U.S. Department of Labor Office of Inspector General

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Report Number: 04-94-021-03-320

Issue Date: August 18, 1994

The Targeted Jobs Tax Credit (TJTC) program was enacted in 1978 as a means of helping certain individuals find employment. The Joint Committee on Taxation estimates that in 1994 the TJTC program will cost taxpayers nearly $300 million. For that outlay, it is intended the program will entice businesses to hiring members of hard-to-employ target groups--predominantly the economically disadvantaged--in exchange for Federal tax credits.

Based upon our review, we have concluded that the TJTC program is not an effective means of helping target group members find employment. We recommended the Secretary encourage Congress to discontinue the program when its authorization expires on December 31, 1994. We examined program activities which occurred during the period July 1, 1991 through June 30, 1992. Field work was completed in nine states and included an evaluation of 1,150 individuals upon whom employers requested and received TJTC eligibility certifications. Our sample design allowed us to statistically project our sample results to the Nation. We also analyzed TJTC program data and unemployment insurance wage history information maintained by the states.

We found the tax credits did not induce employers to hire members of target groups they might not otherwise have offered jobs. Nationally, we project 92 percent of those individuals for whom employers could have claimed a credit would have been hired regardless of the tax subsidy.

Most employers paid contractors to determine whether job applicants met the TJTC program's eligibility requirements and to assist in obtaining an eligibility certification from State Employment Security Agencies (SESAs). Regardless of whether eligibility screening was done by employers or their contractors, the process was typically completed after the hiring decision had been made.

The program largely subsidizes the wages of those who are hired irrespective of their eligibility and the availability of a tax credit. Consequently, for our audit period, we estimate the program cost three times the amount that it returned in economic benefits. For our audit period we estimate that the costs of the TJTC program exceeded its benefits by almost $234 million. That is, for each dollar in tax credits employers were allowed to claim and the Federal Government provided states to administer the program, only about 37 cents in economic benefits were returned.

Jobs for which employers receive credits were unremarkable. We project that through their TJTC employment about:

• One in three employees was paid the minimum wage allowed by law; for all TJTC jobs in our sample, starting wages averaged $4.96.
• Two of three employees worked part-time.
• Two of three employees received no fringe benefits, such as health insurance, life insurance, or the opportunity to participate in a retirement plan (exclusive of social security).
• Three of four employees were no longer with the TJTC employer five quarters after being hired.

We found more similarities than differences. Overall, the TJTC jobs were much like other jobs in the individuals' employment histories. That is, their TJTC job was another entry-level, low- pay, low-skill job in a succession of similar jobs many of the individuals had held.

On August 5, 1994, ETA responded to our report. ETA commented that past studies have cast doubt on the TJTC program's effectiveness and that this audit report, ". . . adds to indications and deepens our concern about the program's design." However, ETA suggests the audit is insufficient and a " scientific study" with a "carefully constructed methodology" is necessary to determine the program's long-term impact. ETA indicates it shares OIG's concern that the program "does not effectively provide incentives for employers to hire individuals in the target groups" and will "continue to examine ways to strengthen achievement . . . including commissioning of a scientific study on the program's overall effectiveness."

We are disappointed.