Comments on Employment Tax Credits

GAO reviewed the Targeted Jobs Tax Credit Program (TJTC) and several other related credit programs. Three issues were analyzed, including: (1) whether wage subsidy programs have a chance of being successful; (2) what type of workers benefit the most; and (3) how businessmen will respond to a reduction in labor costs.

The evidence suggests that business would respond to an extent that would significantly lessen unemployment among inexperienced and low-skill but otherwise job-ready workers. There is no evidence available that workers with severe employability problems can benefit from the wage subsidy approach. The review showed that there are problems which can be anticipated in the implementation of a wage subsidy program. The major design problem involves minimizing the loss of tax revenues to the Department of the Treasury because the subsidy or tax credit can be claimed by employers for hires which would have occurred anyway. The design problems for labor market programs are especially complex because of the enormous amount of labor turnover that characterizes the Nation's economy. Thus, the number of new hires in any year greatly exceeds the increase in employment levels, with the result that some program designs can result in very large tax losses. The GAO analysis suggests that the TJTC narrow socio-economic targeting approach produced a program that was apparently grossly underutilized and which had little impact on the employment levels of the target group members. GAO determined that the target group members would have benefited much more from a program that was not limited to members of their group. Three alternative programs were reviewed. However, unresolved technical issues prevented GAO from selecting the optimal program design.