition, 

the experience with similar determinations for the CETA program 

indicated that the process involved frequent errors . Congress had recently taken steps to reduce such errors by provisions in 

the 1978 amendments to CETA, leading to DOL administrative 

procedures to verify CETA eligibility determinations. The same 

procedures were mandated for the TJTC. 

An additional complication in the case of the TJTC was that 

the statute required these determinations to be based on income 

in the "six months immediately preceding the month in which the 

Employment and Training Administration, Office of Program 

Policy, Evaluation, and Research, "Evaluation Study of the 

Early Implementation of the Targeted Jobs Tax Credit 

Program" (Report No. 51, December 1979), p. viii. 

Additional information about the study is in Appendix B. 
-67-

hiring date occurs" . This meant that vouchers needed to be 

revalidated at the end of the month in which they were issued. 

Thus, a voucher issed to an eligible job applicant on April 29 

expired the next day and required revalidation in two days. 

Local administering agencies were reluctant to issue vouchers 

toward the end of the month. (This problem was eliminated by the 

1981 amendments to the TJTC.) 

For the three economically-disadvantaged target groups, a 

voucher life of one month or less meant that: (1) some vouchers 

expired unused and (2) some individuals were vouchered more than 

once. From the standpoint of a local administering agency, the 

high resource cost of unused vouchers or revalidations of expired 

vouchers reduced the attractiveness of large-scale vouchering, 

relative to issuing retroactive certifications, as a means of 

reaching the certification targets set by ETA. 

3. Retroactive Certifications 

The most controversial aspect of the TJTC program involved 

retroactive certifications. In its recordkeeping, the Department 

of Labor (DOL) counted as retroactive any certification in which 

the eligible individual was vouchered 15 or more days after the 

employee started work. Retroactive certification for the jobs 

credit is similar to the substantiation tests for all other tax 

credits that are claimed at the end of the tax year or several 

years later by amended return. According to DOL data (described 

below), nearly two-thirds of all targeted individuals (other than 

cooperative education students) certified during the first three 

quarters of FY 1981 were certified retroactively. A Mershon 

Center studyi/ surveyed. the certification procedures at four 

different times in 1980 and 1981. Their surveys, which counted 

as retroactive any voucher and certification issued after an 

employee was hired, found that between two-thirds and four-fifths 

of all certifications issued in the areas studied were 

retroactive. 

Retroactive certifications were necessary initially in order 

to compensate employers of workers hired before the certification 

system was established. The law allowed the credit to be claimed 

for wages incurred or paid after December 31, 1978 to employees 

hired a f ter September 26, 1978. This necessitated retroactive 

certifications for workers hired before January 1, 1979 , even if 

the certification system was operative on November 6, 1978, the 

date the TJTC was enacted. Furthermore, since many designated 

Ohio State University, Mershon Center, The Implementation 

of the Targeted Jobs Credit, Report No. 2 (January 1981), 

Report No. 3 (May 1981), Final Report (January 1982). 

Additional information about the study is in Appendix B. 
-68-

agencies were unable to certify individuals until the summer of 

1979, many employers could not obtain certifications for 

employees hired during part of 1979. 

In order to avoid penalizing employers of these workers, the 

Internal Revenue Service took the position, announced in a March 

21, 1979, news release, that the certifications could be 

completed after employees were hired, but not later than the due 

date, including extensions, of the employer's tax return on which 

the credit was claimed. This interpretation was consistent with 

the statutory provision that allowed employers to claim the 

credit for wages paid after December 31, 1978, for employees 

first hired after September 26, 1978, a date preceding enactment 

of the statute. Otherwise, the statute did not specify when the 

certifications may be made. 

Retroactive certifications could conceivably have been 

restricted administratively after a transition period which 

allowed for the late start of the program. However, this was not 

done. By the time the Internal Revenue Service became aware of 

the retroactive certification issue, legislation concerning the 

TJTC was already pending. A legislative solution to the issue 

was chosen. 

According to a study of TJTC administration, the establishment of certification targets by DOL provided considerable 

stimulus to the practice of retroactive certifications. In their 

efforts to reach their targets, many SESAs found that certifications could be achieved at the lowest administrative cost by 

assisting employers to identify eligible workers already on their 

payrolls. 

4. Funding for Administration 

The Department of Labor initially estimated that it would 

cost about $70 million annually to properly operate the 

certification system, but no funds were approved for this 

purpose. Congress did not specifically authorize appropriations 

for administering the TJTC. However, DOL reprogrammed $10 

million from Title III, of the Comprehensive Employment and 

Training Act (CETA) for FY 1979, and in subsequent years 

earmarked $14 million from CETA Title VII, to administer the TJTC 

certification system. The funds were to be used for recordkeeping, reporting, and promoting the credit. 

As noted above, the lack of funding required the use of 

several cooperating agencies to voucher groups other than 

cooperative education students. In addition, the lack of funding 
-69-

for eligibility determinations caused most cooperating agencies 

to maintain only modest vouchering efforts.~/ 

C. Other Aspects of TJTC Program Administration 

1. Promotion and Information 

TJTC promotional activities were undertaken by both the 

Department of Labor and the Department of the Treasury. These 

included the development and distribution of brochures, flyers, 

and other materials providing information on the TJTC to the 

employer community, to organizations serv ing various target 

groups, and to vouchering agencies. Promotional packages and 

standard radio spots, for use in local areas, were also 

developed . Many SESAs developed their own promotional materials 

and conducted extensive marketing campaigns. 

2. Treasury Regulations 

Proposed regulati ons for the Targeted Jobs Tax Credit were 

published December 28, 1979, in the Federal Register, volume 44, 

Number 250. The regulations covered the definition of qualified cooperative education programs, the apportionment of the credit 

among a group of busin~sses under common contr ol, and the 

carryback and carryover provisions for unused credits. The 

proposed regulations also dealt with some aspects of the New Jobs 

Tax Credit. 

Public response to the new regulations primarily concerned 

the definition of a quali f ied cooperative education program. The 

proposed regulations defined the term "program of vocational 

education" as an "organized educational program which is directly related to the preparat1on for a career requiring other than a 

baccalaureate or advanced degree. '' The "organi zed education 

program'' was defined to be "only instructions related to the 

occupation or occupations for which the students are in 

training." 

Several service industry associations responded that the 

proposed regulations interpreted the statute too narrowly. They stated that students should be eligible for the TJTC regardless of whether or not the jpb was specifically related to the course 

of study or career goal. Several State Education Department officials and cooperative education program directors argued, on 

the other side, that the regulations were too broad. They stressed that the statute requires a written agreement between 

the school and employer(s ) that plans the alternation of study and school with a job that "contributes to the students' 

education and employability." 

/ Ohio State University, Mershon Center, Report No. 1, p. 11. 
- 70-

Final regulations were issued on November 6, 1985. 

II. Statistical Summary 

Information on the use of the Targeted Jobs Tax Credit is 

available from two sources: certification data collected by 

SESAs and a sample of corporate income tax returns. 

A. Certification Data 

1. The Initial TJTC Program 

Since the inception of the TJTC program, the SESAs have 

collected .data on individuals vouchered and certified. State 

reports are sent to Department of Labor regional offices, and the 

regional summaries are sent to the National Office where they are 

compiled. The reports contain certain demographic information--

age, sex, race or ethnic group--and the occupations and wages of 

those certified. 

The data in Table 5.1 show that through September 30, 1981, 

1 . 35 million vouchers had been issued, including 318,000 for 

cooperative education students. More than two vouchers were 

issued for every certification for individuals in the 

non-cooperative education groups. Vouchers were often issued 

several times to the same person. The SESAs and CETA prime 

sponsors issued nearly seven out of every eight vouchers for the 

target groups other than cooperative education students. 

Vocational rehabilitation and welfare agencies accounted for most 

of the remainder. 

Certifications i ssued through September 30, 1981, totalled 

about 717,000 . The largest shares of total certifications went 

to cooperative education students (44 percent) and economically disadvantaged youth ( 40 percent ) . 

Overall TJTC certification activity has varied over time 

(see Table 5 . 2), with the trend line dominated primarily by the 

variability of cooperative education certifications which are 

strongly tied to the school cycle. Within the general trend, 

several patterns emerge. On a quarterly basis, certifications 

for economically disadvantaged youth increased steadily since the 

beginning of 1980 . Certifications for economically disadvantaged Vietnam veterans and vocational rehabilitation referrals 

increased since the July-September 1980 and October-December 1980 

quarters, respectively, while certifications for the other groups 

have fluctuated over time. 
- 71-

Table 5.1 

Targeted Jobs Tax Credit Vouchers and Certifications 

Issued by Target Group 

(CUmulative ·through September 30, 1981 ) 

Target Group 

Youth, Economically Disadvantaged 

Vietnam Veterans, Economicall y Disadvantaged 

Ex-Convicts, Economically 

Disadvantaged 

Vocational Rehabilitation - Handicapped 

Cooperative Education Students 

General Assistance Recipients 

Supplemental Security Income 

Recipients 

Total 

Source: u.s. Department of· Labor . 

vouchers 

647,378 

84, 728 

901511 

75,945 

317,901 

129,867 

4, 284 

1, 350,614 

Certifications 

289,814 

29,847 

30,015 

33,609 

317, 901 

14,481 

1,657 

717,324 
-72-

Table 5.2 

Certifications for Target Groups Per Quarter Through 

September 30, 1981 ll 

Disadvantaged Cooperative 

Youth Education Other 

January - March 1980 22,739 52,015 12,049 

April - June 1980 24,585 20,613 12,203 

July - September 1980 29,585 111525 11,699 

October - December 1980 35,834 53,301 12,654 

January - March 1981 41,921 53,320 14,847 

April - June 1981 46,946 25,693 14,732 

July - September 1981 51,430 46,670 14,233 

ll Data problems preclude use of quarterly data prior to 

January 1980. 

Source: U.S . Department of Labor. 

Total 

86,803 

57,401 

52,809 

101,789 

110,088 

87,371 

112,333 
-73-

Data on demographic characteristics, occupations, and wages 

are collected for certified individuals in all the target groups 

except coope r ative education students.6/ Data in Table 5.3 show 

that about three-fifths of the certifications issued were for 

males, three-fourths for individuals under age 25, about one-half 

for whites, one-third for blacks, and one-tenth for Hispanics. 

As of June 30, 1981, certifications (excluding cooperative 

education students) have been concentrated in the services, 

benchwork occupations, machine trades, and clerical and sales 

(Table 5.4). Service occupations have accounted for nearl y 

one - fourth of all certifications. About three-fourths of TJTC 

certifications for all groups except cooperative education 

students were for jobs ·with wages below $4.00 per hour 

(Tabl e 5.5) . 

In the first three quarters of fiscal year 1981, 63 percent 

of all vouchers for noncooperative education students were issued 

15 or more days after the individual began employment, based on 

reports from 44 states. An earlier Mershon Center report?/ 

estimated that 80 percent of the certifications in the area they 

studied were issued after the individual ' s employment starting 

date. 

2. Vouchering and Certification Activity Since the 1981 

Amendments 

The 1981 amendments restricted the issuance of retroactive 

certifications. The effect of this change can be roughly gauged from Table 5.6, which compares certification levels during the 

fi·rst half of FY 1981 with the levels during the first half 

of 1982. Excluding the cooperative education group, certifications issued for the original TJTC target groups declined by 32 

percent, from 105,256 in the first half of FY 1981 to 71,936 in 

the first half of FY 1982. It should be noted that the 1981 

amendments to the TJTC coincided with two other changes of major 

/ Data on the number of certifications for cooperative 

education students generally are sent by the schools to the 

SESAs, but data on demographic characteristics, wages, and 

occupations are not compiled for cooperative education 

s tudents. Data are not collected on retroactive certifications for this group either. 

21 Mershon Center Report No . 1. 
-74-

Table 5.3 

Demographic Characteristics of Certified Individuals 

(Excluding Cooperative Education Students) 

(CUmulative through June 30, 1981) 

Demographic 

Characteristics Number Percent 

Males 206,634 62.0% 

Female 126,885 38 . 0 

16-18 Years Old 34,339 10.3 

19-24 Years Old 227,588 68.2 

25-34 Years Old 54,050 16.2 

35 Years Old or Over 17,542 5.3 

White, Not Hispanic 182,337 54.7 

Black, Not Hispanic 108,673 32.6 

Hispanic 33,786 10.1 

American Indian/ Alaskan 

Native 2,203 0.7 

Asian or Pacific Islander 6,106 1.8% 

Source: U.S. Department of Labor. 
-75-

Table 5.4 

Occupations of Certified Individuals 

(Excluding Cooperative Education Students) 

(CUmulative through June 30, 1981) 

Professional, Technical, Managerial 

Clerical and ·sales 

Service 

Farming, Forestry, Fishery 

Processing 

Machine Trades 

Benchwork _!/ 

Structural 

Miscellaneous 

Total 

14,852 

39,952 

81,394 

8,780 

33,201 

35,526 

40,437 

30,400 

49,252 

333,794 

_!/ Includes assembling, grinding, and drilling. 

~/ Does not add to 100 percent due to rounding. 

Source: U.S. Department of Labor 

Percent 

4.4% 

12.0 

24.4 

2.6 

9.9 

10.6 

12.1 

9.1 

14.8 

99.9 2/ 
-76-

Table 5. 5 

Starting Wage Rates for Certified Individuals 

(Excluding Cooperative Education Students) 

(CUmulative through June 30, 1981) 

w.age Rate NUmber Percent 

Up to $3 . 99 248,024 74 .6% 

$4.00 - $4.99 47,578 14.3 

$5.00 - $5.99 18,326 5.5 

$6.00 and Over 18,558 5.6 

Total 332,486 100 . 0% 

Source: u.s. Department of Labor. 
-77-

Table 5.6 

Certifications by Target Group Before and After 

the 1981 Amendments to the TJTC / 

Target Group 

Youth, Economically-Disadvantaged 

Vietnam veterans, Economically Disadvantaged 

Ex-convicts, Economically Disadvantaged 

vocational Rehabilitation 

General Assistance 

Supplemental Security Income Recipients 

Total ~/ 

Certifications Issued 

1o; 1; eo 1o; r; e1 

to to 

3/ 31/ 81 3/ 31/ 82 

77,755 51,170 

7,415 5,241 

7,702 5,871 

7,875 6,034 

4,048 3,315 

461 305 

105,256 71,936 

/ Certification data for cooperative education students are 

unavailable after FY 1981. 

~/ The total does not include certifications for three target 

groups: cooperative education students; ex-cETA 

participants, and the AFOC/WIN group. 

Source: U.S. Department of Labor. 
- 78-

importance to the TJTC program: a worsening in overall economic 

conditions and reductions in the staff of the Job Service.~/ 

The requirement that cooperative education students be 

economically disadvantaged did not take effect until January l, 

1982. After that date, the schools issued certifications only after a student was determined to be economically disadvantaged 

by the Job Service. To examine the effect of the 1981 amendments 

on the use of the TJTC by the cooperative education system, appropriate comparison periods would be the second halves of 

fiscal years 1981 and 1982. Cooperative education certifications 

during the second half of FY 1981 totalled 72,363. During FY 

1982 the schools ceased reporting to the Job Service the number 

of certifications issued for cooperative education students. 

However, Job Service records show that approximately 8,435 

cooperative education students were determined to be TJTCeligible during the second half of FY 1982. 

The Economic Recovery Tax Act incorporated the WIN/Welfare 

credit into the TJTC. WIN/Welfare certifications decreased f r om 

65,700 in 1980 to 31,090 in 1982. The WIN/Welfare credit was 

also modified in two ways that discouraged its use: the issuance 

of retroactive certification was restricted and employer eligibility was limited to business employers. The economic 

downturn and administrative changes in the WIN program also 

contributed to the decline in WIN/Welfare certifications. WIN 

administrative funds in FY 1982 were 25 percent less than in FY 

1981. In addition, the 1981 Omnibus Budget Reconciliation Act 

allowed states to opt for their own alternatives to the WIN 

program, called WIN demonstration project (demos). By the end of 

FY 1982, 16 states had implemented WIN demonstration projects. 

I Certifications for all target groups, with the exception of 

c ooperative education students, have increased from 202,261 

in FY 1982 to 563,381 in FY 1984. The Department of 

Education provides technical assistance to state education 

agencies which certify cooperative education students. DOL 

performs "economic determinations" for cooperative education 

students, i.e., DOL determines whether these students are 

economically disadvant aged. The number o f "economic 

determinations" provides an upper bound on the number of 

certifications for cooperative education students. There 

were 8,324 "economic determinations" for cooperative education students in FY 1984. A comparable number is 

unavailable for 1982. Certifications for AFDC recipients/ 

WIN program eligibles have grown more rapidly than certifications for any target group, increasing from 18,503 in FY 

1982 to 84,769 in FY 198 4. 
-79-

The transition from the regular WIN program is believed to have 

inhibited use of the TJTC, especially since there was some 

uncertainty as to the eligibility of WIN demo registrants. 

The 1981 amendments created a new TJTC target group: 

individuals involuntarily terminated from CETA public service 

employment programs. During FY 1982, 1,285 certifications were 

issued for members of this group. 

B. Employer Income Tax Return Data 

1. Description of the Data 

Additional information about the use of the Targeted Jobs 

Tax Credit is available from a sample of early corporate income 

tax returns for 1979 on which jobs cred1ts were claimed. 

Corporations that claimed jobs credits in 1979 reported the total 

amount of the credit earned and additional information: the 

number and type of targeted workers hired, the total qualified 

wages paid to each type of worker, the amount of credit claimed 

in the current year, and i nformation on the company's tax 

liability limitation worksheet. 

The data from the 1979 corporate income tax returns can only 

provide limited informati on for the analysis of the effectiveness 

of the TJTC program. Nonetheless, the sample provides relevant 

information on characteristics of employers claiming the credit. 

2. Limitations of the Data 

Complete informati on from employer tax returns is generally 

not available until two ye a rs after the end of a tax year. For 

some businesses, the 1979 fiscal tax year lasted through June 

1980. Given that the completion date for this report was 

originally anticipated to be June 30, 1981, it was not possible 

to use employer tax return data to analyze the pattern of TJTC 

use for tax years after 1979. Even for the 1979 tax year, it was 

not possible to obtain a r epre s entative sample of all tax 

returns. The last of the 1979 tax year returns were being filed 

in March 1981 due to the three-month filing period and two automatic filing extensions. In additi on, transcribing, assembling, 

processing, and verifying the data take several months. 

The analysis in this section is based on a sample of early 

1979 corporate income tax returns. The sample was limited to 

corporations filing calendar year or early fiscal year returns; 

corporations with 1979 fiscal years ending after December 1979 
were not included.9/ 

sample were calendar 

returns. The sampl~ 

November 1, 1980. 

- 80-

The vast majority of the returns in the 

year returns; few were early fiscal year 

was also limited to returns filed before 

The data from the corporate tax return sample indicated that 

the TJTC was claimed for an estimated 33,000 employees by 

corporations which filed calendar year or early fiscal year 

returns for 1979 prior to November 1, 1980. The Department of 

Labor reported a total of 108,000 certifications in 1979. The 

difference mostly reflects certifications of workers employed by 

unincorporated businesses and by corporations whose fiscal years 

ended after December 1979.10/ In addition, some certifications 

may never have been claimeo-as tax credits on income tax returns 

because the eligible employees never started work or they worked 

for only a very short time. Despite their differences about the 

total size of the progam, the Treasury and Labor Department data 

show a similar pattern of credit use by target group. 

It is important to note that the tax return data provided 

only information needed for calculation of tax liability which is 

not sufficient to evaluate the TJTC's effectiveness. In 

addition, the tax return data pertain to the first year of the 

TJTC program, during which use of the TJTC was lower than in 

subsequent years . The TJTC administrative system was implemented 

slowly and it is likely that employer awareness of the credit 

began at a low level. The TJTC program did not issue its first 

certification until April 1979 and few workers were certified 

before September 1979. 

3. The Results 

a. Use of the Targeted Jobs Tax Credit 

Few corporations with early returns (calendar year or early fiscal year) claimed the TJTC in 1979. Table 5.7 shows that the 

estimated 12,000 such corporations accounted for less than one 

percent of the more than 1.4 million corporations with early 

returns. 

Use of the credit varied greatly by industry classification. Table 5.7 shows that manufacturing and retail 

trade industries made the most intensive use of the credit. 

I The distributions by industry and firm size do not 

differ greatly between the corporations with calendar or 

early fiscal year returns and those with late fiscal year 

returns. 

!QI It is unlikely· that much of the difference was due to 

credits claimed on calendar year or early fiscal year 

returns which were filed after November 1, 1980. Few 

calendar year or early fiscal year returns are filed after 

November 1. 
-81-

Table 5.7 

Number of Corporations with Early Income Tax Returns Claiming 

the Targeted Jobs Tax Credit, by Industry - 1979 

Industrial 

Classification 

Agriculture 

Mining 

Construction 

Manufacturing 

Transportation, 

Communication, 

and Utili ties 

Wholesale Trade 

Retail Trade 

Finance, Banking 

Services 

Other 

All Corporations 

:Corporations Claiming: Estimated 1979 Percent 

--~~T~J_TC~-~1~9_7~9~--~~~Ea~r1~y~R~e~t~u~rn~s~~ Claiming NUmber Percent Number Percent TJTC 

36 

44 

516 

3,072 

90 

907 

3,768 

1,940 

1,168 · 

421 

111963 

0.3% 

0.4 

4.3 

25.7 

0.8 

7.6 

31.5 

16.2 

9.8 

3.5 

46,840 

12,110 

143,210 

159,440 

66,260 

161,760 

301.360 

320,390 

282 ,740 

65,890 

100.0% 1,560,000 

3.0% 

0.8 

9.2 

10.2 

4.2 

10.4 

19.3 

20.5 

18.1 

4.0 

100.0% 

0.08% 

0.36 

0.36 

1.93 

0.14 

0.56 

1.25 

0.61 

0.41 

0.64 

0. 77% 

Note: Early 1979 tax returns are mostly calendar year returns; they 

also include fiscal year returns with accounting periods ending 

in calendar year 1979. The number of early tax returns on 

which the TJTC was claimed was underestimated to the extent 

that returns filed after November 1, 1980 were not counted. 

However, the degree of underestimation is slight since few 

early returns are filed after November 1. 

Source: Department of the Treasury. 
-82-

However, the jobs credit was only claimed by 1.9 percent of all 

manufacturing firms and 1.3 percent of all retail trade firms. 

Less than 0.7 percent of firms in all other industries claimed 

the credit. 

The TJTC was used more often by larger firms than by smaller 

firms. Table 5.8 shows the percent of firms claiming the credit 

by size of firm. Seven percent of firms with assets totaling $10 

million or more claimed the credit while less than one percent of 

firms with total assets below $500,000 claimed the credit. 

Table 5.9 shows the number of jobs credits claimed {i.e., the number of employees for whom the credit was claimed) by firm 

size and industry. An estimated 33,000 jobs credits were claimed 

by firms filing 1979 calendar year returns. Within both 

industrial and commercial industries, firms with assets totaling 

one million dollars or more claimed over three-quarters of the 

jobs credits. 

The average number of jobs credits claimed increased with 

firm size . Firms with total assets below $500,000 claimed, on 

average, less than two jobs credits, while firms with total 

assets above $10 million claimed an average 5.4 credits. The 

average number of credits claimed increased with firm size 

within each of the industrial classifications. The higher 

average number of credits claimed by larger firms is not 

unexpected, since i large firm employs more workers. 

b. Patterns of TJTC Use 

The jobs tax credit Form 5884 contained information on the 

number of targeted workers and the amount of wages paid to each 

target group. For firms in the Treasury sample, qualified wages 

paid totalled $70 million and the credit earned equalled $35 

million. 

Table 5.10 shows the number of credits claimed for each 

target group. More credits were claimed for hiring cooperative 

education students than any other targeted group. Three-eighths 

of the credits claimed, or 12,000 credits, were for students 

participating in a qualified cooperative education program. 

Economically disadvantaged youth were the next largest target 

group, for whom one-quarter of the credits were claimed. Table 

4.10 also shows the distribution of credits claimed by target 

group when an adjustment was made for a possible incorrect 

transcription of ce~tain certifications.ll/ After adjustment, 

the distribution of credits is quite simTTar to the DOL certifi11; The adjustment is described in Appendix B. 
- 83-

Table 5.8 

Number of Corporations with Early Income Tax Returns Claiming 

the Targeted Jobs Tax Credit, by Size of Finm - 1979 

claiming Estimated 1979 Percent 

Total Assets TJTC - 1979 Early Returns Claiming ($000) Number - Percent Number - Percent TJTC 

0 - 100 2,204 18 . 4 877,000 56.2 0.25 

100 - 500 3,263 27.3 449,000 28.8 0.73 

500 - 1,000 1,682 14.1 101,000 6.5 1.67 

1,000 - 10,000 2,957 24.7 107,000 6.8 2.76 

10,000 or more 1, 857 15 .5 26,000 7.1 8.14 

All Corporations 11,963 100.0 1,560#000 100.0 0. 77 

Note: See note to Table 5.7 . 

Source: Department of the Treasury. 
-84-

Table 5.9 

Number of Credits Claimed by Industry by Size of Firm - 1979 

: Average 

:Number of 

Credits 

Total Assets ($000) Claimed 

Industry :0 - :100 -: 500 :1,000- : 10,000 Per 

Classification :100 :500 :1,000 :10,000 :or more :Total Return 

Manufacturing 1,126 1,453 633 5,254 4,476 12,942 4.21 

Construction and 

Wholesale Trade 280 3,988 2,089 2,657 1,147 10,161 7.14 

"Comnercia1" 

Retail Trade, 

Finance 

and Services 5 535 487 1,550 4, 081 6,658 2.17 

Other 1,611 136 484 807 403 3, 441 1.96 

All Corporations 3,022 6,112 3,693 10,268 10,107 33,202 2.78 

Average Number 

of Credits Per 

Return 1.37 1.90 2.20 3.47 5.44 2. 78 

Source: Department of the Treasury. 
-85-

Table 5.10 

Number and Percentage Distribution of Credits 

Claimed and Certifications - 1979 

TJTC claimed Department 

or 1979 of Labor 

Early Certifications 

Corporate in 

Tax Returns 1979 

Target Groups Number: Percent Number: Percent 

Economically Disadvantaged 

Youth 8,261 24.8 36,774 33.8 

Economically Disadvantaged 

Vietnam veterans 1,846 5.5 4,330 4.0 

Economically Disadvantaged 

Ex-Convicts 1,269 3.8 4,768 4.4 

Handicapped 1,603 4.8 6,119 5.6 

Cooperative Education 

Students 12,593 37.8 54,764 50.4 

SSI Recipients 6,372 19.1 390 0.4 

General Assistance Welfare 1,358 4.1 1,585 1.5 

Total 33,302 100.0 108,730 100.0 

Note: See note to Table 5.7 

Source: Department of the Treasury. 

TJTC Claimed 

Correcting 

for Possible 

Transcription 

Errors 

Number: Percent 

8,261 24.8 

1,846 5.5 

1,269 3.8 

1,603 4.8 

18 ,705 56.2 

261 0.8 

1,358 4.1 

33,302 100 . 0 
-86-

cation data. Cooperative education students account for 56 

percent of all credits claimed, while SSI recipients account for 

approximately one percent. All other tables in the text, 

however, report the unadjusted data. 

The type of targeted worker most often hired differed 

considerably by industry. Table 5.11 shows the proportion of all 

jobs credits claimed for each target group within a particular 

industry. Employers in the retail trade, finance, and service 

industries claimed the jobs credit primarily for cooperative 

education students. Twelve percent or less of their jobs credits 

were claimed for economically disadvantaged youth age 18-24. By 

contrast, corporations in the construction, manufacturing, and 

wholesale trade industries claimed the jobs credit most 

frequently for disadvantaged youth. 

Table 5.12 shows the same pattern of industry hiring from an 

alternative perspective. The last column shows that construction, manfacturing, and wholesale trade--which might be called 

"industrial"--firms, claimed approximately one-half of all jobs credits and firms in the retail trade, finance, and the service 

industries--or the "commercial" sector--claimed roughly the other 

half. However, the · pattern changes for particular target groups. 

Industrial firms claimed 83 percent of credits for economically 

disadvantaged youth compared with 16 percent by commercial firms. 

Industrial firms were also more likely to claim jobs credits for 

Vietnam veterans, ex-convicts, general assistance recipients, and 

handicapped individuals than were commercial firms. Seventy-one 

percent of the credits for hiring cooperative education students 

were claimed by commercial firms compared with 24 percent by 

i n·d us t r i a 1 f i r m s . 

c. Impact of the TJTC Limitations 

The amount of TJTC claimed in any given year was limited by 

two provisions. Qualified first-year wages could not exceed 30 

percent of a firm's aggregate FUTA payroll. This limitation was 

intended to prevent large scale replacements of non-eligible labor with workers for whom the TJTC could be claimed. In 

addition, total jobs credits could not be claimed for more than 

90 percent of a firm's tax liability in the current year after 

all other credits were claimed. The tax liability ceiling 

affected one-third of the firms claiming the TJTC, and reduced by 

two-thirds the amount of the credit claimed in the current year by those firms. The amount of the credit exceeding the tax 

liability limitation could still benefit the employer, as the 

credit could be either carried back three years for refund of 

past tax liability, or carried forward up to seven years to 
Industry 

Table 5.11 

Type of Targeted worker Hired within Industries - 1979 

(Percentage Distribution of Jobs Credits Claimed) 

Targeteo Gr_o_ups 

Economically Disadvantaged: 

: : Coop. : : General 

: : Vietnam: Ex- :Handi-:Education: SSI :Assistance: 

Classification :Youth:Veterans:Convicts:capped:Students :Recipients: Welfare :Total 

"Industrial" 42.3% 8.9% 4.9% 8.6% 18.7% 11.7% 4.9% 100.0% 

Construction 45.2 7.0 * * 32.4 4.8 * 100.0 

Manufacturing 41.6 9.2 5.9 9.7 18.3 11.6 3.7 100.0 

Wholesale Trade 44.8 2.8 * 6.3 14.6 15.8 14.3 100.0 

"Commercial" 8.3 2. 0 2.4 1.3 55.7 26.7 1.6 100.0 

Retail Trade 7.4 2.1 2.9 1.7 57.1 24.4 4.4 100.0 

Finance, Banking 7.7 1.1 1.4 1.1 52.4 33.4 2.9 100.0 

Services 12.5 3.2 3.2 * 56.7 23. 2 * 100.0 

Other 7.3 9.0 6.0 * 60.0 16.4 * 100.0 

Total 24.8 5.5 3.8 4.8 37.8 19.1 4.1 100.0 

*Less than 40 cases. 

Note: The data in the table pertain only to corporations with early income tax returns. 

See note to Table 5.7. 

Source: Department of the Treasury. 

I 

OJ 

..._, 

I 
Table 5.12 

Percentage Distribution of Credits Claim by Industry, 

for Each Targeted Group - 1979 

EconORdcally DisadVantaged 

Targeted Groups 

: : Coop. : : General 

Industry : :Vietnam : Ex. :Handi-:Education: SSI :Assistance: 

Classification :Youth:Veterans:Convicts:capped:Students :Recipients: Welfare :Total 

"Industrial" 

Construction 5.9% 10.0% * * 2.8% 0. 8% * 3.3% 

Manufacturing 65.2 64.6 59.8% 78 . 5% 18.8 23.5 35 .6% 38.9 

Wholesale Trade 11.8 3.3 * 8.5 2.5 5.4 22 .9 6.5 

Subtotal 82 .9 77 . 9 59.8 87.1 24.1 29.7 58.5 48.7 

"Conmercial" 1 

co 

Retail Trade 8. 2 10.5 21.0 9.5 41.1 34.7 29.4 27.3 co 

1 

Finance, Banking 4.3 2.7 5.2 3.0 19.0 24.0 9.9 13.7 

Services 3.7 4.2 6.2 * 11.1 9.0 * 7. 4 

Subtotal 16.2 17.4 32.4 12.5 71.2 67.7 39.3 48 . 4 

Other * 4.3 * * 4.6 2.3 * 2.9 

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 .0 

*Less than 40 cases. 

Note : The data in this table pertain only to corporations with early income tax returns. 

See Note to Table 5.7 . 

Source: Department of the Treasury. 
-89-

reduce future tax liabilities. For firms affected by the tax 

liability limit, the expected present value of the credit was, on 

average, reduced by about one-quarter.~/ 

The 30 percent FUTA limitation affected only 7 percent of 

the corporations in the sample. Qualified wages eligible for the 

credit were reduced by approximately 3 percent because of this 

provision. The limitation most likely affected new firms, firms 

that had very high turnover rates, or firms that were expanding 

very rapidly. Nearly one-half of the firms affected by the FUTA 

limitation were also affected by the tax liability limitation. 

III. Evaluation of Effectiveness 

The purpose of this section is to evaluate the effectiveness 

of the Targeted Jobs Tax Credit in achieving the objectives of 

Congress. Congress intended the credit to increase the employment of eligible individuals in the private sector and to promote 

the growth of cooperative education programs.!l/ 

This section is divided into three parts. The first part 

describes the unexpectedly low use of the TJTC by both employers 

and target group members and presents reasons for the limited 

use of the tax credit. The second part evaluates the hiring 

incentive provided by the credit and the possible induced 

targeted employment effect. The third part analyzes the impact 

of the TJTC on the economy's total employment, on participating 

workers' wag&s, and the long-term benefits of the program to 

participating workers. 

A. Utilization of the Targeted Jobs Tax Credit 

The original Carter Administration TJTC proposal was 

intended to benefit disadvantaged youth aged 18-24, who numbered 

roughly four million at that time. During the first two years of 

the TJTC program, less than 200 ,000 disadvantaged youth were 

certified as qualify ing employers for the credit.l4/ Reasons for 

low certification rates for target groups are discussed in this 

section. 

12/ Expected va lue of credit earned • [0.32 claimed in current 

year ] + 0.68 no t "used" in current x 0.60 expected value of 

"unused" credits] = 0.73 . An estimate of the expected value 

of "unused" credits is given in footnote 11, of Section III, 

Chapter 4. 

!11 U.S. House of Representatives, Committee on Ways and Means, 

Report on the Revenue Act of 1978, No. 95-1455, p. 90. 

!il !n FY 198 4 , there were 328,213 certifications of 

economically disadvantaged youth. 
-90-

1. The TJTC Penetration Rate 

One important aspect of the assessment of the credit is 

measuring the extent to which the TJTC reached the population 

potentially eligible for it. This will be called the 

"penetration rate," the degree to which TJTC reached the 

potential, eligible, working, population. It is defined as the 

fraction of eligible hires who were hired with the jobs credit. 

Since many eligible individuals are unemployed and do not find 

work, the proportion of the total eligible population affected by 

the credit is even lower. 

Although prec~se data on the penetration rate are unavailable, estimates have been made for several target groups.l5/ The 

estimates in Table 5.13 indicate that, during FY 1981, TJTC 

certifications were issued for 21 to 23 percent of cooperative 

education student placements. For the other target group, the 

penetration rate was lower: in the 5 to 10 percent range. Thus, 

in FY 1981, except for cooperative education students, in less 

than 1 out of 10 instances was the credit claimed for persons 

eligible for TJTC by firms that could use the credit.l6/ Most 

eligible employees are hired without the credit . 

Estimated Penetration Rates, for Selected TJTC 

Target Groups, Fiscal Year 1981* 

(Percentage of Eligible Working Population) 

Cooperative Education Students 

Economically Disadvantaged 

Youth Aged 18-24 

Economically Disadvantaged 

Vietnam Veterans 

SSI Recipients 

21-23% 

6-8 

9-10 

4-5 

*See Appendix B for explanation of how the estimates 

were made. 

15; See Appendix B for a detailed discussion of the methods used 

to estimate the penetration rates. 

16/ This estimate corresponds closely to an estimate made by the 

General Accounting Office. General Accounting Office, 

Letter Report to Senator Heinz, "Comments on Employment Tax 

Credits" (PAD-81-730), June 5, 1981. 
-91-

2. The TJTC Take Up Rate: A DOL Employer Survey 

An employer survey was conducted in the spring of 1980 by 

WESTAT Inc. under a contract with the u.s. Department of Labor. 

Data were obtained from a stratified random sample of 4,832 

establishments that pay unemployment insurance taxes in 30 sites 

around the country. Respondents were questioned in detail about 

their knowledge and use of four employment subsidies; the TJTC, 

the WIN tax credit, CETA's On the Job Training (OJT) contracts, 

and WIN-OJT contracts. Research projects analyzing the survey 

data were awarded by the u.s. Department of Labor to the 

Institute for Research on Poverty and the National Center for 

Research in Vocational Education. As part of this research 

effort, Bishop and Montgomery studied the factors which 

determined employer participation in each of the subsidy 

programs.!?/ Participation was modeled as the outcome of two 

condition5=-familiarity with the subsidy program and a decision 

to participate given familiarity. Bishop and Montgomery 

estimated the individual effect of each of several variables on 

the likelihood that both conditions would obtain. The effect of 

each variable was estimated holding constant the other variables 

included in the analysis. 

Seventeen percent of the respondents to the survey claimed 

''familiarity" with the TJTC; these employers accounted for 33 

percent of the employment of survey respondents. Bishop and 

Montgomery found that the establishments which were most likely 

to be familar with the TJTC were large, belonged to a business 

organization, had a preaominately blue-collar workforce, and had 

claimed the New Jobs Tax Credit. Familiarity was also found to 

be positively related to a measure representing government 

activity to promote the subsidy programs. (The government 

promotion measure was the proportion of respondents in the survey 

site who learned of the WIN program from a government representative.) Across regions, employers in the Northwest were least 

likely to be familiar with the TJTC; those in the Southwest were 

the most likely to be familiar with the TJTC. Across industries, 

familiarity was highest· in manufacturing and lowest in construction, wholesaling, and retailing. 

Among the 901 surveyed employers who were familiar with the 

TJTC, 15 percent had claimed the credit. The results of the 

statistical analysis by Bishop and Montgomery indicate that the 

establishments most likely to participate were large establishments which had been responsive to the WIN credit and the NJTC 

and which had learned of the WIN credit from a government 

John H. Bishop and Mark Montgomery, Chapters 2 and 3 in 

Subsidizin On-The-Job-Trainin , editor, John Bishop, 

Nat1ona Center or Researc 1n Vocational Education, Ohio 

State University, 1982. 
-92-

representat1 ve. The probability of part1cipation was lower among 

establishments in the Northwest and higher in finance and service 

establishments. 

3. Reasons for the Low Penetration and Take-up Rates 

This section attempts to explain why the utilization of the 

TJTC was far below the expected level. A number of reasons for 

employers' low use of the credit are examined. Certainly, no 

single explanation accounts for the entire difference between the 

actual and expected use of the credit. 

a. Knowledge of the Credit 

The General Accounting Office (GAO} conducted a survey on 

the TJTC in January 1980, after the TJTC had been in existence 

for about one year.l8/ Nearly two-thirds of the firms in the 

survey knew about (nad heard of) the TJTC. Knowledge of the 

credit varied with the size of firm, ranging from about 50 

percent of firms with 20 or fewer employees to 75 percent of 

firms employing 100 or more workers. More than two-thirds of the 

employment among surveyed firms was in knowledgeable firms.l9/ 

Knowledge of the credit was not the sole factor explaining 

the low usage by employers. About 15 percent of the firms in the 

GAO sample that indicated awareness of the TJTC had actually used 

it. However, many employers who were aware of the credit may not 

have understood its provisions or may not have known which 

employees were eligible. Knowledge of the credit may have been 

limited to a vague idea that it was targeted to disadvantaged 

workers. The difference between "knowledge" of the TJTC and 

familiarity wi th it is suggested by the results of the WESTAT 

employer survey. In contrast with the results of the GAO survey 

in which over 66 percent of employers in the knew of the TJTC, 17 

percent of employers in the WESTAT survey claimed to be 

General Accounting Office, letter report to Senator Heinz. 

The GAO survey estimate of the knowledge rates were probably biased upward by the exclusion from the survey universe of 

firms that had both fewer than 50 employees and assets under 

$500,000. The excluded firms employ only about 17 percent 

of all workers in the private business sector. Therefore, 

the proportion of private sector employment that was in 

knowledgeable f i rms would probably not be much overestimated 

by the results o f the GAO survey. (Dave M. O'Neill, 

"Employment Ta x Credit Programs: The Effects of Socioeconomic Targeti ng-Provisions", Journal of Human Resources 

XVII (3) 1982, p. 455). 
-93-

with the TJTC.20/ The extent to which employers are 

familiar with tne TJTC ~as undoubtedly increased substantially since the spring of 1980, when the WESTAT survey was conducted. 

A mid-1980 study on the use of employment tax credits in 

Wisconsin provides some evidence on employer familiarity with 

the specifics of the TJTC. Of the 169 firms surveyed during the 

first phase of the study, 60 percent claimed familiarity with 

the WIN/Welfare credit or the TJTC .21/ Of those claiming 

familiarity, however, less than 20 percent could identify the 

amount of the subsidy, and only 25 percent could identify any of 

the target groups. 

In the second phase of the Wisconsin study a promotional 

marketing experiment was undertaken during March-July 1981 in 

three counties. Over 800 employers received information 

promoting the TJTC, either through a mailed brochure alone or 

through the brochure plus a telephone call. An approximately 

equal number of employers comprised the control group. 

Initially, about 300 firms were selected for inclusion in the 

mail plus phone group . . Of these firms, 87 could not be contacted 

and another 80 refused to complete the telephone interview or to 

participate at all. The study's investigators argue that the 

loss of the latter group of 80 firms· probably biased the 

experiment's results toward positive promotional effects, since 

they believe that the firms in this group were likely to have 

been uninterested in the TJTC. 

20/ 

/ 

John H. Bishop, Chapter 1 in Subsidizing On-The-JobTraining, Editor, John Bishop, National Center for Research 

in Vocational Education, Ohio State University, 1982. It 

should be noted that apart from the distinct meanings 

attached to "know about" vs. "familiar with", there is an 

alternative explanation of the difference in the results of 

the GAO and WESTAT surveys. The WESTAT survey utilized a 

sample of establishments from the unemployment insurance 

files, whereas the firm was the sampling unit in the GAO 

survey. If the central decision-makers of a multiestablishment firm.were familiar with the TJTC but not 

interested in using it, they would be unlikely to pass on 

their knowledge to establishment staff. 

Thomas Corbett, et al., "Tax Credits to Stimulate the 

Employment of Disadvantanged workers", University of 

Wisconsin-Madison, Institute for Research of Poverty, 

Special Report No. 31 (April 1981). A report on Phase I of 

the Wisconsin Wage Bill Subsidy Research Project, funded by 

the Governor's Employment and Training Office, State of 

Wisconsin, Wisconsin Department of Health and Social 

Services, Division of Policy and Budget, and the Institute 

for Research on Poverty, January 1982. 
-94-

The investigators attempted to estimate the effect of the 

experimental treatment on the number of certified hires. There 

was no evidence of any experimental effect for the mail-only 

group. For the mail plus phone group the TJTC participation rate 

during the experimental period was 9 percent, as compared with 

4.5 percent for the control group. The difference was close to 

statistical significance at the 10 percent level. In addition, 

when the investigators controlled for differences among firms in 

characteristics other than experimental status (via a logit 

regression), the experimental effect became statistically significant at the 5 percent level. Nevertheless, the investigators concluded that the results of the mail plus phone promotion "did not represent a major improvement given the present low 

level of tax credit usage" and that the promotion efforts were 

not "cost effective". It was also concluded that lack of 

knowledge was not the main causal factor in the underutilization 

of the TJTC. 

Since the Wisconsin study did not attempt to quantify in 

money equivalents the social cost and benefits of the mail plus 

telephone promotion, the basis for the conclusion that it was not 

cost-effective is unclear. A cost-benefit calculation would have 

to take into account the effect of the credit's promotion on 

employer participation beyond the limited experimental period. A 

cost-benefit calculation would also be necessary to justify the 

conclusion that the mail plus phone promotion did not effect a 

"major improvement". Finally, it is possible that a TJTC 

promotional campaign could be more successful if it was directed 

to employers who are relatively likely to be responsive, such as 

employers who list job openings with the Employment Service. 

The results of a 1977 demonstration project conducted by 

IMPACT were more encouraging than those of the Wisconsin 

experiment.22/ The project tested the effect of intensive 

marketing or-the WIN/Welfare tax credit. The information 

c ampaign was undertaken in four cities. The report on the IMPACT 

study summarized the results of the project: 

22; 

"Briefly, at the end of an eight month period, about 31 

percent of all employers in the demonstration cities claimed 

to know about the WIN/Welfare tax credits, compared with 15 

percent of the employers nationally. The number of 

WIN/Welfare job entrie s increased by 78 percent in the 

demonstration cities, a s compared with a 46 percent increase 

for the nati on . The number o f WIN/Welfare tax credit 

certifications increased 236 percent in the demonstration 

David Thompson, Jan Parkinson, and Dorothy Bonnallie. An 

Assessment of WIN and Welfar e Tax Credits. (Minneapolis: 

Institute for Manpower Program Analysis, Consultation and 

Training, March 1977). 
-95-

cities as compared wi t h 49 pe r cent nat ionally. The r atio of 

certifications to job entries inc r e ased from 14 . 9 percent to 

28.1 percent, or 89 percent, while this ratio remained 

unchanged throughout the nation in general." 

b. Insufficient Value of the Credit 

For firms aware of the credit, use of the credit also 

depends on the amount and t erms of the subsidy. The gross value 

of the subsidy is the amount of credit claimed. The credit 

equals 50 percent of the first $6,000 of wages in the first year 

of employment ($3,000) and 25 percent in the second year of 

employment ($1,500).23/ For example, for an eligible worker 

earning the minimum wage of $3.35 and working up to 1,800 hours, 

the credit reduces wage costs by 50 percent in the first year and 

by 25 percent in the second year. The wages of workers with 

higher earnings would be reduced by smaller fractions. In 

practice, it appears the percentage wage reductions approached 

the maximum, because eligible workers' wages were generally low: 

in FY 1980, 78 percent of TJTC- certified hires had starting 

wages under $4 per hour. 

As discussed i n Chapter 2, factor adjustment costs may be a 

major impediment to the use of a temporary tax credit. Hiring 

additional eligible workers will normally entail costs in 

searching for and/ or screening job applicants, as well as 

training costs and paperwork. If the additional workers are to 

be retained only for the duration of the credit, there could also 

be additional costs in contributions for unemployment insurance. 

Similar costs can also deter employers from substituting eligible 

labor for other inputs in order to take advantage of the credit. 

23/ Employers must reduce their wage deduction by the amount of 

the credit. This requirement makes the net tax savings from 

the credit vary inversely with the employer's marginal tax 

rate. On the other hand, the requirement tends to equalize 

the percentage reduc tion in the net (after-tax) wage cost of 

targeted workers. For example, suppose an employer pays $6,000 in wages to a targeted worker during the first-year 

of employment. If the employer does not claim the credit 

for this worker, the after- tax first-year cost would be 

$3,240 at a 46 percent marginal tax rate and $4,800 at a 20 

percent marginal tax rate. If the employer does claim the 

credit, his wage deduction is reduced by $3,000, the amount 

of the credit. The decrease in the wage deduction increases 

tax liability by $1,380 at a 46 percent marginal tax rate 

and by $600 at a 20 percent rate . Thus, the net tax savings 

from claiming the credit at these two marginal tax rates 

would be respectively $1,620 and $2,400. The net tax saving 

is larger at the l~wer marginal tax rate, but the percentage 

reduction in the after-tax wage cost is 50 percent at either 

rate. 
-96-

There is some weak evidence on the responsiveness of 

employers' take-up rate to the size of a subsidy. In the private 

sector wage subsidy experiments which were conducted as part of 

the Youth Incentive Employment Pilot Projects (YIEPP), employers 

were offered differing rates of subsidy for hiring economically disadvantaged youths. Estimates by the Manpower Demonstration 

Research Corporation showed five percent participation for 

employers receiving a 50 percent subsidy, ten percent with a 

subsidy of 75 percent, and 18 percent with a 100 percent subsidy. There were several ·considerations which suggest that the results 

understated the potential effectiveness of employment subsidies 

for the disadvantaged: (1) in one experiment site the economy 

was depressed; (2) participating employers could claim the 

subsidy only for youths referred through the YIEPP program; (3) the hours of work on subsidized jobs had to conform to the 

school schedule; (4) the experiment lasted only five-months; and 

(5) employers who had previously provided YIEPP positions were 

not contacted. 

c. Low Level of Administrative Activity 

It is estimated that approximately 10 percent of the 

eligible clients served by the local administering agencies were 

vouchered.24/ Two reasons for the low level of administrative 

activity on-the part of the local agencies are the lack of 

administrative funding and the process for certifying economically-disadvantaged groups . 

During the first three years of its existence, funds were 

not appropriated specifically for administering the TJTC. The 

De·partment of Labor did shift limited funds from the CETA program 

The level of TJTC vouchering can be gauged by comparing 

non-retroactive vouchers with estimates of the 

potentially eligible population served by the SESA and 

CETA systems. During calendar 1980, CETA prime sponsors and SESAs issued approximately 305,000 vouchers 

(including an unknown number of multiple vouchers issued 

to the same persons) to persons, who were not vouchered 

retroactively. This is approximately ten percent of the 

approximately 3.1 million SESA new applicants and renewals 

plus persons terminated from CETA training programs who 

were either economically disadvantaged youths 18-24, 

Vietnam veterans, or handicapped persons. There is 

probably some overlap between the 2.2 million such persons entering the ~ESA system and 900,000 persons terminated 

from CETA training and employment programs. 
- 97-

for use by SESAs to administer the TJTC certification system. 

The incentive for the administering agencies to undertake 

vouchering was reduced by the absence of any funds earmarked for 

that activity.~/ 

Vouchering activity was also reduced by the statutory 

requirement that economi c ally-disadva ntaged eligibles be 

certified as to their family income in the six months immediately 

preceding the month of hire. This statutory provision was 

interpreted to mean calendar months, rather than 30 days, so the 

vouchers issued were valid only u nti l the end of the month. 

Eligible individuals had to be recertified at the beginning of 

each month. This requirement reduced the advantage of vou chering 

for the administering agencies as well as for the eligible 

individuals. 

d. Acce~tance and Knowledge of TJTC by the Cert~fying Agencies 

Agencies with certification authority were also responsible 

for disseminating information on the existence of the credit and 

its basic features as well as admin istering other labor market 

programs. Through their regular contacts with both eligible 

individu als and employers, these agenc i es were in a position to 

influence employers' use of the credit and the costs incurred by 

usi ng the credit . Through contacts, they could explain the steps 

necessary for certification and the dollar benefits to a 

particular employer, and allay fears about ''red tape", fair 

hiring practices, and the quality of workers who might be 

certifiable . Large-scale vouchering could also have provided a 

means of spreading awareness by encouraging eligible workers to 

use the vouchers in their own job search. 

However, the Mershon Center's evaluation of 25 sites 

concluded that the mairi vouchering agencies--CETA prime sponsors 

and state ES local offices--generally did not consider the credit 

sufficiently useful as a way to increase employer contacts to 

actively promote it.26/ Nor did the agencies generally accept 

In Wisconsin, TJTC certifications dropped to almost zero in 

the last three months of 1979, after federal funds for 

administration were exhausted (Bishop p. 32) . 

Mershon Center, Report No. 2. 
-98-

the concept that "blanket vouchering" was a cost-effective means 

of increasing certifications.~/ The study found that in many 

sites the staff of "CETA Prime Sponsors attempted to avoid 

involvement with TJTC. In a large number of sites, CETA 

administrators objected to TJTC on the grounds that it did not 

remedy the root cause--low productivity--of the employment 

difficulties of TJTC eligibles. The administrators argued for 

the CETA approach of providing training. Jobs tax credits were 

also seen as competing with CETA programs in attracting 

participants. The Mershon Center Study found that response to 

TJTC was somewhat more positive at ES offices than at CETA Prime 

Sponsors. There was considerable variation in the response of ES 

offices across the study sites, ranging from active promotion to 

slight involvement. The administrative response was clearly a 

barrier to full utilization of the credit in several areas where 

retroactive certifications were discouraged. 

The Mershon Center Study found that the cooperative 

education agencies, vocational rehabilitation agencies, and 

agencies placing ex-offenders responded much more favorably to 

TJTC than did either the CETA Prime Sponsors or the ES offices. 

Officials in vocational rehabilitation agencies and in agencies 

placing ex-offenders were often of the belief that the credit had 

significantly assisted their job placement efforts. 

Insufficient familiarity with the TJTC on the part the 

implementing staff appears to have been a factor inhibiting its 

use, at least initially. A report on the early (1979) 

implementation of the TJTC noted that "employment and training 

agencies ... are at least at the outset, uncomfortable with or 

unable to explain authoritatively detailed aspects of the 

credit."28/ During the first phase (mid-1980) of the Wisconsin 

jobs creOTts study, interviews were conducted with members of the 

field placement staff in the Division of Vocational Rehabilitation and the Division of Corrections (serving ex-offenders) in 

/ 

Cost-effective from the perspective of the local Job Service 

often means the extent to which an action generates final 

placements, not whether it is likely to increase eligible 

employment by affecting the hiring decision. Mershon 

Center, Report No. 3, p. 58 suggests that eligible individuals often did not use the voucher in their job 

search, frequently discarding the vouchers outside the 

office of the vouchering agency. 

Employment and Training Administration, Office of Program 

Policy, Evaluation and Research, "Evaluation Study of the 

Early Implementation of the Targeted Job Tax Credit Program" 

(Report No. 51, December 1979), p. iii. 
-99-

the Department of Health and Social Services. Nearly two-thirds 

of the responding staff indicated that their lack of knowledge 

about the TJTC was a factor in its underutilization.29/ 

e. search Costs 

The design of the TJTC was intended to minimize the costs to 

employers of screening job applicants for TJTC eligibility. 

Ideally, eligible job applicants would come to the employers 

already vouchered. In practice, however, this was generally not 

the case. Many TJTC-implementing agencies did not actively 

initiate vouchering of their clients who were seeking jobs. In 

addition, a large proportion of TJTC eligibles seeking jobs did 

not turn for assistance to the agencies that could have vouchered 

them. Thus, employers commonly incurred costs in attempting to 

screen job applicants for TJTC eligibility. Employers also 

incurred costs in obtaining retroactive certifications. This was 

reflected in the emergence of several private "third-party 

vendors"--firms that would check the eligibility of firms' 

employees in return for a percentage of the tax credits earned. 

f. Disadvantages of the Tax Credit Approach 

Providing the wage subsidy through the tax system resulted 

in additional complications for employers and for the agency 

staff asked to administer the TJTC. The requirement that the 

credit be subtracted from wages allowable as a business 

deduction--which equalizes the percentage reduction in wage costs 

for employers of different tax brackets--has been cited as making 

the ultimate dollar value of the credit difficult to grasp. Some 

employers might have preferred a wage subsidy that took the form 

of a direct grant rather than a tax credit since the value of the 

credit was reduced for employers affected by the tax liability 

limitation. Finally, some employers cited the fear that claiming 

the TJTC would increase the likelihood of an Internal Revenue 

Service audit, although the IRS informed employers that this 

would not be the case.30/ Nevertheless, the relatively hightake-up rate among corporations eligible for the New Jobs Tax 

Credit (43 percent in 1977 and considerably higher in 1978) shows 

that employment subsidies which take the form of tax credits can 

be widely utilized. 

A recent experiment provides evidence on whether employers 

respond differently to direct subsidies as compared to tax 

credits. The experiment was conducted between December 1980 and 

29; Corbett, et al., · cit., p. 35. 

lQI Mershon Center Report No. 2., p. 49. 
-100-

May 1981 by the local CETA Prime Sponsor in Montgomery County (Dayton), Ohio. Over 800 welfare recipients who were enrolled in 

a job search assistance program participated.31/ During their 

first two weeks in the program, enrollees were-trained in job 

search skills, such as preparing resumes and rehearsing for job 

interviews. The training provided to participants was varied to 

some extent, in order to assess its interaction with of wage 

subsidies. Participants were randomly assigned to one of three 

groups. One experimental group was given TJTC or WIN/Welfare tax 

credit vouchers. An alternative experimental group was given 

vouchers entitling employers to direct subsidy payments. Both 

experimental groups were instructed in the use of their vouchers 

and given explanatory materials for employers. A "control" group 

was not given vouchers but instead was instructed in the use of 

the resources of the Employment Service. After completing the 

job search training, program participants engaged in up to six 

weeks of structured job finding activities in groups. 

The results of the experiment were consistent with the 

hypothesis that the employer take-up rate will be higher for 

direct subsidies than for tax credits. The job placement rates 

of the two subsidy groups were equal: 13 percent of participants 

found jobs within the six weeks following the completion of job 

search training. However, even though the two types of subsidies 

were designed to be equivalent in value for all employers with 

positive tax liability, only 16 percent of the job placements for 

the tax credit vouchered groups resulted in certifications as 

compared with 37 percent for the direct subsidy voucher group. 

g. Negative Stereotyping of TJTC Eligibles 

One of the main reasons for tying the TJTC administration to 

the employment and training community was to avoid the 

potentially stigmatizing effect of associating the jobs credit 

with the welfare system.32/ Nonetheless, the Mershon Center 

cites some employers' perceptions that TJTC eligibles are less 

productive than other workers as a possible explanation of the 

low take-up rate.~/ 

31/ See Gary Burtless and John Cheston, "The Montgomery County (Dayton) Ohio Wage-Subsidy Voucher Experimental: Initial 

Findings", u.s. Department of Labor ASPER, June 1981, 

Draft. 

~/ House Report 95-1445, p. 92. 

~/ Mershon Center, Report No. 3, p. 86. 
-101 -

The results of the Dayton Wage-Subsidy Voucher Experiment and the Wisconsin study of wage bill subsidies are consistent 

with the hypothesis that TJTC eligibility carries a stigma. Participants in the Dayton experiment who were instructed to use 

their jobs credit (TJTC or WIN/Welfare) vouchers in job search 

were less successful in finding jobs than were members of the 

"control" group. Nearly one-third of the employers surveyed during the first phase of the Wisconsin study indicated that they harbored reservations about the quality of workers eligible for 

the TJTC.li/ In the second phase of the Wisconsin study an 

experiment similar to the Dayton experiment was conducted during 

the March-July 1981 period. A sample of 329 individuals who were 

actively seeking work was drawn from the current caseloads of the 

three state agencies which served, respectively, Work Incentive 

Program eligibles (the WIN office), the handicapped (the state 

vocational rehabilitation agency), and ex-offenders (Division of 

Corrections). Partic i pating agency staff instructed clients 

placed in the experimental group in using their jobs credit 

eligibility to their advantage in seeking a job. Experimental 

clients were encouraged to present prospective employers with a 

brochure on the jobs tax credit after telling the employer of 

their eligibility . The' results of the experiment would appear to 

be even more striking than those of the Dayton experiment. The 

experimental WIN clients were found .to be significantly less 

likely to obtain a certified job than were the WIN clien~n the 

control group.35/ While this finding is not easy to interpret, it does suggesr-that individuals receiving any type of targeted 

government assistance may be stigmatized. 

If jobs credit eligibility does carry a stigma, then it 

would not be surprising. to find that some eligibles are reluctant 

to be vouchered and to use vouchers in their job search. Some 

evidence of such behavior was reported by the project staff in 

the Dayton experiment and by employment counselors (in WIN, 

vocational rehabilitation, and ex-offender programs) interviewed 

in the first phase of the Wisconsin study. More than one-third 

of the vocational rehabilitation and ex-offender counselers 

interviewed in the Wisconsin study felt that clients were (or believed that they would be) stigmatized by revealing their 

eligibility for a subsidy. This finding is perhaps surprising given that the characteristics which might stigmatize vocational 

rehabilitation participants and ex-offenders should in most cases 

be fairly apparent to employers, even if the employer does not 

know of the job applicant's eligibility for the subsidy. The 

Mershon Center study found very few reported instances of 

handicapped persons or ex-offenders refusing to be vouchered.~/ 

34; Corbett, et al., op. cit . 

I 

36/ 

Wisconsin Department of Health and Social Services, "Job Tax 

Credit- Wage Bill Subsidy Research Project- Phase II", 

January 1982. 

Burtless and Cheston, op. cit., p. 12; Corbett, et al., 

pp 41-42; Mershon Center, op. cit., 44-45. 
-102-

h. Fear of Violating Fair Hiring or Privacy Laws 

Some conce rn was expressed that, in attempting to identify eligible individuals, regulations covering fair hiring or privacy 

might be violated. Congress intended that the administering 

agencies, not the employer, to be responsible for checking worker 

eligibility. It was intended that workers would bring the 

voucher to the job interviews, so employers would not have to ask 

about their eligibility. However, employers frequently became 

involved in determining applicants' eligibility and this factor 

might have inhibited use of the credit . 

IV. Summary 

No single reason can entirely explain the low take-up and 

low penetration rates of the TJTC. Although many employers knew 

of the credit by the end of the first year, it was rarely 

claimed.37/ The main factors inhibiting use of the credit seem 

to have Eeen lack of knowledge by employers, the costs to 

employers of identifying target group members, and the small size 

of the credit relative to the costs of identifying and employing 

target group members. Finally, providing hiring incentives to 

employers via the tax system seems to have inhibited their use 

somewhat. 

A. The Targeted Jobs Tax Credit as an Employment Incentive 

1. The Effect of the TJTC on Targeted Employment 

The number of targeted individuals who gained employment as 

a result of the TJTC is not known. Prior to late 1981, most 

certificates were issued retroactively, which typically meant 

that the employers' hiring decision was unaffected by the 

applicants' eligibility for the credit. And, even among workers 

whose eligibility was apparent to the employer at the time of 

hire, not all would in fact be induced by the credit. 

Department of Labor data for the first three quarters of 

Fiscal Year 1981 indicate that, for target groups other than 

cooperative education s tudents, approximately 63 percent of all 

certifications were "retroactive" (based on eligibility determinations done 15 or more days after the individual had begun work). At the time that the decision was made to hire a worker 

who was later retroactively certified, the employer was often 

totally unaware of .the worker's eligibility for the TJTC. In 

these cases, the TJTC would have played no role in the employer's selection of the new employee. In at least some cases, however, 

the retroactive certification may have resulted from delays by 

the employer or the certifying agency even though the employer 

might have been aware of the individual's eligibility. Further37/ Use of the credit has increased since 1982. See footnote 8 

of this chapte r. 
- 103-

more an employer aware of the TJTC may have hired a worker he 

felt might be eligible for the TJTC, only to find out later that 

the worker was indeed eligible. 

Among thos e hires· for which an employer was aware of 

eligibility, not all can be considered induced. The proportion 

of subsidized hires that are in fact induced will depend on the 

net value of the subsidy and on market conditions. The h igher 

the net subsidy value, the greater will be the incentive to hire 

targeted workers. As described earlier, the incenti ve value of 

the credit was less than the nominal 50 percent wage reduction in 

the first year for a number of reason s. 

The effectiveness of the credit in inducing additional 

targeted wo rk ers will also depe nd positively on the responsiveness of the demand for and supply of target group labor t o wages. Both the demand for and the supply of targeted workers may be 

fairly responsive to changes in wage rates. The TJTC target 

groups are defined quite narrowly, so that they are close substitutes for nontargeted low-skill workers. This would imply 

that the demand for targeted labor is highly responsive to the 

relative cost of employing targeted workers, but any i nduced 

gains in targeted employment may occur largely at the expense of 

nontargeted low-skill labor. The high unemployme nt rate of the 

TJTC target groups suggests a willingness to work at preva iling 

wage rates, which would translate i nto an increase in employment 

of targeted wor kers if there is an i ncrease in t heir demand. 

Thus, the TJTC has at least some po t entia l for increasing 

employment of the targeted groups. 

Several other factors must also be considered i n evaluating 

the effectiveness of the TJTC. First, the r e is some evidence 

that in cases where an. employer was aware of an appl icant's 

eligibility, the c redit may have worked to the appli cant's disadvantage. The results of the experiments in Dayton, Ohio and 

Wisconsin suggest that individuals who use wage subsidy vouchers 

in independent job search may be le ss likely to find work than 

similar individuals without vouchers. The results of these 

experiments may indicate negative sterotyping by employers of 

vouchered TJTC eligibles, which might o ffset the inte nded 

incentive for employers t o inc r e a se targeted employment . 

Second, t he to t al i mpact of the TJTC on target g roup 

employment is channeled through t he employment experiences of 

both vouchered and nonvouchered t arget group members. To the 

extent that employment gained by vouchered TJTC individuals came 

at the expense of nonvouchered TJTC eligi bles, t he e f f ecti veness 

of the p rogram is reduced. 
-104-

Third, the credit could have some effect on targeted employment even if employers do not substitute targeted for nontargeted 

workers. The subsidy provided to firms employing targeted 

workers could lead to an expansion of those firms' production, and thus targeted employment. The scale effect of the subsidy is 

undoubtedly small in the aggregate due to the low utilization and 

small size of the TJTC program. Nevertheless, the scale effect 

could have been significant for firms that were heavy users of 

the credit, especially after 1981 when the 30 percent ceiling on 

the share of FUTA wages that could be subsidized was removed. 

Fourth, because the agency responsible for certifying 

cooperative education students--the school system--was invariably 

involved in placing the students in jobs, the impact of the TJTC 

on cooperative education employment may have differed from the 

TJTC's impact on the employment of other target groups. On the 

basis of interviews with the cooperative education staff, an 

April 1980 study by the Employment and Training Administration 

concluded that the TJTC did little to induce additional employer 

participation in cooperative education programs during the 1979 

academic year. 

Finally, there are the responses to survey questions which 

directly ask TJTC users about the impact of the credit on their 

employment and hiring patterns. Bishop reports some empirical 

evidence that is relevant to the credit's overall impact on 

targeted employment. Respondents to the 1980 WESTAT Survey who 

indicated having used at least one targeted employment subsidy 

(TJTC, the WIN credit, or CETA-OJT) were asked whether their 

participation in these programs had influenced their establishment to "expand total employment by more than might otherwise 

have been done." Respondents answering this question affirmatively were then asked to estimate for the most recent year that 

the establishment participated in one of the programs: (1) the 

number of "additional employees that were hired that wouldn't 

have been hired otherwise"; and (2) the total number of employees 

for which a tax credit or a subsidy was received. It is unclear 

whether in providing the former estimate respondents had in mind 

the net increase in total hires, as was intended, or the number 

of subsidized hirei that were induced hires. 

Assuming that respondents understood the question correctly 

to refer to net changes in total hires, Bishop reports that among all respondents who used solely the TJTC, the 1979 ratio of the 

net increase in total hires to the number of subsidized hires was 

22 percent.~/ (In forming this estimate, respondents who 

38; John H. Bisho~ and Mark Montgomery, Chapter 4 Subsidizing 

On-the-Job-Training, Editor, John Bishop, National Center 

for Research in Vocational Education, Ohio State 

University, 1982. 
-105-

reported no net increase in total employment were included.) Since Bishop's finding relates to total hires, it is possible that some nontargeted workers were displaced by targeted workers 

such that the net increase in targeted group hires to subsidized 

hires may have exceeded 22 percent. However, the reliability of 

Bishop's findings may be questioned, since the number of 

respondents was small, and many respondents may have misinterpreted the questions or have been unable to answer them with 

resaonable accuracy. In addition, the responses pertain to the 

first year of the TJTC program, a year which probably was not 

typical of later experience. 

Although Bishop finds a modest employment effect, it is 

contrary to the conclusion of the Mershon Center study which 

finds that "Employer hiring and firing practices do not appear to 

be significantly influenced by TJTC, even in those cases where 

they are applying for current rather than retroactive certifica- tion."~/ However, this finding, like Bishop's, is based on the 

survey responses of a small sample of employers which may not be 

representative of all employees using the credit. 

Until more is known about labor market behavior, the total 

induced employment effect for targeted workers will not be known. 

Employer questionnaires, certification data, and tax return 

information are not sufficient for an analysis of the effect of 

the subsidy on targeted employment. The information that is 

known about the credit during its first three years of operation 

would suggest that some fraction of workers who were hired with 

the credit actually gained employment as a result of the credit's 

availability. 

2. Budgetary Cost of the TJTC 

The benefits of the TJTC must be measured relative of the 

cost of the program, since the Federal government could have 

chosen alternative employment programs with the same budgetary 

cost. The direct budgetary costs of the TJTC amounted to $730 

million in Fiscal Years 1979-1981. In addition, employers could 

claim credits in FY 1982 and FY 1983 for workers certified during 

FY 1979-1981, because the credit was available for the first two 

years of employment. There are also costs of administering the 

credit by the Departments of Labor and Treasury, and the other 

agencies involved in TJTC vouchering. In evaluating the cost of 

the TJTC, it would also be necessary to account for any impact which the credit might . have had on government welfare payments. 

39; Mershon Center, Report No. 2, p. 29. 
-106-

B. Other Effects of the Targeted Jobs Tax Credit 

1. Effects on Employment of Noneligible Workers and 

on Total Employment 

The TJTC could have adversely affected employment opportunities for ineligible individuals by giving employers an 

incentive to favor target group members in their hiring decisions. It is unlikely that employers directly replaced 

ineligible workers hired before the TJTC was available with 

eligible workers. Instead, the displacement of ineligibles was 

more likely to have resulted from hiring a credit-eligibile 

worker rather than an ineligible worker when positions became 

available due to company expansion or regular turnover. 

The only direct evidence that pertains to the displacement 

effect of the TJTC comes from the GAO employer survey. Among 

employers who used (or intended to use) the credit, 25 percent 

indicated that their use of the credit had led (or would lead) to 

an increase in their employment. Among actual and prospective 

users responding to a separate question, however, 40 percent 

indicated that they. had "used some target groups workers in place 

of workers with similar skills but who were not members of a 

target group". Moreover, although users of the TJTC may have 

increased their total employment as a result of the credit, it 

cannot be concluded that the credit increased aggregate employment (see the discussion in Chapter 1). 

2. Effect on Target Group Wages 

The TJTC could increase the wages of participating workers 

in either of two ways. First, by providing additional 

employment, the TJTC may boost the earning power of participating 

workers through increased experience and on-the-job training. 

Second, even without such improvement in skills, employers 

desiring to take advantage of the subsidy may offer higher wages 

in order to attract and retain eligible workers. A rough assessment of the second effect can be made by comparing wages at 

placement of certain categories of individuals placed by the 

Employment Service nationwide during FY 1980 with the wages entered on completed TJTC certificates through FY 1980 . 

Comparison of TJTC placements with two other groups is 

made in Table 5.14. These groups are: (1) all economically 

disadvantaged ES applicants placed, aged 18 and over; and (2) 

the group c losest in skill levels to the TJTC population, 

economically disadvantaged 18-24 years old, Vietnam-era 

veterans, and the handicapped. The TJTC group includes 270,000 

individuals; the first group consisted of over 1.2 million 

individuals in FY 1980; the second totaled about 675,000 . Table 

5.14 shows a wage distribution for TJTC participants which is 

broadly similar to the wage distribution of the comparison 
- 107-

Table 5.14 

Comparison of Hourly Wage Rate Distribution of TJTC Workers 

and Employment Service Placements - FY 1980 

Percent 

TJTC ES Applicants ES Youth, Vets 

Hourly wage Rates Certifications 1/ 18 and Over 2/ Handicapped 3/ 

Under $4.00 78.0 73.2 77.5 

$4.00 - $4 . 99 12.3 15.0 13.7 

$5.00 - $5.99 4.8 5.5 5.0 

$6 . 00 and Over 4.9 4.3 3.8 

Total 100. 0 100.0 100.0 

11 Excludes cooperative education students. 

/ Economically-disadvantaged employment se rvice (ES) placements, age 18 

and older. 

/ Employment service placements of economically-disadvantaged youth age 

18-24, Vietnam veterans, and handicapped individuals. 

Source: u.s. Department of Labor. 
-108-

groups, particularly that of the group which most closely matches 

the TJTC population. While this comparison suggests tha t the 

wages of TJTC participants do not differ from those of similar 

workers, the comparison suffers from inadequate detail. For each 

of the groups compared in Table 5.14 the bulk of the workers earn 

under $4.00, and the absence of any finer breakdown may obscure 

differences between the groups. In addition, the data shed no 

light on the effect of the TJTC on the future wages of 

participating workers. 

More informative estimates of the wage effects of the TJTC 

were obtained by Bishop and Stephenson, using the data from the 

WESTAT survey.40/ Employers were asked to provide detailed 

information on~heir most recent subsidized and unsubsidized 

hires. The starting wages of subsidized workers were compared 

with those of unsubsidized workers, controlling for differences 

in measures of education, experience, age, sex, and employer characteristics. A similar comparison was made for percentage 

wage growth during the first year of the employee's tenure at the 

firm. Employees for whom the TJTC was received were not found to 

differ from otherwise similar employees with respect to the 

starting wage or wage growth. 

3. Hours and Tenure 

In Chapter 2 i~ was argued that a pure wage subsidy 

(especially a temporary one) would encourge employers to increase 

hours per employee, whereas a per worker subsidy of a fixed 

amount would provide the opposite incentive. The $6,000 ceiling 

on annual subsidized wages per employee made the TJTC a cross b~tween a pure wage subsidy and a fixed per employee subsidy. 

The wage distribution shown in Table 4.14 suggests that the 

$6,000 ceiling may have been binding for a significant proportion 

of the positions subsidized by the TJTC. 

The TJTC may not have had an effect on the job tenure of 

workers for whom the credit was claimed. The costs to the 

employers of identifying and certifying TJTC eligibles gave 

employers an incentive to retain certified employees. On the 

other hand, the limitation of the subsidy to an employee's initial two years on the job gave employers an incentive to limit 

job tenure to two years. 

40/ John H. Bishop . and Stanley Stephenson, Jr., Chapter 9, in 

Subsidizing On-the-Job Training, editor, John Bishop, 

National Center for Research in Vocational Education, Ohio 

State University, 1982. 
-109-

C. Conclusion 

Based on the initial Congressional projections of the tax 

expenditures for TJTC, the actual impact of the program fell 

short of Congressional expectations. For most target groups, the 

credit was claimed for only a fraction of eligible hires. 

Available evidence is not adequate to explain the underutilization of TJTC. It is likely, however, that both the design of the 

credit and the administrative procedures involved in certifying 

workers were major factors. Provision of the wage subsidy through the tax system reduced the possible incentive effect for 

many employers . 
-110-

Appendix A 

New Jobs Tax Credit Data 

I. Description of the Data 

A. Limitations of Data 

The analysis o~ t he distribution of NJTCs in this report was 

limited to corporations . Corporations claimed about 80 percent 

of the NJTCs taken in 1977 and 1978. The remaining credits were 

earned by proprietorships and partnerships and claimed on 

individual tax returns. The distributions of jobs credits earned 

by partnerships and proprietorships should be broadly similar to 

the patterns observed among corporations. 

One systematic difference is likely to exist between the 

distributions of credits claimed by corporations and those 

claimed by proprietorships. Partnerships are more likely to be 

able to claim credits than corporations of the same size because 

their taxable income includes the labor income of their owners. 

However, including noncorporate businesses would be unlikely to 

significantly alter the finding tha t the NJTC was less likely to 

be used by small businesses. 

The data presented in Chapter 4 are based largely on final 

Statistics of Income (SOI) corporate income tax returns for 1977 

and 1978. Information contained in two early samples of 

corporate tax returns and a sample of income tax data matched 

with payroll ta x data was used to estimate eligible corporations 

and the effects o f the vari ous credit limitations. 

B. Corporate Income Tax Return Samples 

The Internal Revenue Service's Statistics of Income (SOI) 

sample of 1977 cor porate returns had 90,634 returns, of which 

76,723 were included in the jobs credit sample. Firms filing 

1120-S or 1120-DISC returns were not included in the jobs credit 

sample since the NJTC could not be claimed on those returns . Credits earned by Subchapte r s corporations could only be claimed 

on the individual tax re tu rns of the shareholders. Nor could the 

NJTC be earned by DISCs . The 1978 corporate SOI sampl e had 

89,249 returns, of wh i ch 79 ,000 were included in the sample. 

In the 1977 sample, 24,922 returns were filed with jobs credits c laimed on either Schedule J of Form 1120 or on Form 

5884 . I n the 1978 sample, 58,835 returns claimed a jobs credit. 

The Treasury Departmen t used information transcribed from 

the sample returns to reca lculate the amount of credit each 

cor poration could claim . If the calculated cred it differed from 
-111-

the credit actually claimed by less than $500, the two credits 

were considered matches. In 1977, there were 21,322 ''matches" 

out of a possible 24,922; in 1978 there were 54,070 ''matches" out 

of a possible 58,835. 

The text presents information on the number of firms using 

the credit based upon the number of returns that claimed the 

credit in each sample, regardless of whether or not the credit 

claimed and the calculated credit matched . The information on 

the credit limitations presented in the report, however, was 

based upon the matching cases in the sample. In 1977 , the 

calculated credit exceeded the credit actually claimed by $106.9 

million. In 1978 , the calculated credit exceeded the amount of 

credit actually claimed on all returns by $205.7 million. These 

discrepancies represented 7 percent of the total dollar amount of 

credit claimed in 1977 and 8 percent in 1978. 

C. Estimating FUTA Base Growth Rates 

The effect of the two percent employment growth threshold on 

eligibility for the NJTC could not be determined from tax returns 

because not all corporations are required to report their Federal 

unemployment Tax Act (FUTA) base on their income tax returns. 

Hence, only companies claiming the NJTC reported FUTA base 

information. 

Growth in the FUTA base for all corporations was estimated 

by matching the Census Business Master File (BMF) for 1977 with 

the FUTA payroll tax returns (IRS Form 941). The BMF contains 

various data items, including corporate income tax return data, 

on approximately 2.5 million business entities. The payroll tax 

file contains FUTA base information for the same business taxpayers. About 1.5 million direct matches between these two files 

were achieved. These matched data were used in Chapter 4 to 

estimate FUTA base growth rates for the universe of corporations. 

The approximately one million non-matches resulted from 

different filing periods for some firms, business consolidations, 

and different collection procedures. Distributions using BMF 

matched data assume that the excluded non-matched firms do not 

differ significantly ~ith respect to payroll wage growth from the 

matched firms. There is no reason to expect that firms were more 

likely to be matched for reasons related to payroll wage growth. 
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Appendix 8 

Targeted Jobs Tax Credit Data 

I. Description of TJTC Employer Income Tax Return Data 

The data for firms claiming the TJTC in 1979 were taken from 

a large sample of corporate income tax returns claiming a jobs credit in 1979. The entire sample contained firms whose 

accounting periods ended no later than December 31, 1979, which 

filed a return before November 1, 1980, and which either filed 

Form 5884 or reported a jobs credit on Form 1120. The sample was 

limited to corporations with early accounting periods in order to 

provide information for this congressionally mandated report prior to its July 1, 1981 deadline. Corporations with late 

fiscal year returns differ only slightly from corporations with 

early accounting periods with respect to industry and asset size. 

The amounts of NJTC and TJTC claimed were combined on a 

single line on Form 1120. The fiscal year 1978-9 Form 5884 

contained line items for both credits, while the 1979 calendar 

year Form 5884 included a line item for carryovers of the NJTC. 

Thus, the TJTC had to be separated from the amount claimed 

for the NJTC. A tax calculator, replicating the calculations on 

Form 5884, was used to estimate the amount of the TJTC claimed on 

each return. The calculator assumed that the employment and wage data on Form 5884 were accurate. Any returns that contained no 

employment or wage data for the targeted groups were assumed to 

have claimed only the NJTC. Any returns that reported jobs credits totaling more than the calculated TJTC amount plus $500 

were assumed to also claim the NJTC for the excess amount. 

II. Adjustment for Potential Transcription Error 

The eligibility certifications received by employers contained a letter-designation of the worker's target group, 

which was to be used in filling out the jobs credit tax form. 

The Tax Form 5884 listed seven letter-designated categories for 

the targeted groups rather than listing the specific types of 

eligible workers. This procedure was used to prevent employers from learning which target group an individual belonged to from 

the certification system. 

The letter designations reported on the corporate tax return 

were used to estimate the number of tax credits claimed for each 

target group. However, the estimated number of credits taken for 

SSI recipients was 6,372, whereas according to DOL records only 

390 members of this group were certified. This result was 

probably due to an incorrect transcription of the letter-designations for cooperative education students and for SSI recipients. 
-113 -

Some cooperative education students who were designated as letter 

'E' appea r to have been incorrectly classified as SSI recipients who were designated as letter 'F'. The distribution of credits 

claimed for the two groups was quite sim1liar by industry classification. 

Some caution is necessary in interpreting the results by 

target group due to this inconsistency. Nevertheless, as Table 

5.10 shows, among the five target groups other than the SSI and 

cooperative education groups, the distribution of tax credits was 

similar to that of Department of Labor certifications. It was 

not possible to check the reliabi lity of the letter designations 

on Form 5884, since certifications were not required to accompany 

the tax form. 

Table 5.10 also reports the number of jobs credits claimed 

for each target group when an adjustment for the possible 

incorrect transcription was made. The adjustment assumes that 

firms hired an SSI recipient only if they claimed credits for 

both cooperative education students and SSI recipients; otherwise 

only cooperati ve education students were assumed to have been 

hired. After the adjustment, the distribution of credits claimed 

for each of the targeted groups is more similar to that of the 

DOL certifications--cooperative education students and SSI 

recipients account for 56 percent and 1 percent respectively, of 

all credits claimed . All other tables in Chapter 5, howeve r, 

report the unadjusted data. 

III. Summaries of Evaluations of TJTC Implementation 

The following summaries, except the descr1pt1on of the GAO 

survey, are based upon evaluations of the TJTC conducted 

internally or financed . by the Department of Labor. 

A. Ohio State University Resea rc h Foundation (Mershon 

Center Study), The Implementation of the Targeted Jobs Tax 

Credit, Repor t No. 1 (July 1980), Report No. 2 (January 1981), 

Report No. 3 (July 1981), Final Report (Janua r y 1982). 

The TJTC evaluation project funded by DOL was intended to 

provide periodic feedback on the progress of the implementation of the TJTC at a sample of 25 areas chosen earlier for a study of 

the impleme ntation of the Private Sector Initiatives Programs 

(PSIP). The 25 sites comprised about 5 percent of all CETA prime 

sponsors' areas and , since they were located in 17 States, 

involved contact with about one-third of State Employment 

Security Agencies (SESAs). A report was prepared after each of 

four waves o f field visits. During the field visits, the 

evaluators contacted key individuals in the agencies involved in 

the TJTC implementation, reviewed reports, and observed 

operations. As part of the Fall 1980 field work, they also 

contacted a small sample of employers who were knowledgeable 

about th e TJTC . In all, 47 employers were intervi ewed (about 2 
-114-

per site ) , and the researchers referred to earlier employer 

surveys (such as a California survey of 620 employers) to confirm 

their findings. In addition, persons involved in the 

administration of the TJTC at the state, regional, and national 

levels were contacted. 

The first report was based on field study in the 25 sample 

sites as of mid-1980 . The principal finding of the report was 

that many local ES offices and CETA sponsors were skeptical about 

the tax credit approach and reluctant to use it extensively as a 

job placement aid. This attitude and the tendency to give TJTC a 

low priority were explained by several factors: 

(1) The tax credit idea was new to the agencies. Key staff 

were not convinced of its "legitimacy" because it may provide 

financial gains to employers who do not alter their hiring 

practices. 

( 2) The TJTC certification system increased agency 

workloads, with what were seen to be little positive results. 

The small funding prov i ded to administer the program suggested to 

local officials that the program was not important or that it was 

mistakenly seen at the national level as self-administering or 

readily absorbable by local agencies. 

The second report in the series, based on a field study 

lasting through October 1980, indicated why employers responded 

only weakly to the tax credit incentive to hire from the targeted 

groups. Among its findings are: 

(1) Many Employment Service offices and most CETA sponsors continued to be skeptical about the TJTC and reluctant to use it 

extensively as a placement tool. Employment Service offices in 

the selected sites were generally unable to meet their goals for 

certifications unless they actively promoted retroactive 

certifications, or at least responded to employer requests for 

assistance in obtaining them. 

(2) Employer hiring practices did not appear to be 

significantly influenced by the TJTC. Most employers using the 

TJTC had already customarily been hieing from the eligible target 

groups. 

(3) As to why more employers were not seeking TJTC hires, 

the principal reasons appeared to be "fear of government" and 

"hidden costs"--expressed as concern about "red tape", government 

intrusion into hiring, IRS audits, or being subject to 

requirements for Federal contractors. 

The third report in the series was based on field studies 

and consultations in February and March 1981. It was primarily 

concerned with describing in detail the structure of the 
-115-

implementation of TJTC and how that structure evolved, and its 

effect on performance. 

In addition to the findings presented in its first two 

reports--which were found to hold substantially in the areas 

studied in the third round of field studies--the report notes: 

o Most ES offices vouchered selectively or in response to 

an employer's request . 

o Over time, non-retroactive vouchering and marketing activity declined in the sites studied due to reduced 

resources and employers' emphasis on retroactive 

certifications. 

o Agencies were generally more successful in meeting certification goals if they used a variety of marketing 

approaches, integrated TJTC with their other labor market 

programs and involved other agencies. Approaches 

involving direct contact with employers or accountants 

seemed to generate more certifications than approaches using the mass media. 

o Despite the evidence suggesting that in some cases 

vouchered individuals did not use the TJTC voucher issued 

to them as a job search tool, the Center concluded that 

promotion of client-directed job search was the approach 

most likely to yield new--as opposed to retroactive--

hires, although the volumn of certifications might not 

reach previous target levels. 

The fourth and final report in the series updated the 

findings of the third report to July 1981. The most significant trends that were reported were a slight decline in the efforts of 

ES offices and CETA Prime Sponsors towards implementing TJTC, and 

a continued increase in activity by private "third-party" TJTC 

vendors. · 

B. Office of Program Evaluation, Employment and Training 

Administration, u.s. Department of Labor, Evaluation Study of the 

Early Implementation of the Targeted Jobs Tax Credit Program, December 1979. 

The study of the early implementation of TJTC, done for 

internal Labor Department management purposes, was based on 

visits during the summer of 1979 to a major metropolitan area in 

each of nine ETA regions. Key staff of the agencies involved in 

TJTC implementation in each site were interviewed. In addition, 

about 200 employees who had been issued certifications or were 

known to be familiar with the TJTC were interviewed to obtain 

their opinions about the TJTC and to find out how they used the 

credit. 
-116-

The major findings of the report are: 

(1) Though it was generally assumed that the TJTC could be 

set up locally as a simple program, SESAs and CETA sponsors found 

it a rather complicated program to implement. 

(2) Both SESAs and CETA sponsors were unhappy with ETA's 

assignment of exclusive responsibility to the CETA sponsors for 

eligibility determination and vouchering for the three incometargeted groups. The SESAs were concerned because this 

arrangement constrained the use of the TJTC in their regular 

labor exchange activities. CETA sponsors were concerned with the 

burden on them of arranging eligibility screening and vouchering of many persons they may not enroll in CETA programs. 

(3) CETA sponsors generally considered the TJTC as a 

placement resource, much more suited to SESAs than to their own 

needs, and, therefore, generally did little to util ize it 

directly . 

(4) There was evidence of skepticism about the TJTC and 

hesitation among many local agency staff actively to screen and 

voucher applicants or to promote TJTC use among employers . 

C. Office of Program Evaluation, Employment and Training Administration, U.S. Department of Labor, Study of the Georgia 

TJTC Program, June 1980. 

The Labor Department field evaluation of TJTC in Georgia was 

conducted to determine why and how Georgia ( and more generally 

the States of DOL Region IV) had been attaining a high volume of 

tax credit certifications while most other areas had made 

relatively limited use of the TJTC. The study was based on 

visits to eight localities in Georgia in the spring of 1980, and 

on telephone contacts with a number of employers at those sites. 

The major findings of the study are: 

(1) The Georgia Job Service, with regional office support 

and with agreement of CETA sponsors and other agencies, had taken 

almost sole responsibility for the program, had assigned local 

office staff to work on it, and had actively sought to achieve 

relatively large numbers of certifications. 

(2) Its efforts were primarily geared to helping employers 

identify previously hired workers who may be eligible, making 

eligibility determinations for such workers, and issuing retroactive certifications for them. As a result, it was estimated 

that about 80 percent of Georgia's certifications had been 

retroactive rather than involving workers hired by employers with 

the prior knowledge that they were eligible for the credit. 
-117-

(3) The Georgia SESA officials saw this strategy as a way 

to get employers favorably oriented to using the tax credit, to 

get them to consider target groups more consciously in future 

hiring, and to make greater use of the Job Service generally. 

(4) Neither Job Service nor CETA staff in Georgia were 

making any appreciable attempt to issue TJTC eligibility vouchers 

to applicants to help them in their job search . They doubted 

that workers could explain the TJTC or that employers would hire 

on the basis of a worker-presented voucher. 

D. Office of Program Evaluation, Employment and Training Administration, U.S. Department of Labor, The Use of TJTC in 

Cooperative Education, December 1980. 

This study of the use of the TJTC by instructors and 

coordinators of cooperative eductaion programs, done for internal 

Labor Department management purposes, was based on telephone interviews in the spring of 1980 with about 70 persons at the 

state, county, and local levels in a sample of nine States. 

The study found that the TJTC was not used to any significant extent in the 1979-80 school year for lining up positions with new employers. It may have been of moderate value 

in increasing the retention of some· students. On the basis of 

the limited sample of local experience in the survey, the study concluded the TJTC was not needed to obtain cooperative education 

placements in localities where the employment situation was not 

particularly depressed ~ 

The principal role that s c hool staff administering cooperative education saw for the TJTC, however , was as a means 

of rewarding employers already inclined to join with the schools 

in this activity. With only few exceptions, local school staff 

indicated they approached the credit as an entitlement of the 

employers they already wor k with, a sort of bonus for loyal 

support of the school-work program over the years. 

E. u.s. General Accounting Office (GAO), Letter Report to 

Senator Heinz, "Comments on Employment Tax Credits" (PAD-81-73), 

June 5, 1981. 

The GAO survey, taken in January 1980, was based on a 

stratified sample of 1,000 firms chosen from the Dun and 

Bradstreet Million Dollar and Middle Market files. These files 

cover almost the entire un i verse of firms employing 50 of more 

persons, as well as most firms employing less than 50 persons if 

they have a net worth of $500,000 or more. The major omission is 

very small firms (1-9 workers) with a low net worth. Such firms 

account for about 80 percent of all firms but less than 20 

percent of aggregate employment. Seven hundred and twenty firms 

responded to the mail survey. The main findings of the survey 

are reported i n the Chapter 5 . 
-118-

IV. Description of the Penetration Rate Calculations 

This section describes the calculation of the TJTC 

penetration rate; i.e., the ratio of TJTC certifications to 

potential certifications. An employer in a "trade or business'' 

who had newly hired a member of a TJTC target group since 

September 27, 1978 could claim the credit by having that person 

certified. The credit could only be applied against actual tax 

liabilities. The potential universe of TJTC certifications was 

thus all new hires of persons who were members of TJTC target 

groups by trade or business firms with past, present, or future 

federal income tax liabilities. 

A full specification of this universe would require data on 

the number of individuals in each taraget group newly hired by trade or business firms with usable tax liabilities. While these 

data were not available, they were be estimated for certain 

target groups. Estimates of the numbers of economically 

disadvantaged Vietnam-era veterans and SSI recipients who work 

were available. 

The calculation of the universe of one eligible group--

economically disadvantaged youths--is described for 1981 in the 

following steps: 

!/ 

o The 1981 population of 18-24 year-olds who were 

"economically disadvantaged'' according to the TJTC 

definition was estimated to have been approximately 4 

million. 

o According to Current Population Survey (CPS) data for 

1981, about one half of that number were at work on an 

average day during the year. 

o CPS data also indicate that about 10 percent worked in 

sectors of the economy not covered by the credit (private 

homes; private nonprofit organizatons; unpaid family 

work; government; or self-employment). 

o Of the remaining 1.8 million, it was assumed that threefourths worked for firms with enough residual income tax 

liability to use the credit.!/ 

In any year, rpughly one-half of all businesses have income 

tax liabilities. However, due to the carryover provisions 

of the law, TJTC could still be attractive to firms with no 

tax liability in the year of hire. An upper estimate of 25 

precent was used for the percent of businesses that would 

have no ''usable" tax liability after other nonrefundable 

credits during the 11 year period allowed for carrybacks and 

carryforwards of the credit. 
-119-

o Based on CPS gross flow data, it is estimated that, on 

average, persons of this age group leave the state of 

employment ( i.e., be come unemployed or out of the labor 

force) at a r a te of 9 percent per month.2/ To allow for 

the possibility that economi cally disadvantaged youths 

probably hav e higher than average job turnover and to 

allow for job changes with no intervening spell of 

unemployment or labor force withdrawal, a range of 

estimated monthly turnover rates of 15 to 18 percent is 

reasonable. This implies a range of 1.8 to 2 . 2 new hires 

per year per job to maintain the size of the employed population. 

o Thus, the potential TJTC universe of economically 

disadvantaged youths is conservatively estimated at 2 . 4 

to 3 . 0 million new hires dur i ng 1981. 

o During fiscal year 1981, ther e wer e about 176,000 

certifications of e conomically disadvantaged 18- 24 year 

olds . This implies a penetrati on rate of 6 to 8 percent . 

Similar calcula tions for o ther targe t g roups include 

cooperative education youth, 21 to 23 per cent; SSI recipients, 5 

percent; and economi cal l y disadvantaged Vietnam-era veterans 9 to 

10 percent. 

The size of the uni verse o f the remaining groups--ex-felons, 

vocational rehabilition re f errals, and general assistance 

recipients-- canno t be determined because the size of the 

populations is unknown . It is unlikely that the penetration r~t~s for these groups differ signifi cantly from the rates for 

economically disadvantaged youths or veterans. On the whole, for 

the TJTC groups other than cooperative education students, the 

penetration rate achieved during FY 1981 is estimated between 5 

and 10 percent, and probably c loser to the lower figure. 

/ See Stephen T . Ma rs ton, "Empl oyment Instability and High 

Unemployment Rates" Brookin s Pa e rs on Economics Activit , 1: 1976 p. 175. The CPS ata can on y 1 ent1 y c anges 1n 

labor market status (e.g., empl oyment-to-unemployment); they 

do not identify j ob-to-job shifts involving no intervening 

spell of unemployment or labor force withdrawal. 
ro r~ 5884 DtP-'t1mt n1 4f 11\t lt1'U Ut) 

lftlt t1't l Ant"vt S.tn iU 

New Jobs Credit ._ ~e sep.rat8 Instructions. 

._ Attach to your tax return. 

@ 

~®78 

Name l

ldenttlylnc number •• -"own on .-.. 1 of 

rour w m um 

Important-ihe employer's wage and salary deduct ron must be rtduced by the new tobs credo! on lone 13. (See onstruclron G.) 

-- II you are e small busmtss corporatJon. 

partnersh•P. estate, or t rust whteh appor· tions the cred• t to r.hareholder!>, partners. or ben e lacoa roes. comple te only lines 1 

through 13 . II you a re en indovidual shareholder. 

partner, or beneficia ry who recellles the 

credit fr om the above enllt•es and havt no 

other JObs credot, complete only tmes l6 

thlougn 19. tnt er the apportioned cre 011 o n 

line 20, 21, or 22. respectovely and com· 

plete t he balance of the lorm as applicable. 

If you are an indovodual who has more 

tha n one new JObs credo!, see mstrucllon 

lor lone 13. 

Note: II you a re a membet of a group of 

trades 01 busrnesses that are under com· 

mon conttol or If you ate an esta te or trust 

thai apportions the new jobs cred1t · 

tween Itself a nd Its benefociaries, please 

see rnsttuctoon H a nd the instruction lor 

line 13 before complet1ng the lotm. 

1 Enter t he total unemployml'nt lnsu rancl' wages (Jrmoted to $4,200 lor each employee) pa id duronf; calenda r 

yr:ar 1978 (see onstructoon for ltne 1) . 

2 Enter I 02% of the total unemployment ins ur<1nce wages (limrteo to $4 ,200 for each employee) pa id 

d uring cafe J'ldar year 1977 (see instrucl•on lor lone 2) . 

3 Subtract lone 2 from line 1 

" Enter 50% of line 1 • 

!5 En\ er the smaller of lone 3 o r lin~ 4 

6 Enter total wages paod in calendar year 1978 (see instructoon for line 6). 

7 Enter lOS% of total wages paid in ca lendar year 1977 (s ~ instrucllon for line 6) . 

8 Subtract lone 7 from lo ne 6 . 

9 Enter SO% of the s maller ol Jane 5 or lme 8 . • : 

. ' .. : 

10 Enter the sm•ller or hne 9 or $1 00,000 (m•rmd indov1duals lolone separ1tely, estates • nd trusts, ste onstruttoon lor hnc 10) . 

11 Ente r th e unemployment Insurance wages (hmit ed to $4,200 for each employee) paid to vocahonal rehabilit.a· 

t oon relerra l employees du11ng calendar year 1978 (see Instruction E) . 

12 Enter the maller ol (a) l 0% o f lone 11 or (b) 20% of lr ne 9 . 

13 Current year new jobs cred1t-Add Iones 10 and 12 (see instructoon I for sptci1l hmits). (Members of • rroup of tildes or 

bus t~ un6er tcmmon tonuol, srull bus1nen corpor1toons. pulne~hops , tSIItel, 1nd trusts. see instruclton for line 13) . 

14 Carryback and carryover of unused cred t(s) (attach computatoon-see instruct oon F) . 

15 Te ntatrve new JObs credot-Add Jrnes 13 ano 14 . 

Umitation 

16 (a ) IndiVIduals-Enter a mount from Form 1040, lrne 37, page 2 . 

(b) Estates ana tru sts-Enter amount from Form 104 1, lrne 27 or 28, page 1 . 

(c) Corporations-Enter amount !rom Schedule J (Form J 120 ), line 9 , page 3 . 

17 (a) Cred•t lor the elderly (mdrviduals only) . 

(b) Foreogn ta,; c red•t 

( c) Inv estmen t credrt 

(d) WIN credo! 

(•) Credo! for pohllcal controbutoons (~noovlduals only) 

(I) Credot lor chold and dependent ca re expenses (!rtdoviduals only) . 

(i) Po ssessoon tax credo\ (corporatrons only) 

( h) Tax on lump·sum dostrobutoons (se.e onstructron for lrne l 7(h)) 

(i) Sec tion 72(m)(5) penalty tax (rnd rv1duals only) . 

18 i otal (add lines 17(a) lhroush (r)) . 

J· 

19 Subtract lone l81rom ltne 16. (All lrlers, other than s hareholders, partne rs, or bene lrc1aries to whoch lrnes 20. 

21 , or 22 apply, are to slo.rp hnes 20 througn 23, enter zero on line 24, and complete hne s 25 through 27 .) • 

20 Shareholde r's cred•l from ~hedule K-1 (f orm l120S) plus unused new jobs cred1t (see instructoon for hne 13) . 

11 Pa rtner's credrt from Schee!ule K-1 (form 1065) plus unused new jobs cred•t (sec inslruthon for hne 13) . 

22 Benefocoary's cred•t from Schedule K-1 crorm 104 1) plus unused new jobs credit (see onstrucloon for hne 13). 

2J Lone 20, 21. and 22 lrmrts· 

(a) Ente r t he , maller of lrne 20 or the amount logured by usong the formula in the lo ne 23 1nstructoon. 

(b) Ente r t he smaller of lrne 21 or the amount lrgured by usrng the formula tn the hne 23 rnstructoon. 

(c) Enter t he smaller of hne 22 o r th e amoun t figured by usrn& the formula in the hne 23 lnstructron. 

24 Add trnes 23(a). (b), and (c) 

25 Subtract hne 24 !rom line 19 . 

26 Enter t he ~maller of lrne IS or lone 25 (1f there os no entry on lrne 15, ente r zero). 

27 Total a llowable new jobs c red1t (add lines 24 and 26). Enter here e nd on Form 1040, line 44; Schedule J 

(form 1120). I ne IO(d). page 3 or the appropriate lone on other returns . 

. 

--

ro rm 5884 11 971) 
~®78 uctl@{J liit@~J17 

Internal Revenue Service 

Instructions for Form 5884 

(1978-79 Fiscel Year Filers See ln~lruction ' lot Fotm 5884-FY) 

New Jobs Credit 

(References are to the Internal Revenue Code) 

•• • • 

General Instructions 

Genmlly, employers who hire additional 

'l'lorkm may claim a new jobs credit lor their 

tax yea~ beginning in 1978. This cred1t is. 

usually based upon the employer's total un· 

employment insurance (fUTA) wages (limited 

to $4,200 lor each employee) paid during the 

1978 calendar year. It is equal to SO% ol the 

amount by wh1ch the employer's FUTA wages 

paid during 1978 meeds the greater ol: 

(1) 102% ol total FUTA wages paid during 

1977; or 

(2) SO% of total FUTA wages paid during 

1978. 

The credit is limited to the lesser ol the 

!allowing amounts: 

(1) SO% ol the mess of the total wages 

(determined without any dollar limita· 

lion) paid during 1978 over 105% ol 

the total wages paid during 1977; 

(2) S100,00l}-married persons filing sep· 

arately and eslatu and trusts, see in· 

struction lor line 10 ol this lorm (the 

total jobs credit ol a taxpayer involved 

in more than one business enterprise 

may not erceed S 100,000); or 

(3) Tat liability as delincd in section 53. 

To figure the credrt and the limitation in 

item (1). hml year taxpaym with lax years 

beginmng in 1978 must use the wages paid dur· ing 1977 and 1978 and not during their liscal 

yur. for uample. il your tax year began 

12/1/78 you would ligure y:>ur credit and 

limitation in (I) above by laking inlo account' 

wages paid during the calendar years 1977 and 

1978. 

An employer also is allo111ed an additional 

credit that is equal lo 10% ol the FUTA wages 

pa id to vocational rehabililation referral em· 

ployees during the calendar year. See instruction 

E lor definitions and limllalions concerning this 

credit. 

A. Who Must File.-Any Individual 

estate, trust, organiution, or corporation· 

entitled to a new jobs credit; or any 

small busintss corpotation. partnership, 

estate. or tru~t that apportions the credit 

among its shareholders, partners. or 

benefociaries must altach this form to Its 

income tax return. A Schedule K- 1 ~how· 

Ina the allocation ol the credrt to each 

shareholder. partner, or beneficiary must 

also be attached to the Income tax return. 

For further details on allocation of the 

credo\, )ee ~Ktion 52(f) and (g). 

B. New Employers.-Employers who 

started in business in 1978 can qualify for 

the new jobs tax credit. Generally, the new 

job~ credit for new employers Is equal to 

25% of the total FUTA wages (limited to 

$4.200 for each employee) paid duting 

1978. 

C. Credit Not Allowed.--Generally. em· 

ployers who ere not subject to FUTA or 

who are tu·exempt organizations (other 

than a cooperative described in section 

S2J) do not qualify for the credit. See In· 

struc\lon D below lot special rules regard· 

lng agricultural end railroad employers. 

D. Unemployment lnsu~nce Wagu.-

Generally, unemployment rnsurance wagu 

are FUTA wages up to $4.200 per em· 

ployee. Agricultural employers are to use 

Federal Insurance Contribution Act (riCA) 

wages up to S4.200. Railroad employers 

not covered by FUTA un Va of the R~lil· 

road Unemployment Insurance Act (RUIA) 

w11ges up to $4,200. See section Sl(f)(J). 

(2) and (3). 

E. Vocational Rehabilitation Referral Em· 

ployees.-For J978, employers may claim 

11n addotoonal credit of 10% of (1) the first 

$4,200 of FUTA wages paid In 1978 to 

each vocational rehabilitation referral em· 

ployee reduced by (2) any FUTA wages 

paid to such employee in 1977. Thi' 11d· 

drtlona l credit is limited to 20% of the 

regular new jobs credit (line 9}. 

The wagu to be t aken into account for 

this type of employee are only those wages 

that are paid to the employee during a 

J ·year period. This period starts with the 

employee's forst payment of wages after 

the start of the employee·s rehabilitation 

plan. The first payment must have occurred 

after 1976. (See section 5J(e).) 

A vocational rehabilitation referral em· 

proyee is 1 handicapped employee who has 

been refetred to the employer upon com· 

pletion of (or while receiving) rehabilita· 

lion services accordong to 11 written rehabil· 

itation plan undtt a State plan for voca· 

tional rehabilitation services approved 

under the Rehablhtation Act of J 973. or a 

program of vocational rehab1iltatron car· 

ried out under Chapter 3J of title 38. 

United States Code. (See ~ect ion 51 (f) 

(4).) 

F. Unused Credit.-11 the amount of 

t he credot determined under section 5 I Is 

more than the tax liability lomitation of 

sect1on 53, the excess (unused cted•t) may 

@ 

be carroed ':ltck to each of e 3 tax years 

precedong t he yeat ol the unused creoot 

and afterwards may be carroe:: forward to 

each of the 7 years followrng the year of 

the unused credrt. (See sectron 53(c).) 

G. Employer' s Deduction for Salaries 

and Wages.-No deductoon rs allowed loan 

employer for the part of ul~ ro es and 

w11ges paid or Incurred for the tex year 

equal to the new jobs credrt on line 13 of 

Form 5884. The salary end wege deduc· 

tion Is to be reduced even though the new 

Jobs ctedrt Is not used for the current tu 

year. for example, en employer would be 

entitled to a $20,000 credot on line J 3 but 

has tax liability of only $1 8,000. The em· 

ployer must reduce the u lary and wage 

deduction by $20,000 even though the 

allowable new JObs credit (line 27) is only 

S 18,000. The unused cred•t of $2.000 may 

be used for carryback and urryforward 

purposes. 

In most cases, employers must reduce 

t he aperopriate salary and wage deduc· 

l ion on their returns by the new jobs credit 

on line 13 of Form 5884. An employer that 

Is • member or a group or ttades or busi· 

nesses under common control must re· 

duce its salary and wage deduction by the 

amount of new jobs credit (line 13) ap· 

portioned to it from the group. (See In· 

stt uction H(l} below.) 

When salaries and ._.-ages are capitalized 

for depreciation. the amount sl.lbject to de· 

preciation must be reduced by the part of 

the new jobs credit that applies to the sal· 

aries and wages being ca pitelrzed. For ex· 

ample. if the new Jobs credit on hne 13 of 

Form 5884 Is $1,000 end $ 100 of thi s 

credrt os attributable to salaries and wages 

being capitalind (which represent 10% of 

total wages), the amount subject to depre• 

ciation would be reduced by $100. The 

S900 balance ( $).000 I!!SS $100) would 

be entered on the appropriate salary and 

wage deduction hne of your tax return 

(Form 1120, ltne 13: form 1065, line JJ; 

Schedule C (Form 1040), lone 31 ; etc.). 

(See section 280C end 1.280C-1 of the 

regulations.) 

Note: Att•ch a schedule to Form 5884 

(or use the b.eck ol the lorm) fo reconcile 

any differences for cues In which the rt· 

duct ion of the "ppropriete salary and weae 

deduction Is less than the new jobs credit 

on line 13 of Form 5884. 

H. Special RuiH.-

( 1) Tr.,des or Businesses fh" t are Under 

Common Controi.-When there Is 1 group 

of trades or businesses under common 

control. the new jobs credrt 11ccording to 

section 51 Is figured on the basos that ell 

the organiutions under common conlrol 

ere one trade or business. The new jobs 

cred•t for the group must be apportioned 

emong the members of the group on the 

basrs of each member's proportionate con· 

t ribution to the increase in FUTA weaes for 

the entire group. See section 52 end regula· 

t oon 1.52-1 for definitions and other de· 

tails. 

(2) Adjustments for Cert~ n Acqui si· 

tions and Ojsposltron,.-See sectoon 

52(c) ~nd regulatoon 1.52-2 concernrng 

adjustme nts thet art to be m:~de when • 

me1or portion or a trade or business rs 

acquired or drsposed or alter 1975. 

76J-19~7 
(3) Change m Status from Self-Em· 

played to Employee -If duflng 1977 an tn· 

d1111dual has net earntngs from self en· 

ployment 10 a trade or busmess. and during 

any port1on of 1978 the lnd1v1dual is an 

employee of that trade or busmess, to determine the cred1t allowable lor the sue· 

ceed1ng tu year the employer's aggregate 

FUTA wages for 1977 must be Increa sed 

by an amount equal to the self·employ· 

ment net earnings but not more than 

$4,200. 

(4) Short Tu Year.-lf the employer 

has more than one tax year In 1978, the 

new jobs credit shall be determined trom 

the em ployer's last tax year beg.nnlng in 

1978. 

(5) Wages paid by an employer to an 

employee dun ng any calendar year is taken 

into account only il more than one·half of 

the wages paid IS for set111ces perlormed 

in the United States In a trade or business 

of the employer. 

I. Mutual Savings Institutions, Regu· 

lated Investment Compemes, Real Ettete 

Investment Tru1t-., and Cooperatives.-

These inst1tuttons are not allowed the full 

sect1on 5 1 cred 1t. See regulations 1.52-3 

for the applicable limit s. 

4 • . 

Specific Instructions 

Une 1.- Enter the total unemployment 

ins urance wages (limited to $4,200 for 

each employee) paid during 1978. Gener· 

ally, t hese wages would be reported on 

hne lS(b) on the 1978 Form 940 Special 

rules apply to agricultural and railroad em· 

ployees. (See 1ect1on 51(f)(2) and (3).) 

Line 2.--Generally, enter 102% of the 

total unemployment wages (hne 15, 1977 

Form 9 40) pa1d dunng calendar year 1977. 

Special rules apply to asricultural and rail· 

road employees. (See sect1on 51 (f)(2) and 

(3 ).) 

Line 6.- Enter total wages (d1sregard· 

lng any dollar hmitat1on) pa1d 1n 1978. An 

employee's wages must be taken Into ac· 

count only if more than one-half of the 

wages pa1d dunng t he calendar year are 

tor set111ces perlormed In a trade or bus1· 

ness of the employer 1n the Un1ted States. 

Total wages include salaries, wages, com· 

m 1ssions, fees, bonuses, vacat1on allow· 

ances and salanes and wages paid to tem· 

porary or part·time employees; and the 

value of goods. lodamg, food. and clothing 

that tre subject to the FUTA tax. For ag· 

ricultural and railroad employers, total 

wages paid include the above except that 

generally only cash remuneration is sub· 

ject to t he FICA and RUIA taxes. The spe· 

cial rulu contained in lnstruct1on H also 

rnust be taken into account to f1gure theu 

total wages. 

Generolly, for line 6, total wages would 

be reported on line l5(a) of the 1978 Form 

940 For lone 7, enter 105% of the sum of 

line~ 13 and 15 of the 1977 Form 940. 

Line 10.-lt a husband and w1fe f1le 

separate returns. the $100,000 llm1tat10n 

must be reduced to $50.000 each. Th1s 

does not apply 11 the one spouse has no 

rn ert~t 1n a trade or busmess tor the tax 

year wh1ch ends w1th1n or w1th the other 

spouse's tax year. 

For an estate or trust, the $1 00.000 

amount must be reduced to an amount 

that has the same ratio to $1 00,000 as 

the port1on of the new jobs credit allocable 

to the estate or trust has to the entire 

amount of such credit. 

Line 13.-When a group of trades or 

busmesses are under common control (see 

Instruction H(1)), the member of the group 

that made the greater proportionate con· 

tribution to the increase in FUTA wages of 

the group must report the computation of 

the group credtt on lines l through 13 

(ignoring lines 14 through 27) of Form 

5884. In order for each member to deter· 

m1ne its allowable new jobs cred1t. each 

member (including t he above member) 

must enter its appOrtioned share of the 

current year's new jobs credtt on line 13 

and any unused credit from prior or sub· 

sequent years on hnc 14 of a separate 

Form 5884 (1gnoring lines 1 through 12) 

and complete lines 15 through 27 as ap· 

pllcable. Each member must attach to its 

Form 5884 a schedule showing t he ap· 

portionment of the total group credit to 

the members of the group. 

. If the new jobs credit f1gured by an 

estate or trust is to be apportioned to t he 

estate or trust itself as well as to the bene· 

ficiartes. the cred1t on line 13 is appor· 

tioned between the estate or trust and 

the beneficiaries on the basis of the in· 

come of the estate or trust allocable to 

each. The estate or trust must attach to 

Form 5884 a schedule showing this appor· 

tionment and enter and identity the 

estate's or trust's port1on and the bene· 

ficiaries' portion in the margin to the right 

of hne 13. The est ate or trust t hen w1ll 

complete lines 14 through 27, as appli· 

cable, to determme its allowable new jobs 

cred1t to be claimed on Form 1041. The 

beneficiaries' shares will be apportioned 

to the 1ndividual beneftciaries and each 

benef1ctary is to determine his or her al· 

lowable new jobs cred1t as explained 

below. 

The cred1t f1gured on lines l through 13 

by a small business corporation, partner· 

ship, or estate and trust is apportioned to 

the ind1v1dual shareholders, partners, end 

benef1c1afles. respectively. This appor· 

tioned cred1t and any unused cred1t from 

prior or subseQuent years IS entered on 

lines 20. 21. or 22 of a separate Form 

5884 by these 1nd1v1duals. They must com· 

plete the ltmitat1<Jn sect1on of the separate 

Form 588-4 to determine the allowable 

credtt to -be entered on Form 1040. 

Note: Where an md1V1dual shareholder, 

partner, or benet1ciary is entitled to a 

new jobs ctedit from two sources, such 

u from a sole proprietorsh•p and a part· 

net ship, the new jobs cred1t of the pro· 

prietor ship would be f1gured on lines J 

through 15 of Form 5884. The new jobs 

cred1t arising from the partnership t.'lould 

be enteted on line 21 of the same form. 

lines 16 through 27 would be completed 

to determine the total allowable credit 

(proprietorship credit on line 15 plus the 

partnership credit on line 21) to be en· 

tered on tile individual tupayet's Form 

1040. 

Une 17(h). Tar on lump·sum distribu· 

tlons.-lndividuals, estates, or trusts 

which are recipients of lump·sum distribu· 

t1ons from Qualified employees' trusts or 

annuity plans are to enter the amount of 

partial tax included in line 16. This partial 

tax Is computed on Form 4972 and Fonn 

5544. 1 ... 

Line 23. Limits.-The new jobs credit 

entered on hnes 20, 21. or 22 is limited to 

the proportionate part of the tax liability on 

line 19 that is attrtbutable to the shareholder's, partner's, or beneficiary' s Inter· 

est in each small business corporation, 

partnership, estate, or trust from which 

t he credtt is de rived • 

The credit from each ent1t y is limited to 

an amount computed in accordance with 

the following formula: 

Line 19 x 

Portion of ptraon'a tauble 1ncome anro buta ble to tha 

CM'"'on' a 1ntern t tn .. ch 

I I 20S, 1065. or 104 1 enlltt 

Peraon'a taxable 1ncome lor the ya tr reduced by tile paraon'a zero bracket amount (u ctoon 63(d)). II any 

Stt uct1on 63 lor 1 definition of t .. eble in· 

come end roaul atlon l.Sl-1 fo r lutther lnlorma· t1on and u e rnplu of the cornputltoon ol the 

limitation. 

Note: The carryback or carryover of an 

unused new jobs credit res ulting from the 

application of any of the limitations (line 

23 (a), 23(b). 2 3(c), or 25) is subject to 

these respective separate limitations as •P· 

plica bit in prior and subsequent years. (See 

instruction F.) 

Une 25.-line 25 contains the tn lia· 

bihty limitation in excess of the separate 

1imitat1on computed under section 53{b). 

This is t he amount of the cred1t allowable 

from all sources, other than partnerships, 

estates and trusts, and small business 

corporations. 

$100,000 U mitltlon.-The total new 

JObs cred1t to be entered on line 23(a); 

23(b); 23(c); 24 ; or 27 may not exceed 

t he sum of (1) $100,000, (2) the dollar 

amount ot the cred•ts earned by employers 

attrtbutlble to the hiring of vocational re· 

llab1l1tahon referral employees, and (3) 

any unused new jobs cred1t from prtor or 

subseQuent yeal"'. 

Publication 902.-For more detailed 

informat1on please get Publication 902, 

Tax InformatiOn on Jobs Tax Credit, from 

your local Internal Revenue office. 

263-195-1 

<!tU S GOVERNMENT PRINTING OFFICEi 9 8 6 - '+ 9 1 8 1+ 9 5 a. 9 0 I 
Department of the Treasury 

Washington, O.C 20220 

Offictal Business 

PenallY for Private Use, $300 

SPECIAL FOURTH 

CLASS MAIL