Workers with disabilities frequently face special challenges and disincentives when entering or maintaining a place in the workforce. To help those with disabilities overcome these challenges, the federal government has designed a wide variety of programs and incentives. Most of these federal efforts, as described in appendix II, are targeted to persons with disabilities and can include job placement and training programs from state-administered vocational rehabilitation agencies and other service providers as well as extended medical and benefit coverage for Social Security disability beneficiaries to encourage their return to work. Recognizing that businesses may also face some challenges when hiring, retaining, or accommodating individuals with disabilities, the Congress designed some programs and incentives for businesses. These include the three federal tax incentives reviewed in this report as well as several other federal efforts, such as Office of Disability Employment Policy’s (ODEP) Business Leadership Network to link the employers who have jobs to the local agencies who have workers with disabilities to fill these jobs (see table 1). The oldest of the three tax incentives, the barrier removal deduction, was enacted in 1976 to encourage the more rapid modification of business facilities and vehicles to overcome widespread barriers that hampered the involvement of people with disabilities and the elderly in economic, social, and cultural activities. Administered by IRS, it allows taxpayers to claim expenses for the removal of eligible barriers as a current deduction rather than as a capital expenditure that is gradually deducted over the useful life of the asset. Internal Revenue Code and corresponding regulations delineate the specific types of architectural modifications that are eligible, such as providing an accessible parking space or bathroom. In 1990, legislation reduced the maximum amount of the barrier removal deduction from $35,000 to $15,000 and created the disabled access credit. The disabled access credit may be taken for expenditures made by eligible small businesses to comply with the requirements of the Americans With Disabilities Act of 1990. The credit defines small businesses as having no more than (1) $1 million in gross receipts or (2) 30 full-time employees. The credit is equal to 50 percent of eligible expenditures made during the year, not including the first $250 and excluding costs over $10,250, resulting in a maximum yearly credit of $5,000. Along with their responsibility to enforce the ADA, the Equal Employment Opportunity Commission (EEOC) and the Department of Justice (DOJ) provide information and promote the use of the disabled access credit and other related tax incentives. In addition to these incentives for accommodation, the work opportunity credit provides businesses of any size with a hiring incentive for employing economically disadvantaged individuals, including those with disabilities. Established with the enactment of the Small Business Job Protection Act of 1996 (P.L. 104-188), the Work Opportunity Tax Credit Program provides employers with an incentive to provide jobs and training to economically disadvantaged individuals, many of whom are underskilled and undereducated. Of the nine eligibility categories of disadvantaged workers, two categories specifically include workers with disabilities–the vocational rehabilitation referrals and Supplemental Security Income recipients. The method for determining the amount of work opportunity credit to be claimed has two tiers: (1) for newly hired eligible employees working at least 400 hours, the credit is 40 percent of the first $6,000 in wages paid during the first year of employment, for a maximum amount of $2,400 for each employee and (2) for eligible workers with 120 to 399 hours on the job, a lesser credit rate of 25 percent is allowed. No credit is available for eligible workers who do not remain employed for at least 120 hours. Federal and state agencies share responsibility for administering the work opportunity credit. The IRS is responsible for the tax provisions of the credit. The Department of Labor (DOL), through the Employment and Training Administration (ETA), is responsible for overseeing the administration and promotion of the program. DOL awards grants to states to determine and certify workers’ eligibility and to promote the program. As part of the certification process, for each new person hired, employers must submit two forms to the state employment agency within 21 days of the hiring. For a fee, consultant businesses can assist the hiring business with the program’s administrative requirements. Employers must also determine the appropriate amount of credit to claim and maintain sufficient documentation to support their claim. In 1999, a small proportion of corporate taxpayers or individual taxpayers with a business affiliation reported the work opportunity credit and the disabled access credit on their tax returns. Whereas taxpayers in the retail and service industries accounted for most of the dollar amount of work opportunity credits, those providing health care and other social assistance services accounted for most of the dollar amount of the disabled access credits. Although we can provide information on the credits’ use and characteristics of users, we cannot determine the amount of credits used to hire, retain, and accommodate workers with disabilities. This information is not available from tax data because tax returns provide only the total amount of credits reported, and employers can also claim the work opportunity credit for employing other types of workers and claim the disabled access credit for expenditures made to accommodate customers with disabilities. Moreover, information is not readily available regarding the usage of the barrier removal deduction for providing transportation or architectural accommodations because IRS’s databases commingle this deduction with other deductions. In 1999, a small proportion of taxpayers reported the work opportunity credit on their tax returns. In that year, about 1 out of 790 corporationsand 1 out of 3,450 individuals with a business affiliation reported this credit. Corporations, excluding those that pass their credits through to individual shareholders, accounted for an estimated 87 percent ($222 million of $254 million) of the total work opportunity credits reported for 1999. These corporations also had an estimated average credit of about $106,000, an amount more than 25 times greater than the estimated average credit for individual taxpayers. Table 2 shows the estimated amount of work opportunity credits reported for 1999. Corporate credits reported were concentrated in a few industries.Corporations in retail trade, hotel and food services, and nonfinancial services accounted for an estimated $170 million, or about three-quarters of corporate work opportunity credits in that year. Interviews with those knowledgeable about this credit, including federal and state government officials, told us that retail and service businesses participate in this program because they have high employee turnover and need a large number of the low-skilled workers that this program targets. Table 3 provides an industry distribution of the estimated amount of work opportunity credits reported by corporations for 1999. Furthermore, large corporations, those with $1 billion or more in total receipts, accounted for most of the work opportunity credits. These large corporations accounted for an estimated $177 million, or about 80 percent of corporate credits for 1999. Interviews with those knowledgeable about this credit, including federal and state government officials, told us that these larger businesses are more likely to know about and use this credit because their large hiring needs make it financially beneficial to learn about and develop procedures to use the credit. Data support this view, as the estimated average credit for corporations with $1 billion or more in total receipts was about $540,000. Those interviewed also noted that larger corporations are more likely to have the needed human resources to manage the administrative requirements of this program or they can, for a fee, use consultants to meet these requirements. Table 4 shows the estimated distribution, by total receipts, of work opportunity credits reported by corporations for 1999. Although we can provide estimates on the amount reported for the work opportunity credit, we cannot accurately determine the amount of credits associated with hiring and employing workers with disabilities. This amount cannot be precisely determined because tax returns only include the total amount of the credit reported for all disadvantaged workers eligible for the credit. In 1999, a small proportion of taxpayers reported the disabled access credit on their tax returns, and the dollar amount of credits reported were concentrated in the health care and other social assistance services. In that year, about 1 out of 686 corporations and 1 out of 1,570 individuals with a business affiliation reported this credit. Most of the disabled access credits were reported by individual taxpayers with a business affiliation ($51 million of the total $59 million reported). Furthermore, providers of health care and other social assistance services accounted for an estimated $31 million, or approximately half of all the disabled access credits reported for 1999. However, it is not possible to determine if these credits were for accommodations to benefit their employees or clients because credits can be reported for either purpose, and tax returns include only the total amount reported. It is also not possible to determine the total number of taxpayers whose businesses met the credit’s small business eligibility requirements. Table 5 shows the estimated amount of disabled access credits reported for 1999. Little information is available regarding the effectiveness of the incentives in encouraging employers to hire, retain, or accommodate workers with disabilities. Of the three incentives, only the work opportunity credit has been the subject of specific study. The two studies we identified showed that some employers participating in the program modified their recruitment, hiring, and training practices to increase their hiring and retention of disadvantaged workers. However, one of these studies, as well as some studies of a similar hiring credit that preceded the work opportunity credit, indicate that such credits can reward employers for hiring disadvantaged workers they would have hired anyway. We were unable to identify any studies that directly examined the effectiveness of the disabled access credit and barrier removal deduction. However, discussions with those knowledgeable about these incentives, including government officials, academic experts, and business representatives, and some general studies of employers’ perspectives on various disability employment issues provided some additional information about the awareness, usage, or effectiveness of the incentives. For example, they indicated that businesses were frequently unaware of the incentives. While the studies, surveys, and opinions provide some information about the incentives’ effectiveness, limitations in the research methods used, and a lack of required data for further assessment preclude a conclusive determination of how effective the three tax incentives are in increasing the employment of workers with disabilities. One of the WOTC studies, conducted by GAO, included a survey of 225 employers participating in the WOTC program in California and Texas in 1999 and in 1997 or 1998 and found that most of the employers participating in the WOTC program reported changing their recruitment, hiring, or training practices to secure the credit and to better prepare the credit-eligible new hires. Frequently, reported changes to recruitment involved employers listing job openings with a public agency or a partnership (48.8 percent), asking other organizations to refer job applicants (42.6 percent), partnering with agencies to identify applicants (33.8 percent) or to screen them (29.1 percent). These changes may have helped employers to increase their pool of WOTC-eligible applicants and may thereby have increased their chances of hiring these workers. About one-half of these employers also reported training practices that may have increased the retention of WOTC-eligible hires, such as providing mentors or work readiness training and lengthening training times. On the other hand, the report found that 57 percent of employers surveyed said that the possibility that an applicant might make the company eligible for the tax credit would not affect the applicant’s chance of being hired. The other study, commissioned by DOL, involved in-depth interviews with a judgmental selection of 16 businesses that used the WOTC and the Welfare-to-Work Tax Credit. Most, but not all, of these employers indicated that these tax credits played little or no role in their recruitment policies or that the individuals hired from either of the credit’s target groups would have been hired in the absence of the tax credits. Even in those cases where the tax credit played a role in the hiring decision, employers indicated that it was one among several factors considered, such as the applicant’s experience and skills. Interviews with those knowledgeable about the work opportunity credit provided some additional information about the effectiveness of this credit. Some businesses and business groups we interviewed indicated that the credit may motivate certain employers, such as large businesses hiring many low-skilled workers, as well as some smaller businesses, to hire disadvantaged workers because it can lower their labor costs. However, some of the other businesses we interviewed told us that the work opportunity credit had marginal, if any, impact on their hiring, because they based their hiring decisions on other factors, such as the skills and abilities of job applicants, or because they viewed workers with disabilities as valuable employees and wanted to have a workforce that reflected their customer base. Furthermore, government officials and academic experts told us that the usage of this hiring credit is limited by a lack of knowledge of the credit in the business community, its low dollar value per worker hired, and administrative requirements. They also noted that because eligibility is limited to persons with disabilities receiving publicly funded vocational rehabilitation or SSI benefits, a number of other people with disabilities cannot participate. For example, individuals receiving Social Security Disability Insurance or privately funded vocational rehabilitation are not eligible to participate in the program. Studies of a similar tax incentive to encourage employers to hire disadvantaged individuals also provide information about the potential effectiveness of WOTC. Studies of the Targeted Jobs Tax Credit, the precursor to WOTC, showed that it increased hiring and earnings of the eligible workers; however, it also provided credits to employers for hiring workers who would have been hired in the absence of these incentives.These studies indicate that from 50 to 92 percent of the credits claimed were for workers employers would have hired anyway. Studies of the targeted jobs tax credit also found that employers rarely took the actions needed to claim the credit when hiring individuals from eligible target groups, but that proactive government outreach, such as referral of a disadvantaged client to a business, could significantly increase employer participation in the credit program. Although similar to its precursor, several administrative changes were made to WOTC in an attempt to make it less susceptible to providing credits to employers for workers they would have hired anyway; however, the specific effect of these changes is not known. In addition, we found two national surveys examining various disability employment issues that provide some information about employers’ awareness and perceptions of the effectiveness of tax incentives in general. One of the national surveys assessed employers’ experiences with workers with disabilities and found that only 15 percent of the 255 supervisors of workers with disabilities were aware of employer tax incentives. The other national survey assessed employment policies and found that private human resource managers viewed employer tax incentives as the least effective means for reducing barriers to employment for people with disabilities. By order of importance, the more than 800 private human resource managers surveyed viewed visible top- management commitment, staff training, mentoring, on-site consultation and technical assistance, and short-term outside assistance as more important than tax incentives in reducing employment barriers for workers with disabilities. In contrast to the work opportunity credit, we were unable to identify any studies that directly examined the effectiveness of the disabled access credit and barrier removal deduction. However, some of those we interviewed provided additional information on the perceived effectiveness and use of the disabled access credit and barrier removal deduction. Many of the business representatives and others we spoke with were either unaware of these incentives or did not have an opinion about their effectiveness. Of those with an opinion, the barrier removal deduction was viewed by more individuals as having a positive effect on the employment of workers with disabilities than was the disabled access credit. While both incentives can help offset the cost of accommodating workers with disabilities, they believed that the barrier removal deduction was more widely used because larger businesses, that are more likely to be aware of and willing to use tax incentives, are eligible for this incentive. However, they also pointed out that the use of the deduction was limited because it only allows specific types of architectural and transportation modifications. Implemented more than 20 years ago, the deduction cannot be applied to the cost of addressing communication and electronic barriers in today’s modern workplace. Finally, in addition to the business size restriction, they mentioned that the unfamiliarity with the disabled access credit or not clearly understanding the expenditures that qualify, could limit its usage. While the studies, surveys, and opinions from those knowledgeable about the tax incentives provide some insight about their effectiveness, limitations in the studies’ research methods do not allow for directly measuring the effectiveness of the incentives. For example, the WOTC studies are limited in that they did not measure (1) the extent to which employers would have made these hires in the absence of the incentive; (2) the effect of the incentive on the retention and salaries of WOTC hires compared to similar employees who were not certified for the program; or (3) the effect of the incentive on SSI recipients and vocational rehabilitation referrals, who are represented in two eligibility categories for the work opportunity credit. Existing data limitations preclude a conclusive determination of how effective the three tax incentives are in increasing the employment of workers with disabilities. The tax credits and the deduction create incentives to increase the employment of workers with disabilities by reducing the costs of employing these workers. To determine the incentives’ effect on the employment of these workers, information is needed on the extent to which the incentives reduce employers’ costs (by decreasing their tax liability) and the extent to which these reduced costs result in the employment of more workers with disabilities. However, the national databases lack the data needed to make this determination. As previously discussed, IRS databases do not provide information on the barrier removal deduction. And, while these databases provide information to estimate the usage of the disabled access credit and the work opportunity credit, they do not provide information on the amount of credits specifically associated with workers with disabilities. In addition, although DOL has a national database for the work opportunity tax credit program, this database does not contain the information needed to accurately determine the amount of credits associated with workers with disabilities. Furthermore, economic literature does not provide a consensus on the extent to which employers would alter their employment of workers with disabilities in response to reductions in costs. Without this information, a conclusive determination of the three incentives’ effectiveness cannot be made. In addition, surveying employers to determine the extent to which tax incentives caused them to hire or accommodate employees with disabilities may provide wide variations in the results depending upon the research methods used and the quality of the data obtained. Studies that specifically ask an employer whether a tax incentive caused them to hire or accommodate an eligible individual can understate the effect of the incentive, because employers may respond negatively if they do not want to appear to discriminate in their employment practices or because eligibility for the incentive would not be the only or even major factor that employers consider when making such decisions. On the other hand, asking a more general question, such as whether the incentives had some influence on their employment practices, lacks precision and may lead to overestimating the effect of the incentives. Business representatives and experts on disability issues and tax incentives suggested options for increasing the usage and effect of existing employer tax incentives. Many of those we interviewed suggested increasing and improving government outreach and education efforts, including improvements to government coordination and clarification of tax incentive requirements. To further increase the use and effect of the incentives, they also suggested increasing the dollar value of the incentives and expanding the types of workers, businesses, and accommodations that qualify a business to receive the credits or deduction. Although changing the existing tax incentives presents the potential for increased usage and a reduction in tax revenues, such changes give no assurance of a substantial improvement in the employment of workers with disabilities. Interviews with business representatives and experts in disability issues indicate that two primary obstacles to increasing the use of the tax incentives are a lack of familiarity with the incentives and perceptions regarding the amount of effort required to qualify for them. A number of those we interviewed suggested that better coordination of government efforts, clarification of tax incentive provisions, and increased outreach and education could help to improve this situation. The most frequently cited reason by business, academic, and disability representatives for infrequent use of the incentives was that businesses were not aware of them. Among the three tax incentives we examined, most businesses and other organizations contacted were familiar with the work opportunity credit; however, our contacts, especially business representatives, were far less familiar with the disabled access credit and the barrier removal deduction. Several of those interviewed indicated that smaller businesses were less likely to have staff who were familiar with the credits than larger businesses. Furthermore, while larger businesses may have tax staff who are familiar with the incentives, this knowledge is not always shared with the hiring and other human resource managers. Without a general awareness of these tax credits and deduction, employers cannot factor them into the hiring, accommodation, or retention decisions, which may be influenced by concerns about the potential costs of employing individuals with disabilities, such as the possible costs for accommodation or increased workers’ compensation and medical insurance. Another obstacle to the use of the incentives, according to many of those we interviewed, was the perception that qualifying for the incentives would require burdensome paperwork and other efforts. To claim an incentive, businesses must gain knowledge of the eligibility requirements, record the amount claimed on the appropriate tax form, and maintain documentation to support their claim. The process may be particularly burdensome for the work opportunity credit. To claim the work opportunity credit, a business must also complete and provide two forms within 21 days to the state employment agency, which certifies the eligibility of a new hire for this program. According to some familiar with this credit, these extra requirements can create a burdensome paperwork process, especially for smaller businesses that may lack sufficient resources to meet these requirements. Even those businesses that have sufficient resources may not believe that the credit is worth the time and effort needed to qualify for it, according to several business representatives. For a fee, some businesses use consultants to help reduce this burden. Furthermore, the IRS has a demonstration project to enable businesses to electronically file the certification forms and, as of April 2002, authorizes state employment agencies to accept electronic submission of one of the certification forms. Also, proposed legislation, recently passed by the House, is intended to simplify the eligibility requirements for this credit. Given the general lack of familiarity with the disabled access credit and the barrier removal deduction, views about the burdens created by these incentives may be partially based on misperceptions among businesses and others we interviewed. Unlike the work opportunity credit, these incentives do not require any additional paperwork beyond claiming the credit or deduction on IRS tax forms. Accordingly, one vocational rehabilitation official told us that businesses’ perceptions about the burden of these incentives was a “myth” and not based on their actual experiences. However, to some extent, the burden may be related to determining eligibility for incentives, especially for the disabled access credit. Academic experts told us that a lack of clarity as to the type of businesses and expenditures that are eligible for the disabled access credit makes it more difficult for them to use the credit. To increase familiarity and reduce possible misperceptions concerning the incentives, representatives from businesses, academia, government agencies, and disability organizations told us that there is a need for better coordination in promoting the appropriate use of the incentives and the advantages of hiring workers with disabilities. Most of those interviewed believed that the federal government’s efforts to inform and educate taxpayers about these incentives should increase. A variety of suggestions were offered on how the government should proceed with these outreach efforts, and which agency should lead these efforts, given the multiplicity of agencies with responsibility for encouraging the employment of individuals with disabilities. Some business, academic, and disability representatives we interviewed believed that the Department of Labor, specifically the Office of Disability Employment Policy, should have lead responsibility for promoting these three incentives. According to one businessperson, ODEP should take the lead because promoting the incentives is about promoting business and hiring of competent workers. Some of those we interviewed also viewed the participation of all federal, state, and local agencies associated with the employment of people with disabilities in outreach efforts as essential. Some representatives also emphasized that federal agencies should partner with the private sector in promoting the use of these incentives. Federal outreach efforts were viewed as being more likely to be effective if they utilized business organizations as well as disability advocacy organizations, local agencies, and nonprofits to promote these incentives. According to a representative of thousands of small businesses, increased publicity through disability advocacy groups and the tax preparer industry would make small businesses more aware of the available incentives. Outreach efforts by federal government agencies have been limited, but they appear to be increasing. For example, IRS, DOL, DOJ, and EEOC use their Web sites and toll-free numbers to give individuals access to information on the incentives and have recently begun more active outreach. In addition, DOJ officials told us that they had been coordinating their outreach efforts with other agencies. In coordination with the Small Business Administration, DOJ developed an ADA guide for small businesses that addresses the tax incentives. DOJ officials also told us that, for each year since 1994, they had included a flier or an article with information on ADA requirements and available tax incentives along with routine SSA and IRS mailings to businesses and/or their accountants. SSA also has several efforts to provide information about tax incentives to employers and individuals with disabilities. Information about the incentives is available on its Web site and through printed materials widely distributed to employers and disability beneficiaries. As part of SSA’s Ticket to Work Program, the private employment service providers and public vocational rehabilitation agencies offer employers information about their eligibility for tax incentives and assistance in qualifying for these credits, according to SSA. IRS has also recently made efforts to reach out to taxpayers by including an article on the disabled access credit in the IRS Reporter—an IRS publication for taxpayers and tax preparers. Furthermore, as part of the President’s New Freedom Initiative to ensure enforcement of the ADA, DOJ is mailing to selected small businesses a packet of information on tax incentives to encourage the accommodation of customers and employees with disabilities. This outreach effort to the business community was undertaken in response to a general belief that many small businesses were not aware of the tax incentives available to them, particularly the disabled access credit. Other efforts under the President’s initiative include a series of workshops initiated by the EEOC to provide information to small businesses about the benefits of hiring people with disabilities, including information about the tax incentives. The EEOC is partnering with DOJ to conduct some of the workshops. In addition, EEOC recently released a guide for businesses that includes information about the tax incentives entitled The Americans with Disabilities Act: A Primer for Small Businesses. Improved coordination and outreach were also suggested to help resolve a reported concern about the appropriate use of the disabled access credit. According to some academic experts, unclear guidance, including a lack of IRS implementing regulations for the disabled access credit, can inhibit its use. It was explained that some companies may not use the incentives, in part, because they are wary of being audited by IRS and later being found to have used the credit incorrectly. According to a representative of a large tax preparer group, the disabled access credit’s provisions are unclear and complicated. For example, IRS guidelines do not clearly state whether a business that is not required by title I of the ADA to accommodate an employee can use the credit for these expenditures. Many of the organizations that we contacted told us that increasing the maximum dollar amount allowed to be claimed for the incentives might increase usage by attracting the attention of businesses and changing perceptions that the administrative cost of using the incentives will outweigh their benefits. Some academic and business representatives said that they believed that the incentives would need to increase—with some suggesting increases of 25 to 200 percent—to capture the attention of businesses or reduce their concerns about the cost of accommodating workers with disabilities. Although the cost of accommodating a worker with a disability is often less than $500, sometimes these costs can exceed the amount allowed under the tax incentives. For example, some government, disability, and academic representatives told us that the cost of some accommodations, such as those for information technology to accommodate a person that is visually impaired, can sometimes far exceed the maximum $5,000 per year for each eligible business allowed under the disabled access credit. In addition, companies that employ a large number of disabled workers may also incur substantial accommodation costs. For example, one of the large companies we interviewed reported spending more than $1 million on accommodations in the last year, although this official believed that the talent they received more than compensated for these costs. Most of the organizations interviewed favored an expansion of the eligibility requirements of the tax incentives as a means to increase their usage. According to interviewees, use of the incentives is limited by the following restrictions: the type of workers eligible for the work opportunity credit, the size of businesses for the disabled access credit, and the type of accommodations for the barrier removal deduction. Most interviewees favored expanding coverage of the work opportunity credit to include a broader spectrum of workers with disabilities, as eligibility requirements currently limit eligibility for workers with disabilities to certain vocational rehabilitation referrals or Supplemental Security Income recipients. Many suggested including Social Security Disability Insurance recipients as an additional category of eligible workers for this program even though some of these individuals may not be economically disadvantaged—generally a criterion for inclusion in this program. Inclusion of this group would complement SSA’s Ticket to Work program to encourage individuals with disabilities who are receiving disability benefits to return to work. Pending legislation, passed by the House, includes a provision to expand eligibility to those Social Security Disability Insurance recipients who are working with employment networks and have individualized work plans under the Ticket to Work program. Many business representatives would also like to see the disabled access credit expanded to make more businesses eligible for the credit. The tax code limits the usage of this credit to businesses that are making accommodations in compliance with the ADA and have either (1) 30 employees or less or (2) $1.0 million or less in gross receipts. Many believed that the restriction on employees should be expanded to include businesses with over 30 employees. In addition, academic experts pointed out that by tying the use of the credit to compliance with the ADA that many of the smallest firms, that is those with fewer than 15 employees, may not be able to use this credit when accommodating an employee. While the ADA generally requires small businesses to remove architectural barriers, it does not require businesses with fewer than 15 employees to make such modifications for their employees. According to representatives of a business organization representing many small companies, ensuring that the incentives are available to small business to accommodate employees is particularly important because these businesses account for most of the growth in jobs. According to the Small Business Administration, small firms constituted about three-quarters of the employment growth in the 1990s. The vast majority of business, academic, government, and disability representatives interviewed told us that the barrier removal deduction should be expanded to include accommodations to address electronic and communications barriers in the workplace. Although new technologies can open up opportunities for people with disabilities to more actively participate in the workforce, some new technologies can also act as barriers for those with sensory and other types of impairments and can prevent them from fully participating in the modern workplace. For example, an individual with a visual impairment may not be able to use a computer without a screen reader or other special software to interpret images on the monitor. Many of those we interviewed believed that various changes could increase the usage of the incentives to improve the employment of workers with disabilities; however, tax revenue reductions are a likely result from such changes. Tax revenues would be expected to decrease if the dollar value of the incentives was increased and/or coverage was expanded to include more people with disabilities, businesses, or types of accommodation. Potential reductions in tax revenues could be offset to some extent by an increase in taxable income and reduced government benefits for workers with disabilities if changing the incentives were to improve the employment of workers with disabilities. However, because of the lack of data on the effectiveness of the incentives, potential tax revenue losses would have to be absorbed without knowing the effect of changes to the incentives on the employment of people with disabilities. Increasing the dollar amount allowed for these incentives may also increase the potential for misuse and thereby reduce tax revenues. There are already indications that at least one of the incentives, the disabled access credit, has been targeted for fraudulent activity. In April 2002, the Treasury Inspector General for Tax Administration testified that, in tax year 1999, thousands of taxpayers may have inappropriately claimed the disabled access credit, including taxpayers who did not indicate any interest in or ownership of a business on their tax return—a key requirement for receiving the credit. Increasing the value of this and other tax incentives may make them even more attractive to those who may misuse them. Another point to consider with increasing the maximum dollar amount for the incentives is that this change would allow those who are already claiming the incentive to claim an additional amount without increasing the employment or accommodation of workers with disabilities. For example, businesses that already claim the work opportunity credit, could, if the credit were increased, simply claim more for each eligible worker without making any changes in the overall number of workers they hired or the level of accommodation provided. In addition, because the disabled access credit is tied to compliance with the ADA, increasing the maximum dollar amount for the incentive may not increase the level of accommodation provided, in that employers are already required by law to provide reasonable accommodations. Finally, increasing outreach, eligibility, or the maximum dollar amount allowed to be claimed for the incentives may increase their usage; however, it is not known whether the costs of such changes would be offset by improvements in the employment and accommodation of workers with disabilities. We provided a draft of this report to the Department of Education, the Department of Justice, the Department of Labor, the Internal Revenue Service within the Department of the Treasury, the Equal Employment Opportunity Commission, and the Social Security Administration. They generally concurred with our findings. The comments from most of the agencies were limited to technical comments and were incorporated, as appropriate, into the report. In addition to technical comments, SSA provided us with several general comments. In response to one of these comments, we included additional information about workers’ eligibility for the work opportunity credit. SSA also commented that disability groups believe that the current structure of WOTC may be causing a revolving door effect in which employers hire individuals for low-pay and unskilled work and retain them only as long as the employers receive the tax credit. However, in our discussions with a wide range of disability groups, none indicated that the program created a revolving door for WOTC-eligible hires. Moreover, a recent GAO review of the credit found that employers did not appear to be dismissing employees to increase their tax credit. In addition, SSA’s general comments indicated that more attention should be directed at measuring the employers’ awareness and understanding of the three tax incentives, the results of which could, among other things, improve outreach and education. Although further study may provide some additional information on changes to outreach that could increase the incentives’ usage, existing data limitations would still preclude determining the effectiveness of these changes on the employment of people with disabilities. The full texts of SSA’s and IRS’s comments are included as appendices III and IV. We are sending copies of this report to the Department of Education, the Department of Justice, the Department of Labor, the Internal Revenue Service within the Department of the Treasury, the Equal Employment Opportunity Commission, the Social Security Administration, appropriate congressional committees, and other interested parties. We will also make copies available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions concerning this report, please call me or Carol Dawn Petersen, Assistant Director, at (202) 512-7215. Staff acknowledgments are listed in appendix V. To obtain information on the usage of the two tax credits, we analyzed tax data from the Internal Revenue Service’s (IRS) Statistics of Income Programs for 1999, the most recent year that data were available. Statistics compiled for the Statistics of Income (SOI) programs are generally based on stratified probability samples of income tax returns or other forms filed with the IRS. The two SOI programs used were the 1999 Corporation Income Tax Returns Program and the 1999 Individual Income Tax Return Program. The Corporation program includes information on active, for-profit corporations, including information on S corporations. S corporations report items of income, deduction, loss, and credit on their corporate tax returns, but pass through such items to individual shareholders. Throughout the report, we provided information on the number and characteristics of corporations reporting the credits. However, we excluded the amount of credits associated with S corporations because these credits can be passed through to individual shareholders and reported on individual tax returns. For individual tax returns, we differentiated between individuals with and without a business affiliation, as the credits are for businesses that hire disadvantaged employees or accommodate employees or customers with disabilities. Individual taxpayers with a business affiliation are those whose individual tax returns show they had a sole proprietorship, partnership, farm, or interest in a S corporation, rental property, estate, or trust. Because estimates from the SOI programs are based on a sample of taxpayer data, they are subject to sampling errors. These sampling errors measure the extent to which the point estimates may vary from the actual values in the population of taxpayers. Each of our estimates are surrounded by a 95-percent confidence interval, which indicates that we can be 95 percent confident that the interval surrounding the estimate includes the actual population value. In some cases, the small number of taxpayers reporting the tax credits in the SOI sample resulted in large estimate intervals. To assess existing information on the tax incentives’ effectiveness as well as to identify any changes that may increase businesses’ awareness of future usage, we performed extensive literature, legislative history, and Internet searches and reviewed available studies. We also interviewed various groups interested in these issues using interview guides, with a standard set of questions for each group interviewed. We conducted interviews with federal agency officials in the Departments of Education, Labor, Justice, and the Treasury and in the Social Security Administration and the Equal Employment Opportunity Commission and with state agency officials from New York and California. Additional interviews were conducted with selected businesses, business groups, tax preparer groups, disability organizations, and academic experts who were knowledgeable about these incentives and disability issues in general. Among those we interviewed were (1) individuals from a variety of businesses, such as large businesses in the retail and computer industries and small to medium sized businesses in the consulting and engineering service industries; (2) business groups, including the U.S. Federation of Small Businesses, the Washington Business Group on Health, and the U.S. Chamber of Commerce; (3) disability organizations, including the American Association of People with Disabilities, the American Foundation for the Blind, the Paralyzed Veterans of America, the World Institute on Disability, and the Consortium of Citizens with Disabilities; and (4) academic experts at the Law, Health Policy, and Disability Center at the University of Iowa, the Rural Institute on Disabilities at the University of Montana, the Rehabilitation Research and Training Center at the Virginia Commonwealth University, and the Department of Policy Analysis and Management at Cornell University. The federal government provides many programs and incentives exclusively to persons with disabilities to enable them to enter or remain in the workforce. Persons with disabilities can take advantage of more than 100 federal programs. Many of these programs, such as those providing accessible housing, transportation, and independent living services, can help those with disabilities to become or remain employed.However, only a relatively small proportion of these federal programs are specifically focused on providing employment services exclusively to persons with disabilities. The Department of Education, the Department of Labor, the Department of Health and Human Services, and the Social Security Administration (SSA) administer most of the employment programs exclusively targeted to persons with disabilities, with services delivered by numerous public and private agencies at the state and local level. The Department of Education has a long standing involvement in, and numerous programs for, the rehabilitation and training of persons with disabilities. Its Vocational Rehabilitation Program is the largest federal effort for improving the employment of people with disabilities. Recently, the Department of Labor undertook two initiatives to improve the employment of persons with disabilities: (1) a series of projects under the Office of Disability Employment Policy, some of which are targeted to employers, as previously described and (2) Work Incentives Grants to give persons with disabilities better access to the one-stop centers where many of the federally funded employment and training programs are to be provided, as required by the Workforce Investment Act passed in 1998. Other recent legislation, the Ticket to Work and Work Incentives Improvement (TWWIIA) Act of 1999 created four new federal programs for persons with disabilities, as well as incentives to encourage persons with disabilities to work. Two of these programs, under the Department of Health and Human Services, are designed to provide services needed by workers with disabilities to become employed and to help those with severe impairments to maintain their employment. Two others, under SSA, are intended to build the infrastructure for the new ticket program to expand the availability of employment services for disability beneficiaries. This legislation also provides states with options for expanding medical coverage to working individuals with disabilities and adds to the work incentives available to persons who are receiving Supplemental Security Income (SSI) and Social Security Disability Insurance (DI), such as extending healthcare coverage an additional 4-1/2 years to DI recipients who have returned to work. In addition to these incentives, the government also provides a tax incentive to individuals who incur work- related accommodation expenses. The federal employment programs and incentives exclusively available to persons with disabilities are summarized in table 6. In addition to those named above, the following individuals made significant contributions to this report: Jeffrey Arkin, Julie DeVault, Patrick DiBattista, Patricia Elston, Corinna Nicolaou, Robert Tomco, Education, Workforce, and Income Security Issues: Wendy Ahmed, Luanne Moy, Ed Nannenhorn, James Ungvarsky, Anne Stevens, Applied Research and Methods: Shirley Jones and Behn Miller, General Counsel; and Thomas Bloom and Samuel Scrutchins, Tax Administration and Justice Issues.

Summary: More than 17 million working-age individuals have a self-reported disability that limits work. Their unemployment rate is also twice as high as for those without a work disability, according to recent Census data. In the Ticket to Work and Work Incentives Improvement Act of 1999, the Congress mandated that GAO study and report on existing tax incentives to encourage businesses to employ and accommodate workers with disabilities. This report provides information on (1) the current usage of the tax incentives, (2) the incentives' ability to encourage the hiring and retention of workers with disabilities, and (3) options to enhance awareness and usage of the incentives. A very small proportion of corporate and individual taxpayers with a business affiliation use the two tax credits that are available to encourage the hiring, retention, and accommodation of workers with disabilities, according to IRS data. Taxpayers in the retail and service industries accounted for the largest share of the work opportunity credits reported in 1999, while providers of health care and social assistance services accounted for the largest share of the disabled access credits. Information on the effectiveness of the incentives is limited and inconclusive. Only the work opportunity credit has been studied and these studies, along with those of a prior hiring credit, showed that some employers revised their recruitment, hiring, and training practices to increase the number of disadvantaged workers hired and retained, but that credits have also have been claimed by employers for workers they would have hired anyway. However, these studies have not focused on workers with disabilities and data limitations preclude conclusively determining their effectiveness for these workers. To increase the awareness and usage of the tax incentives, business representatives and experts on disability issues and tax incentives suggested (1) improving government outreach and education efforts; (2) increasing the maximum dollar amount of the incentives; and (3) expanding the types of workers, businesses, and accommodations that are eligible for the incentives. While these options may increase incentive usage, it is uncertain whether the potential loss in tax revenues would be offset by improvements in the employment of workers with disabilities. Commenting agencies generally concurred with GAO's findings.