Does the Work Opportunity Tax Credit Actually Work?

For nearly three decades, the Work Opportunity Tax Credit (WOTC) provided small but material subsidies to employers for hiring certain categories of employees, including veterans, ex-felons, and those receiving public assistance. Although the provision expired on December 31, 2025, bipartisan legislative efforts may revive and expand the program, perhaps as part of a “tax extenders” package or in the context of a budget reconciliation bill.

But is the WOTC worth the legislative effort? Over § 51’s thirty-year history, the provision has lapsed at least six times out of thirteen legislative extensions. Over this span, the program’s costs have ballooned from $135 million (1997) to $500 million (2004) to more than $2 billion (2025). A new NBER working paper finds that, consistent with earlier studies, the credit does little to affect hiring, employment, or earnings for at least some targeted workers. The paper, however, also provides a compelling—and potentially fixable—mechanism to explain the WOTC’s lack of effect. More below the fold.

In Hiring Subsidies for the Disadvantaged: Evidence from the Work Opportunity Tax Credit, Manisha Jain (Tulane, Newcomb Inst.), Corina Mommaerts (Wisconsin, Dept. Econ.), and Jeffrey Weaver (USC, Dept. Econ.) use a massive longitudinal dataset to show that the WOTC has little effect on hiring, employment, or earnings for workers targeted by the credit or in the aggregate. Before expiration, the WOTC paid up to 40% of a new worker’s wages for their first year, and roughly 2.5 million employees were covered by the WOTC annually. Approximately half of WOTC-eligible workers triggered the maximum subsidy of $2,400 per employee. The WOTC subsidy was “generous” in both scope and amount, directly affecting more than twice as many workers as the federal minimum wage.

The authors’ bottom line is less than laudatory, however: “employers hire the same workers as in the absence of [the WOTC] subsidies, and [the] subsidies operate as a pure transfer to the firms, where most of the benefits accrue to a small number of large firms.” At least 97% of WOTC-subsidized hires appear to be inframarginal and at the same wage rates as unsubsidized hires. That is, the WOTC doesn’t motivate more hires for targeted groups (or overall), and the WOTC’s incidence does not flow through to wages. One bright spot is that firms don’t seem to fire WOTC-subsidized workers after their one-year anniversary to hire new WOTC-eligible workers—a pattern known as “churning.” Essentially, the WOTC operates as a one-off windfall that’s concentrated in a small number of heavy-user firms.

The WOTC’s firm-level windfall effects perhaps are surprising, given that the credit’s legal and administrative structure requires employers to establish a prospective employee’s WOTC eligibility before hiring them. Firms actually know that a prospective employee will trigger a potential WOTC benefit, though approximately one-third of WOTC-certified hires will not work enough hours to be eligible for any credit. (Presumably these workers separate from service prematurely, which isn’t uncommon for many of the positions that generate WOTCs, such as retail, staffing, and hospitality.) Indeed, Congress expressly intended this mandatory information channel to influence marginal hiring decisions. But it’s not doing so.

And this point is where the authors’ paper really takes off. To discern a mechanism for the WOTC’s ineffectiveness, the authors collected novel mixed-methods data on firms’ WOTC-relevant hiring procedures. They classified online job application processes, analyzed audit data for implicit screening, and surveyed managers to plumb their reasons for not using WOTC criteria in the hiring process. Their findings are striking (and controversial): less than 10% of credit-claiming firms directly collect WOTC eligibility criteria at the time of application, with limited evidence of implicit screening of candidates based on other observable characteristics. The authors’ survey data indicate that more than two-thirds of hiring managers are afraid that asking about WOTC criteria will lead to “discrimination lawsuits.” This fear persists, notwithstanding a 2020 EEOC Formal Opinion Letter that blesses the screening of applicants on WOTC criteria. From this perspective, a nontax legal regime—employment law—stands in the way of this tax incentive’s effectiveness.

The question, of course, is whether one legal regime should cede ground to the other, and, if so, which one. The authors propose statutory immunization of WOTC-based hiring decisions from antidiscrimination claims, which almost certainly is overbroad—especially for the population of SNAP recipients that are the heart of the authors’ dataset. The superficial citation of WOTC criteria could defeat legitimate discrimination claims brought by members of this population. At the very least, the paper exposes a deeper coordination problem between employment law and tax law, one that likely interacts with employer risk aversion and the WOTC’s size in complex ways. Translating that insight into concrete policy is not easy, however.

Alternatively, the answer may lie in the WOTC’s target populations—and the subsidy’s mission creep over time. The authors’ data address only SNAP recipients; another study finds that the WOTC increases employment and wages (for the latter, quite dramatically) for the target population of disabled veterans. Data on veteran status may be collected more routinely by employers at the time of application, the legal risk of hiring preferences for veterans may be less than for other target populations, and the social risk of veteran hiring preferences may be low. Whatever the mechanism, the WOTC’s effectiveness may depend on the provision’s tailoring, and congressional tweaks on this basis may prove more palatable than broader changes to federal employment law from both substantive and revenue-cost perspectives.

In the WOTC’s legislative process, however, “[y]ou win by adding.” Are the employee-level wins for some target populations worth the “pure transfer to firms” for other WOTC claims? Perhaps, if those firms’ increased cash flow improves liquidity or bridges shortfalls in ways that promote those businesses’ survival, retention, or expansion. That is, the WOTC’s firm-side incidence may trickle down to workers—an extensive-margin effect that Jain, Mommaerts, and Weaver do not test directly. Setting aside the concentration and potential magnitude of these firm-level effects, they may complement employee-level benefits for some target populations—and provide popular and political traction to rationalize the resurrection of the WOTC. More broadly, the WOTC’s story probably is a bit more layered than the authors let on.

Finally, the paper raises the administrative texture of the WOTC’s prescreening processes, a more practical implementation question that Congress may ignore but market actors will not. The authors note that hiring often involves more players than just the employer. Outside recruiting agencies, web-based job platforms, and third-party payroll administrators all play roles in the WOTC’s administration, and these roles have shifted since the credit’s inception in 1996. It’s probably time to rethink the WOTC process in light of these stakeholders, and there may be industry support for doing so. For example, payroll services provider ADP has advocated “for WOTC-eligibility screening early in the job application process.” The big questions are what role Congress should play in designing these changes and which federal (and state) administrative agencies should implement them. These questions clearly aren’t intrinsic to the congressional reauthorization process, but it’s also not clear that they will be addressed in the absence of legislative guidance.

Although the WOTC’s future remains uncertain, tax incentives for workforce development will continue. These incentives’ effectiveness is a tricky empirical issue that intersects with policy in myriad ways. Jain, Mommaerts, and Weaver’s paper is a compelling and provocative contribution to these debates—and has substantial import as Congress faces questions about whether to continue the WOTC.

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