The WOTC is intended to encourage employers to hire individuals from eight targeted groups that have consistently high unemployment rates. The targeted groups are individuals in families currently or previously receiving welfare benefits under the Temporary Assistance for Needy Families (TANF) program or its precursor, the Aid to Families With Dependent Children (AFDC) program; veterans in families currently or previously receiving assistance under a food stamp recipients—aged 18 through 24 years—in families currently or previously receiving assistance under a food stamp program; youth—aged 18 through 24 years—who live within an empowerment zone youth—aged 16 and 17 years—who live within an empowerment zone or enterprise community and are hired for summer employment only; ex-felons in low-income families; individuals currently or previously receiving Supplemental Security Income; and individuals currently or previously receiving vocational rehabilitation services. Additional eligibility criteria apply to these groups. For example, welfare recipients must have received AFDC or TANF benefits for any 9 months during the 18-month period ending on the hiring date in order to be eligible for the program. The amount of tax credit that employers can claim under this program depends upon how long they retain credit-eligible employees and the amount of wages they pay to WOTC-certified employees. Employers who retain certified employees for at least 120 but less than 400 hours qualify for a credit of 25 percent of up to $6,000 in wages, for a maximum credit of $1,500. Employers who retain certified employees for 400 hours or more qualify for a credit equal to 40 percent of up to $6,000 in wages, for a maximum credit of $2,400. The credit is calculated using the actual first year wages paid or incurred. Employers must reduce their tax deductions for wages and salaries by the amount of the credit. In addition, as part of the general business credit, the WOTC is subject to a yearly cap. However, excess WOTC can be used to offset tax liabilities in the preceding year or in any of 20 succeeding years. The WOTC was first authorized in the Small Business Job Protection Act of 1996 to improve upon and replace a similar, expired program—the Targeted Jobs Tax Credit program. The WOTC was designed to mitigate some shortcomings that had been identified in the previous credit program—specifically, that it gave employers windfalls for hiring employees that they would have hired anyway and that too many credit- eligible employees left their jobs before they received much work experience. Some target groups were reformulated with the intention of focusing narrowly on those who truly need a credit for firms to risk hiring them. In addition, the minimum employment period for receiving the higher rate of credit was lengthened. The WOTC became effective beginning in October 1996 and has since been reauthorized. It is due to expire in December 2001. In fiscal year 1999, 335,707 individuals were certified as members of the targeted groups, making their employers eligible for the credit if the workers remained on the job for at least 120 hours. Individuals in the welfare target group made up 54 percent of the individuals certified. Youth in the food stamp target group made up another 20 percent of the individuals certified. The other six target groups each accounted for 1 to 8 percent of the remaining certifications. Federal and state agencies share responsibility for administering the WOTC program. The Department of the Treasury, through the Internal Revenue Service (IRS), is responsible for the tax provisions of the credit. The Department of Labor, through the Employment and Training Administration, is responsible for developing policy and program guidance and providing oversight of the WOTC program. In addition, the Department of Labor awards grants to states for administering the eligibility determination and certification provisions of the program. State agencies verify and report to the Department of Labor on state certification activities. All 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands participate in the program. Neither the Department of the Treasury nor the Department of Labor regulations require these agencies to take any actions regarding displacement or churning. The State of New York and the Department of Labor have undertaken studies that may have findings relevant to whether employers engage in displacement or churning practices. The New York study, which was issued in 1998, concluded, among other things, that employer windfalls from churning employees are minimal. This conclusion was based on analysis of state WOTC and Wage Reporting databases with records on 12,609 individuals in New York covering the fourth quarter of 1996 through the first quarter of 1998. The study did not address displacement. The Department of Labor study is ongoing, so its results are not yet available. The study is using in-depth interviews with 16 employers who hire a large number of employees under the WOTC program to examine the hiring, retention, and career advancement experiences of WOTC employers and employees. To obtain information on the characteristics of employers, we analyzed national tax data from the IRS’ Statistics of Income Division for 1997, the most recent year that data were available, and state WOTC data from agencies in California and Texas for 1997 through 1999. To obtain information relating to the extent of displacement and churning, we surveyed a stratified probability sample of employers who have participated in the WOTC program in California and Texas. The participating employers that we surveyed are those with repeated and recent experience in the program in that they hired at least one WOTC employee in 1999 and hired at least one WOTC employee in another year. Our sample is projectible to the entire population of 1,838 employers in California and Texas who met these hiring criteria. For information relating to churning, we also analyzed WOTC and unemployment insurance data for these states. With these data, we determined the total earnings and length of employment of WOTC- certified employees and examined this information for evidence concerning the extent and likelihood of churning. For additional information relating to displacement, we analyzed national employment data in the Commerce Department’s Current Population Survey (CPS) for 1995 through 1999. We used the CPS data to estimate employment rates for members of groups targeted by the credit and members of groups not targeted by the credit but who may substitute in employment for target group members. The absence of a centralized database containing the necessary detailed information precluded a nationwide survey of employers and analysis of employment practices. We chose California and Texas because they are among the states that certified the largest number of employees to participate in the WOTC program in fiscal year 1999, have electronic databases of their WOTC program data, and provided a somewhat geographically diverse population. Together, California and Texas certified about 12 percent of WOTC- eligible individuals in fiscal year 1999, ranking them second and fifth, respectively, in WOTC certifications for that fiscal year. When reporting our estimates derived from the sample and our analysis of program and unemployment insurance data, we combined data from both states because the results in the two states were similar. Furthermore, the confidence intervals for all point estimates in the letter of this report are no more than 10 percentage points on either side of the estimate. Our survey and state agency data pertain only to participating employers in California and Texas. However, to assure ourselves that our findings are likely to apply to WOTC employers in the rest of the nation, we examined the federal laws and regulations related to the credit, surveyed state administrators responsible for the credit, and analyzed the data on participating employers. The federal tax benefits offered by the WOTC are the same across all states. Therefore, we have no reason to believe that employers in California and Texas respond differently to these incentives than employers in other states. We spoke to the officials who were responsible for administering the WOTC program in all 50 states, and they all confirmed that their states made no effort to either encourage or discourage displacement or churning. From the participating employer data, we determined that employers who operate in multiple states account for most of the WOTC hires in California and Texas. Moreover, we found no differences relevant to churning and displacement between employers in California and Texas in the results of our survey and agency data analyses, suggesting that our conclusions would be generalizable to employers in other states as well. We did not evaluate how effective or efficient the WOTC has been in increasing the employment and earnings of target group members. To do this, we would have had to determine the extent to which the credit caused employers to hire workers that they would not otherwise employees’ experience with WOTC employers increases their current and employers received “windfall” credits for employees whom they would have hired anyway. We did not address any of those issues in this report. We did not verify the state and federal databases we used. However, agreements between the Department of Labor and state WOTC offices require the states to conduct audits of the accuracy of their WOTC records. A review of studies of the accuracy of unemployment insurance data, which was conducted for the National Research Council, concluded that the data appear to be accurate. The study notes that employers are required by law to report the data and that intentional inaccuracies are subject to penalties. This same review of studies found that the CPS data are a valuable source of information on the national low-income population, with broad and fairly accurate measures of income. However, the study noted that sample sizes may be small for some subpopulations (e.g., welfare recipients in particular states), and the percentage of some subpopulations covered by the survey appears to have declined modestly in recent years. The tax data from IRS’ Statistics of Income Division undergo numerous quality checks but do not include information from amended tax returns. We conducted our review from January 2000 through December 2000 in accordance with generally accepted government auditing standards. Our scope, methodology, and the sources of the data we used are discussed further in appendix I. We requested comments on a draft of this report from the Department of Labor and asked cognizant agencies in California and Texas to review the draft’s discussion of their WOTC efforts. The comments are discussed near the end of this letter. Employers who were large in terms of gross receipts earned most of the credit reported in 1997, the latest year for which data were available. Data from the agencies that certify WOTC employees in California and Texas showed that a relatively small number of employers did most of the hiring in the WOTC program from 1997 through 1999. Employers’ participation in the program was greatly influenced by such factors as the opportunity to obtain the credit, address a labor shortage, and be a good corporate citizen. In 1997, nationwide, an estimated 4,465 corporations earned an estimated total of $134.6 million in tax credits. Approximately 66 percent of the credit was earned by corporations with gross receipts of $1 billion or more. Table 1 shows the amount of credit that businesses earned by amount of gross receipts. Most of the credit was reported by businesses engaged in nonfinancial services, such as hotel, motel, and other personal services, and retail trade. These industries accounted for 81 percent of the credit reported. Table 2 shows the credit amounts earned by businesses in each industry in 1997. The aggregate amount of WOTC earned by taxpayers is likely to have grown significantly between 1997 and 1999 because the number of WOTC certifications grew significantly nationwide over that period—from 126,113 to 335,707. However, based on the certification data we have from California and Texas, we believe that the percentage distribution of the credit by size of employer and by industry has not changed dramatically. The size distribution of employers measured by number of WOTC hires did not change significantly in either California or Texas during that period. The distribution of certifications by industry also changed little in Texas; we do not have industry information for California. Our analysis of WOTC certification data in California and Texas for 1997 through 1999 showed that a few employers did most of the hiring in the WOTC program. Employers who hired more than 100 WOTC-certified employees represented about 3 percent of all employers in the program but accounted for about 83 percent of all hires. About 65 percent of employers in the program made only one WOTC hire. The larger WOTC employers spent more time in the program. Employers who hired more than 100 WOTC-certified employees were in the program for an average of 10 or more quarters, while those hiring 5 or fewer employees were in the program for an average of less than 3 quarters. The larger WOTC employers also hired more frequently. Employers who hired in every year accounted for about 83 percent of total hires while representing about 8 percent of all employers. Table 3 shows the distribution of the number of employers, the number of WOTC-certified employees, and time in the program, by size of employers (in terms of WOTC-certified hires) for 1997 through 1999. The employers that we surveyed in two states reported that the opportunity to obtain a tax credit was by far the factor that most influenced their decisions to participate in the WOTC program, followed by the opportunity to address labor shortages and be a good corporate citizen. According to our survey, the opportunity to obtain the credit was the largest influence, with an estimated 85 percent of participating employers in California and Texas saying they were greatly influenced by this opportunity. Figure 1 shows the extent to which employers in the states we reviewed said that specific factors greatly influenced their participation in the program. Participation in the program appears often to have had support from high levels within the companies. For example, for an estimated 57 percent of California and Texas employers, the possibility of participating in the program was raised by someone inside the company rather than by an outside organization. In those situations, high-level management was responsible for raising the idea of participating in the WOTC program about three-quarters of the time, according to our survey-based projections. Displacement and churning are likely to be limited, if they occur at all, because, as our survey of employers in California and Texas indicates, most employers view these practices as having little or no cost- effectiveness. This view is consistent with the employers’ estimate that the credit offsets less than half the costs of recruiting, hiring, and training credit-eligible employees. Our employer survey also indicates that most vacancies filled by credit-eligible employees occur for reasons unrelated to displacement and churning, such as voluntary separations. Furthermore, our survey indicates that most employers change at least one recruitment, hiring, or training practice, which, studies suggest, may make these employers more likely to retain new hires. Our analysis of program and employment data from state agencies supports what we learned from the survey regarding the low probability of churning. These data show that employment rarely ends near the earnings level that yields the maximum credit, and employees earning the maximum are no more likely to separate than are other WOTC-certified employees. The agency data do not allow us to perform similar tests for the occurrence of displacement. However, displacement is less likely to occur when employers are increasing their workforce—as has been the case since the introduction of the credit— because they have less need to dismiss non-WOTC workers in order to hire WOTC workers. Most employers do not consider displacement and churning to be cost- effective employment practices. Based on our survey, we estimate that 93 percent of participating employers in California and Texas would agree that displacement is cost-effective to little or no extent. An estimated 93 percent of employers also hold that view regarding churning. Displacement and churning are not cost-effective if the cost of recruiting, hiring, and training a new employee exceeds the amount of WOTC that an employer expects to earn from that employee. Under those circumstances, the WOTC provides no incentive for that employer to dismiss an existing employee to hire a WOTC-certified one. According to our employer survey, on average, the tax credit offsets less than one-half (47 percent) of this cost. Furthermore, employers told us that it is important to reduce the turnover of WOTC-certified employees. Based on our survey, we estimate that for 71 percent of participating employers in those two states, retaining employees after the maximum tax credit has been secured is very important. An additional 20 percent would view retention of employees after the maximum tax credit is secured as somewhat important. For those employers who could tell us the reasons for the vacancies that were filled by WOTC-certified employees, an estimated average of 61 percent of such vacancies arose because the previous employees quit. On average, the next most frequent reasons for the vacancies were that the previous employees were terminated for cause and that the positions were newly created. Figure 2 shows the distribution by California and Texas employers’ responses regarding the reasons for vacancies. None of the reasons given were related to displacement or churning. About 85 percent of employers in California and Texas have changed a recruiting, hiring, or training practice to secure the WOTC and better prepare credit-eligible new hires, according to estimates that are based on employer-reported information from our survey. Furthermore, an estimated 43 percent of employers in these two states have changed their practices in all three of these areas. A 1999 study conducted by Jobs for the Future found that employers who successfully employed welfare recipients—which is the largest targeted group in the WOTC program— developed strategies to improve access, retention, and advancement of those individuals. The strategies used by employers in our survey included targeted recruitment; outreach and screening assistance from organizations that know and understand the targeted group; pre- employment training, such as training in communication skills; and mentors, among other strategies. These strategies are consistent with ones these researchers identified in other studies. Based on the results of our survey, we estimate that about two-thirds of participating employers in the two states changed at least one recruitment practice to secure the tax credit. The most frequent change in recruitment practice was that employers listed job openings with a public agency or partnership. An estimated 49 percent of participating employers in the two states took such an action. Figure 3 shows the extent to which participating employers changed recruitment practices to secure the credit. An estimated three-quarters of participating employers in the two states changed at least one hiring practice to secure the tax credit. Our survey indicated that the most frequent change in hiring practices was that employers began training their managers about the tax credit, with an estimated 66 percent of employers making that change. Figure 4 shows the extent to which participating employers changed hiring practices to secure the credit. Based on our survey, we estimate that about one-half of participating California and Texas employers changed at least one training practice to better prepare WOTC new hires. For example, an estimated 40 percent began providing mentors to their new hires. Figure 5 shows the extent to which participating employers changed training practices to secure the credit. Displacement is less likely to occur when employers are increasing their workforce because they have less need to dismiss non-WOTC workers in order to hire WOTC workers. Since the introduction of the credit in the last quarter of 1996, employment in the U. S. economy has grown robustly, even for low-skilled workers. Using the CPS data, we found that employment rates grew over the period for certain target group members and closely related nontarget group members that may substitute in employment for the target groups. For example, we estimated employment rates for welfare recipients in the CPS (those on welfare for 9 or more months in the previous year) who would be members of the group targeted by the credit. We also estimated employment rates for welfare recipients who would not be target group members (those on welfare less than 9 months of the previous year). The employment rate of the target group welfare recipients grew by 47 percent and nontarget welfare recipients by 12 percent from 1995 through 1999. Figure 6 shows employment rates over the period for members of the targeted and nontargeted welfare groups. Our analysis of the WOTC and unemployment insurance data in California and Texas showed that most certified employees do not earn enough income while working for WOTC employers for churning to make sense for those employers. Sixty- seven percent of certified employees separated from their employers after earning less than $3,000. Furthermore, only a relatively small number of certified employees earned incomes in the range where churning may be most likely to occur. Employers wishing to maximize their credit would retain WOTC employees until they had earned a total of $6,000, the maximum earnings eligible for the credit. Only about 7 percent of certified employees separated after earning incomes between $5,000 and $7,000 (a range of earnings within $1,000 of the credit maximizing level). If employers did not churn when employees reached this level of earnings, it seems less likely that they would churn at other levels of earnings. Figure 7 shows the percentage of employees separating after earning a given amount of income. In addition to determining the percentage of WOTC-certified employees who separated near the maximum earnings level, we also analyzed the effect of reaching the maximum earnings level on the likelihood of separation. We used a statistical technique to measure the likelihood of separation of WOTC-certified employees who reach the maximum earnings level in a given quarter relative to the likelihood of separation of WOTC-certified employees who do not reach the maximum. The technique that we used allows us to measure the effect on the likelihood of separation, while controlling for the effects of other employee characteristics, such as membership in a particular target group. The measured effect is, therefore, the net effect on the likelihood of separation (i.e., net of the effects of the other characteristics). Using this technique, our analysis showed that WOTC-certified employees who reach the maximum earnings in a given quarter (i.e., those whose cumulative earnings are between $5,000 and $7,000) are no more likely to separate from their WOTC employers than those employees who do not reach the maximum. In addition, the analysis showed that reaching the maximum has no effect on the likelihood of separation across most target groups. For example, members of the welfare target group are no more likely to separate in the quarter in which they reach the maximum than are members of other target groups who reach the maximum. Besides differences in target group membership, this analysis also controlled for differences in the occupation of employees, size of employers in terms of total employment, and other factors. This analysis is described in more detail in appendix III. The fact that an overwhelming majority of WOTC employers whom we surveyed in California and Texas considered displacement and churning to have little or no cost-effectiveness leads us to conclude that few of them would engage in these practices. Our analyses of WOTC employment data compiled by the two states provides further support for this conclusion with respect to churning. Further, although our survey and state agency data pertain only to participating employers in California and Texas, we believe that our conclusions regarding the occurrence of displacement and churning are likely to hold true in the remainder of the nation. The federal tax benefits offered by the WOTC are the same across all states. Therefore, we have no reason to believe that employers in California and Texas would be less responsive to those incentives than employers in other states. Moreover, employers that operate in multiple states account for most of the WOTC hires in California and Texas. We spoke to the officials who were responsible for administering the WOTC program in all 50 states and they all confirmed that their states made no efforts to either discourage or encourage displacement or churning. The fact that there were no differences relevant to displacement and churning between the results of our survey and agency data analyses for California and those for Texas also gives credence to the generalizability of our conclusions. The Department of Labor sent e-mail comments on a draft of this report to us on March 1, 2001. The Department of Labor made suggestions for clarifying information in the report. We modified the report where appropriate. The Department of Labor also stated that, given the wealth of evidence in our report indicating that displacement and churning are limited, our conclusions regarding the use of these practices could be stronger. We did not strengthen our characterization of the extent to which displacement and churning may be occurring because we believe that our conclusion appropriately reflects the strength of our methodology and resulting data. Agencies in California and Texas responsible for the WOTC program also reviewed our draft report regarding our description of the credit program in their state and our analysis of state data. The agencies stated that they had no suggestions for changes in our report. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we are sending copies of this report to Representative William J. Coyne, Ranking Minority Member, Subcommittee on Oversight, House Committee on Ways and Means; the Honorable Elaine L. Chao, Secretary of Labor; the Honorable Charles O. Rossotti, Commissioner of Internal Revenue; Mark Heilman, Chief, Job Services Division, California Employment Development Department; and John Carlson, WOTC Coordinator, Texas Workforce Commission. Copies of this report will be made available to others upon request. If you have any questions regarding this report, please contact me or James Wozny at (202) 512-9110. Key contributors to this report are acknowledged in appendix IV. The objectives of this report were to determine (1) the characteristics of employers who have participated in the WOTC program and (2) the extent, if any, to which employers have practiced displacement and churning. To obtain information on the characteristics of employers, we analyzed national tax data from the Statistics of Income Division of the Internal Revenue Service for 1997, the most recent year that data were available, and state WOTC data from agencies in California and Texas for 1997 through 1999. To obtain information relating to the extent of displacement and churning, we surveyed a stratified probability sample of employers who have participated in the WOTC program in California and Texas. Our survey of employers is discussed in more detail below. For information relating to churning, we also analyzed WOTC and unemployment insurance data for California and Texas. With these data, we determined the total earnings and length of employment of WOTC- certified employees and analyzed this information for evidence concerning the extent and likelihood of churning. Our methodology for this analysis is discussed in detail in appendix III. For additional information relating to displacement, we analyzed national employment data in the Commerce Department’s Current Population Survey (CPS) for 1995 through 1999. We used the CPS to estimate employment rates for members of groups targeted by the credit and members of groups not targeted by the credit but who may substitute in employment for target group members. To obtain information relating to the extent of displacement and churning, we identified participating employers from databases of employees who had applied for certification under the WOTC program. These databases are maintained by the state agencies in California and Texas that are responsible for determining the eligibility of employees as members of targeted groups and issuing certifications of eligibility to employers. Our desired survey population initially was managers who were hiring WOTC program employees nationwide. However, since this information is kept by each state office in various forms, it was not feasible to assemble a national sampling frame. Therefore, we used data from two of the five states with the largest numbers of WOTC employee participants in 1999. California and Texas were the two states of the five largest with manageable electronic databases of WOTC employees in 1999. We identified employers from these lists by their unique employer identification numbers (EIN), which are used by IRS. In order to have a population of employers with repeated and recent experience with the program, we included only those who had hired at least one certified employee, hired at least once in 1999, and hired at least once in 1997 or 1998. To identify employers from the databases of WOTC-eligible employees, we aggregated the employees according to their employer’s EIN. For the purposes of our sample, we defined “employer” as a unique EIN and selected a stratified random sample of 157 employers from the 975 total employers in California and 148 employers from the 863 total employers in Texas. The strata were defined by how many WOTC employees the employer hired. Because employers who had more than 100 WOTC hires accounted for 80 percent of the total WOTC hires, those employers hiring more than 100 employees were a separate stratum from those hiring between 2 and 100 WOTC employees. In this way, we were able to sample more employers with larger numbers of WOTC hires. Table 4 shows the breakdown by state and stratum of the number of employers in the population, the number selected into the sample, and the number who responded to the survey. In total, we sampled 305 employers and received responses from 225, for an overall response rate of 74 percent. In addition to the EINs for the employers associated with WOTC-eligible employees, the databases included limited information for a contact person. To try to ensure that our surveys reached the correct person at the employer site, we contacted every sampled employer by phone first. In this initial phone call, we explained the purpose of the survey, the kinds of questions we would be asking, and the location for which we were interested in obtaining information, and we asked for the name of the most appropriate respondent. Most initial contacts indicated that they were the most appropriate respondent or that they would receive the survey and forward it as necessary. Approximately 4 weeks after the initial mailout, we conducted a second mailout to those who had not yet responded. Approximately 4 weeks after that, we followed up with all remaining nonrespondents by telephone, reminding them that they had not responded and asking them to complete a shorter version of the questionnaire over the telephone. Because the survey results come from a sample, all results are estimates that are subject to sampling errors. These sampling errors measure the extent to which samples of these sizes and structure are likely to differ from the populations they represent. Each of the sample estimates is surrounded by a 95-percent confidence interval, indicating that we can be 95-percent confident that the interval contains the actual population value. Unless otherwise noted, the 95-percent confidence intervals for all percent estimates in the letter of the report do not exceed plus or minus 10 percentage points around the estimate. In addition to the reported sampling errors, the practical difficulties of conducting any survey may introduce other types of error, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted may introduce variability into our survey results that is difficult to measure. We conducted pretests of the survey to evaluate the wording of the questions. One particular source of nonsampling error unique to this survey involves the location to which that respondent’s answers refer. In some cases, the employer or EIN that we selected corresponded to a very large corporation, and our contact was in a hiring division located outside the state or local office of interest. In the initial phone calls, the location of interest was specified; however, the respondent may have responded with a different location in mind or may have been unable to take into account variation in hiring practices across several local offices. Careful pretesting of the survey did not uncover such issues, but this possibility may lead to additional variation in our survey results. Our survey and state agency data pertain only to participating employers in California and Texas. However, to assure ourselves that our findings are likely to apply to WOTC employers in the rest of the nation, we examined federal laws and regulations related to the credit, surveyed state administrators responsible for the credit program, and analyzed data on the participating employers. The federal tax benefits offered by the WOTC are the same across all states. Therefore, we have no reason to believe that employers in California and Texas respond differently to these incentives than employers in other states. We spoke to the officials who were responsible for administering the WOTC program in all 50 states, and they all confirmed that their states made no effort to either encourage or discourage displacement or churning. Moreover, employers that operate in multiple states account for most of the WOTC hires in California and Texas. We found no significant differences between employers in California and Texas in the results of our survey and agency data analyses, suggesting that our conclusions will be generalizable to employers in other states as well. We did not verify the state and federal databases we used. However, agreements between the Department of Labor and state WOTC offices require the states to conduct audits of the accuracy of state WOTC records. A review of studies of the accuracy of unemployment insurance data conducted for the National Research Council concluded that the data appear to be accurate. The review noted that employers are required by law to report the data, and intentional inaccuracies are subject to penalties. This same review of studies found that the CPS data are a valuable source of information on the national low-income population, with broad and fairly accurate measures of income. However, the study noted that sample sizes might be small for some subpopulations (e.g., welfare recipients in particular states) and the percentage of some subpopulations covered by the survey appears to have declined modestly in recent years. The sample size for the targeted and nontargeted groups in our analysis was sufficiently large that the confidence intervals for the estimated employment rates were no more than 6 percentage points on either side of the estimate. We concluded that the slight decline in coverage of welfare recipients is unlikely to affect our analysis of trends in employment rates over the period. As noted, we analyzed the tax data from IRS’ Statistics of Income Division. These data undergo numerous quality checks but do not include information from amended tax returns (i.e., revisions made by taxpayers themselves after their initial filings). To investigate whether reaching the maximum earnings in a given quarter affects the likelihood that employees will separate from their WOTC employers, we used state WOTC and unemployment insurance data on total earnings and duration of employment. We also used data from these sources on other employee characteristics, such as target group and occupation, and employer characteristics, such as total employment and the industry of the employer. The data were collected for 108,935 WOTC- certified employees and 5,347 employers in California and Texas for the years 1997 through 1999. We used the logistic regression model to quantify the effect of reaching the maximum earnings on the probability that the employee separates from the employer. We also used the model to estimate the effect of other employee characteristics, such as current wages (total earnings in a given quarter) and membership in a target group, on the probability of separation. The results of this analysis are presented as odds ratios in table 5. An odds ratio is a measure of relative risk of the occurrence of an event–in this case, the separation from an employer. The reported odds ratios indicate the effect of a particular characteristic (e.g., reaching the maximum earnings) on the probability of separation, controlling for the effects of other characteristics included in the analysis. The estimate of the effect, represented by the odds ratio, is the net effect of the characteristic (i.e., net of the effects of all other characteristics). If the characteristic increases the probability of separation, the odds ratio will be greater than 1, and if it decreases the probability of separation, the odds ratio will be less than 1. This interpretation is slightly different when the characteristics are different categories. An example of such a “categorical” characteristic is membership in a target group where the categories are welfare recipients, veterans, food stamp youth, and so on. In such cases, the analysis omits one of the categories (called the “reference group”) and tests whether the included categories have greater or less chance of separation relative to the omitted category. An odds ratio of greater than1 indicates greater probability of separation, while an odds ratio of less than 1 indicates less probability of separation. Table 5 shows that reaching the maximum earnings has no statistically significant effect on the odds that employees will separate from their employers. The variable called “maximum earnings” indicates the quarter in which an employee’s cumulative earnings are between $5,000 and $7,000. This interval includes $6,000 as its midpoint and indicates that reaching the maximum occurs in the quarter when the employee is within $1,000, more or less, of the maximum earnings eligible for the credit. The odds ratio for this variable is not significantly different from 1, meaning that employees whose earnings are within $1,000 of the maximum in a quarter are no more likely to separate than employees whose earning are outside this range. Table 5 shows that reaching the maximum has no effect on the likelihood of separation across most target groups as well. For example, members of the welfare target group are no more likely to separate in the quarter in which they reach the maximum than are members of other target groups who reach the maximum. We also used the logistic regression model to analyze the effect of reaching the maximum earnings separately for each state. The separate analysis permitted more characteristics of the employees and employers to be included because data on characteristics were not always available for both states. We analyzed the likelihood of separation in each state using only the characteristics in table 5, and then expanded the analysis to include the additional variable characteristics available in each state. This analysis shows that the conclusion about the effect of reaching the maximum on separation does not change when additional characteristics are added to the model. When variables indicating the occupation of the employee are added to the analysis in California, reaching the maximum earnings continues to have no effect on separation. When variables indicating the employer’s industry and size in terms of total employment are added to the analysis in Texas, reaching maximum earnings is significant, but employees reaching the maximum are still slightly less likely to separate. Specifically, they are 9 percent less likely to separate than are employees who do not reach maximum earnings. In addition to those named above, Kerry Dunn, Tre Forlano, Wendy Ahmed, Sam Scrutchins, Stuart Kaufman, Barry Seltser, and Cheryl Peterson made key contributions to this report.

Summary: In 1997, 4,369 corporations earned a total of $135 million in Work Opportunity Tax Credits (WOTC). The employers who earned most of the credit were large companies with gross receipts exceeding $1 billion and engaged in nonfinancial services and retail trade. GAO's analysis of state agency data for California and Texas from 1997 through 1999 showed that three percent of participating employers accounted for 82 percent of all hires of WOTC-certified workers. Many employers who participated in the tax credit program in those two states in 1999 say that, besides the opportunity to obtain the credit, their participation in the program was also greatly influenced by such factors as the need to address a labor shortage and the opportunity to be a good corporate citizen. The results of GAO's two state analysis indicate a low probability of replacing employees who were not eligible for the tax credit.