Congress will soon decide whether to extend the Work Opportunity Tax Credit (WOTC), a hiring subsidy for disadvantaged groups that expires at the end of 2025. After nearly thirty years and 13 extensions, the program has primarily created large windfalls for firms that would have hired the same workers anyway, while showing little evidence of improving long-term outcomes for the people it was meant to help.
At an annual cost of $2.1 billion, the WOTC only delivers modest, short-lived benefits, making it a poor tool for expanding opportunity. Republicans rightly did not include the credit in their recent tax legislation, but now Congress faces pressure from special interests to extend it this fall. Congress should allow the WOTC to expire.
What the WOTC Was Supposed to Do
The WOTC was intended to encourage employers to hire from groups facing barriers to work, such as welfare recipients, veterans, and people with disabilities.
To claim the credit, employers must have worker eligibility certified by a state workforce agency, typically by filing paperwork within 28 days of the hire. These state-level offices operate under federal Department of Labor (DOL) oversight and funding, while the credit itself is claimed through the Internal Revenue Service (IRS).
Employers can receive a credit worth up to 40 percent of a worker’s qualified first-year wages if the employee works more than 400 hours (or 25 percent for 120–400 hours). Because eligible wages are capped at $6,000 for most groups, the maximum credit is about $2,400 per hire. The actual subsidy is smaller than the credit amount because credited wages are non-deductible. Long-term welfare recipients and some veterans receive larger credits.
In theory, this incentive can offset the perceived risks of hiring disadvantaged workers and open new opportunities. In practice, the subsidy is small relative to hiring and training costs, and the paperwork requirements create administrative hurdles that limit its effectiveness.
What the WOTC Actually Does
There is limited empirical work on the effects of the credit, and the evidence that does exist points to modest, short-term employment and wage gains, with no sign of lasting benefits. Employer survey results indicate the credits rarely influence initial hiring decisions, calling into question even the estimated positive short-run effects.
Two studies, one looking at disabled veterans and the other investigating eligible welfare recipients, provide the most supportive results for the WOTC. Together, they find positive employment effects, ranging from 2 to 7 percentage points for the target populations. They also show higher wages and suggest limited substitution, meaning the new jobs are not shifted from ineligible to eligible workers. However, the only study to investigate the effects of the credit beyond the first year finds “very little evidence of improvements in long-term employment rates of the target population or in job tenure of certified workers.”
The modest, short-run gains for workers are matched by even larger gains captured by their employers. An Ernst & Young summary concludes that between 63 percent and 96 percent of the budgetary cost of WOTC accrues as windfall profits to firms for hires that likely would have occurred anyway.
Despite reported short-term benefits in a couple of studies, the broader evidence casts serious doubt on the program’s overall effectiveness. Matching unemployment records with firm-level data, Sarah Hamersma finds that employers do not respond to strong incentives in the subsidy to increase WOTC-eligible employee job duration. If the subsidy does not change firm behavior, it is unlikely to result in meaningful changes in outcomes for the disadvantaged workers. Other surveys by the Department of Labor and private researchers also find that firms report the credits play “little or no role in recruitment,” and thus the subsidies “do not appear to improve the job outcomes of disadvantaged workers in these jobs nor encourage the hiring of additional disadvantaged workers as intended.”
Conclusion
After nearly thirty years on the books, the WOTC has little to show for itself. The program was supposed to expand opportunities for disadvantaged workers, but instead, it has added layers of paperwork, delivered private windfalls to employers, and left hiring patterns unchanged. The underlying barriers these groups face, such as skills gaps, limited work experience, high minimum wages, and other regulatory obstacles, cannot be solved by a modest, temporary, and complex tax credit.
The program now costs the federal government more than $2 billion each year. At best, it temporarily boosts earnings or employment for eligible workers while leaving long-run outcomes unchanged. The program is more likely just a multi-billion-dollar windfall for firms with the organizational resources to navigate a complex certification process across state and federal agencies.
The work opportunity tax credit is an unnecessary and highly complex scheme that should be allowed to expire.
