An expert in policy advocacy and coalition building, Chaer leads CCLP’s work to help people meet their basic needs and expand economic opportunity. She also coordinates the Skills2Compete Colorado Coaliton and serves on the executive committee of the All Families Deserve a Chance (AFDC) coalition. Staff page ›

Apr 14, 2016

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Proposed tax credit provides wrong solution for the right problem

by | Apr 14, 2016

On paper, House Bill 1372 looks like a win-win proposition that gives businesses a financial incentive to hire low-income workers who face challenges in today’s job market.

The bill, which was approved with bipartisan support by the House Public Health Care and Human Services Committee, would create state Work Opportunity Income Tax Credits (or WOTC) modeled on the federal WOTC. These tax credits would be available to employers who hire members of targeted groups — including public-assistance recipients, disabled or unemployed veterans and ex-offenders. The legislation addresses one of CCLP’s core priority issues: Jobs for Coloradans with barriers to employment.

But in reality, WOTC does NOT have a strong record of effectiveness in affecting hiring decisions or wage or skill growth over time. A study commissioned by the U.S. Department of Labor found “the tax credits play little or no role in recruitment policies.” In fact, many third-party vendors make a lot of money gathering and processing paperwork from large companies to secure tax credits for the low-income workers their clients would have likely hired anyway.

The legislative declaration of HB 1372 is centered on reducing this population’s dependency on government programs. Yet, given the average wages of WOTC jobs on a national level, and the minimum number of required work hours to meet the threshold for the tax credit (about 8 hours per week), most beneficiaries would still be dependent on government programs. Nationally, 42 percent of WOTC jobs pay between $7.25 and $8.25 hour. Only one-quarter of those jobs pay more than $10 hour.

For example, a mother and child currently on Medicaid lose the benefit when their income exceeds 138 percent of the federal poverty level (FPL), or $22,107 a year. Doing the math, the mother would need to work more than 47 hours per week at $9 per hour to exceed the Medicaid qualification threshold. If the woman earned $10 per hour, she’d need to work 42 hours a week to be ineligible for Medicaid. And two of the three most-common WOTC jobs — retail and food-preparation — generally aren’t full-time jobs.

Because of these deficiencies, WOTC exemplifies “corporate welfare” at the expense of the state budget and taxpayers. As amended, HB 1372 is estimated to cost the state of Colorado $25.2 million in lost revenue beginning in 2018 when the tax credit would go into effect. Since the bill does not cap these tax credits (and the $25.2 million is just an estimate), the state could easily double down on these budgetary implications if businesses become savvy about the tax credits and third-party vendors get more organized in attracting business.

WOTC has proven to be a very costly approach to fighting poverty. The federal WOTC grew from $490 million to $1.1 billion between 2008 and 2010. As mentioned earlier, WOTC would not need an annual appropriation to grow, so the sky is the limit budget-wise.

Though CCLP opposes HB 1372, we encourage legislators to support other bills that could actually help low-income Coloradans obtain gainful employment and skills training. For example, HB 1290, would extend funding for ReHire Colorado, a successful transitional jobs program, from 2017 until the end of 2021. The legislation, which was approved by the House Business Affairs and Labor Committee, has bipartisan support and is part of a package of workforce bills backed by Gov. John Hickenlooper.

Rather than losing potentially $25.2 million a year in tax revenue from HB 1372, another more productive use of scarce resources would be to double state funding for Adult Education and Literacy. Less than $1 million for that program would go far. After all, the 10 percent of working-age Coloradans who lack a high school or equivalency diploma are effectively locked out of most jobs and training opportunities. In 2014, the state unemployment rate was 4.9 percent. The unemployment rate for those without a high school diploma was 12.6 percent.

Without evidence that the WOTC influences hiring decisions, and with the state facing significant budgetary constraints that limit spending in health care, education and other important priorities, why should Colorado give away millions of dollars to large employers affiliated with the WOTC Coalition, such as Walgreen’s, Wing Stop and Waffle House?

We urge the House Finance Committee to put an end to HB 1372. Simply put, it is the wrong solution to the right problem.

– Chaer Robert

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