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• The federal Work Opportunity Tax Credit rewards companies for hiring people who often struggle to get jobs.

• Lawmakers are currently in the process of reauthorizing the $2 billion tax credit, which has been around since 1996.

• Proponents of it argue that it helps people get jobs and get off government assistance. 

• However, a new study by researchers at the University of Wisconsin-Madison and the University of Southern California found that the credit fails to increase hiring or pay for workers. 

• Furthermore, large businesses disproportionately use it.

A new study of Wisconsin data finds what some researchers and policy wonks have long suspected: The $2 billion Work Opportunity Tax Credit doesn’t work. 

Congress created the credit in 1996 as it overhauled the country’s welfare system. It rewards companies for hiring people who often struggle to get jobs, including some people who receive government aid, have disabilities or felony convictions or have been out of work for a long time. Employers can typically claim up to 40% of the wages paid to qualifying workers, with a maximum credit of $2,400. 

The credit subsidizes around 4% of all new hires, according to 2022 federal data cited in the study. Overwhelmingly, they’re low-wage, short-term jobs at large employers, including major retailers and temporary staffing agencies, researchers have found. 

Researchers have wondered for decades whether the credit pays off, but most states don’t offer the kind of records that would answer that question. Wisconsin does. 

Thanks to an unusual collaboration between the state government and the University of Wisconsin-Madison, researchers can track the earnings and employment status of participants in certain social safety net programs. 

In a 2025 working paper, researchers from UW-Madison and the University of Southern California studied two decades of records of Wisconsinites who received food aid through the Supplemental Nutrition Assistance Program (SNAP), the most common way an employee qualifies for the tax credit. Researchers compared SNAP recipients who were eligible for the credit with similar recipients who weren’t. 

Their findings were unequivocal. 

“We find that these subsidies do not increase hiring or earnings among eligible groups,” the authors wrote. In fact, they said, their findings rule out even so much as a 0.2 percentage point effect on hiring. 

They estimate 97% of the hiring subsidized by the tax credit would have happened anyway, a phenomenon known as “windfall wastage.” It’s possible, they wrote, that every one of the subsidized jobs falls into that category. 

The companies that take advantage of the credit are disproportionately large. In Wisconsin, they found, half of the subsidies go to just 48 businesses. Nationally, they estimate the credit costs more than $2 billion a year.

“Without reform, the program will continue as a costly transfer to firms with little benefit to the populations it is meant to support,” the researchers wrote.

Meanwhile, a bipartisan group of federal lawmakers wants to increase the credit, which expired in December. 

In November, legislators introduced a bill to extend the credit and expand eligibility to older SNAP recipients and spouses of military service members. The legislation would increase the amount companies can receive and automatically raise the credit amount with inflation. 

In a statement, co-author Rep. Lloyd Smucker, R-Pa., called the credit “a proven tool” that serves workers and employers. “WOTC is a bipartisan, commonsense approach that every Member of Congress should champion,” Smucker said.

Neither Smucker nor co-author Sen. Bill Cassidy, R-La., responded to a request for comment. 

Troubleshooting the tax credit

So why doesn’t the Work Opportunity Tax Credit work? The authors think one important reason is that hiring managers often don’t know which job applicants qualify. 

To receive the credit, employers must certify that they knew the applicant was eligible on or before the day they hired the person. Researchers surveyed 170 companies that use the credit. Less than 1 in 5 screened for eligibility on job applications. At companies that do collect this information, it might stay in the human resources office, never reaching the person who decides who to hire.

That may well be intentional, said UW-Madison economist Corina Mommaerts, one of the authors of the study. Federal and state law bars employers from considering certain factors in hiring decisions. That includes age and, in some cases, criminal record. There are ways to screen applicants without violating such laws, Mommaerts said, “but you can see why employers might still be very concerned.”

In addition, she said, some job applicants may hesitate to tell a prospective employer that they’re eligible. People with felony convictions, for example, may prefer not to draw attention to their criminal records. In the last two years, Wisconsin authorities certified the hires of just over 3,000 people with a felony conviction as qualifying for the credit.

“The concern is that there might be this stigmatizing effect,” Mommaerts said, explaining that some employers try to minimize that by asking applicants to review all the WOTC eligibility categories and indicate whether any apply to them. 

Melissa Riccio, director of inclusive hiring at the national re-entry nonprofit Center for Employment Opportunities, is an expert on that stigma. It’s her job to convince employers that hiring a formerly incarcerated person may not be as risky as they imagine.

Asked about the tax credit, she said such policies won’t singlehandedly make the kind of change she’s looking for, in part because many employers may see them as more work than they’re worth.

“You would never hear any of us say that it would be a bad thing,” Riccio said. “But I don’t think that that alone is enough to move the needle in encouraging employers to make a change in their hiring practices.”

Some policy experts say the new study proves that the temporary tax credit shouldn’t come back. 

Until now, there was little evidence on how well the Work Opportunity Tax Credit works, said Jen Doleac, executive vice president of criminal justice at the philanthropy Arnold Ventures, who researches strategies to reduce recidivism and help formerly incarcerated people get jobs. She and former colleague George Callas penned an October op-ed in Tax Notes calling the credit “completely ineffective.” 

“The evidence is clear: The WOTC does not serve its stated purpose and is a waste of taxpayer dollars,” they wrote. “Encouraging the hiring of workers from disadvantaged groups is a worthy goal. We must devote scarce public resources to solutions that actually achieve it.”

Lobbyists hail a proven, bipartisan tool

Initially authorized for just one year, the Work Opportunity Tax Credit has stuck around far longer — in part because of a powerful lobby. Major backers include payroll processing companies, temp agencies and groups representing the hospitality and retail industries. 

In 2022, a variety of industry groups seeking “solutions to the U.S. labor shortage” joined forces to form the Critical Labor Coalition. One of the coalition’s top priorities: lobbying for WOTC. The group spent $60,000 on lobbying last year, according to watchdog Open Secrets.

“Members of the Critical Labor Coalition — representing restaurants, retail, hotel and lodging, construction, food manufacturing, and other sectors — consistently affirm that strengthening and reauthorizing WOTC is essential both to their industries and to addressing the nation’s ongoing labor shortage,” Critical Labor Coalition Executive Director Misty Chally said in an email. 

Asked about the new Wisconsin study, Chally questioned its “narrow” focus on SNAP recipients. She said her group places “greater confidence” in a 2025 study commissioned by multinational talent management company Allegis Group. The authors of that study estimate renewing WOTC would subsidize 131,000 jobs, but they note it’s not clear how many of those jobs would have existed regardless.

“The exact impact of WOTC on net new job creation is uncertain … While some studies find that WOTC leads to meaningful employment gains among eligible groups, a significant share of the cost may stem from subsidizing hires that would have occurred anyway,” Allegis Group wrote. For their analysis, they assume more than 85% of those jobs would have existed without the credit. 

Why has WOTC stuck around?

Sarah Hamersma has been worried about WOTC for more than 20 years.

In the early 2000s, she was an economics graduate student at UW-Madison interested in programs designed to reduce poverty and help people work. She wanted to study the much larger Earned Income Tax Credit. Her adviser suggested she instead examine the smaller, newer and unstudied Work Opportunity Tax Credit. 

At the time, the credit was just 4 years old and limited to people who received cash welfare assistance. She asked state officials for access to the data. What she found matched what Mommaerts and her colleagues found decades later. Unlike the Earned Income Tax Credit, which gives money directly to low-income workers — and which studies show increases employment and boosts incomes — this tax credit seemed to just boost employers’ bottom lines.

“They’re not passing it along to the workers in the form of higher wages. They’re just sort of being like, ‘Awesome, I got more money,’” Hamersma said.

She wanted to do similar analyses on other places, but she couldn’t find any other states willing to share their data. Now an economist at Syracuse University, she researches programs like Medicaid and SNAP.

“I started studying other programs that seem to make more of a difference … but I always come back to this,” Hamersma said.

From time to time, reporters contact her to ask about it. Lawmakers, not so much.

“I still wait for them to someday call me and say, ‘What should we do, Sarah? Should we reauthorize this?’ Congress has never called,” Hamersma said.

She’s sure legislators didn’t read her research. But she hopes they might read the new study, and that it might sway them. 

“They’ve checked every angle you could possibly check, and the program is not working,” Hamersma said, calling it an “ironclad case.”

The new research was enough to convince Elena Spatoulas Patel, co-director of the Urban-Brookings Tax Policy Center, who saw the authors present their findings at a conference. “That really changed my mind about how we think about the credit,” said Patel, who co-authored a December op-ed calling for an end to WOTC. 

But Congress has reauthorized the credit each time it lapsed before, and it will likely do so again this year, Patel said. It’s not just that there’s so much industry power behind the credit (“a classic case of lobbying versus good tax policy”), she said — it’s also that lawmakers like the idea of it. 

“Unless and until something better is offered, it’s probably easier to renew the credit than to let it expire,” Patel said. “But again, it’s sort of ignoring the point, which is that we are spending taxpayer dollars on this by offering this credit, and it really isn’t helping employment.”

Exactly what the alternative might be is “the million-dollar question,” Patel said. Policy experts say options could include supporting evidence-backed job training programs or expanding the Earned Income Tax Credit.

“If you’re trying to reduce poverty, putting money in the hands of working people is a great way to do it, which is what the Earned Income Tax Credit does … Those low-income working families get more money to spend on the things they need, and we kind of cut out the middleman of the employer altogether,” Hamersma said.

Still, Hamersma doesn’t think Congress will follow her advice anytime soon. 

“This is my cynical take: It’s kind of the perfect program because it benefits corporations, which Republicans historically like, and it seems like it’s supposed to be for poor people, which Democrats historically like,” Hamersma said.

“The facts are kind of irrelevant, the facts where nobody gets helped — it doesn’t quite make it to the top.”

Natalie Yahr reports on pathways to success statewide for Wisconsin Watch, working in partnership with Open Campus. Email her at nyahr@wisconsinwatch.org.

Tax credit meant to help struggling workers mostly helps employers, Wisconsin study finds is a post from Wisconsin Watch, a non-profit investigative news site covering Wisconsin since 2009. Please consider making a contribution to support our journalism.

Ten Democratic-leaning states are using their own money to help people buy Obamacare health plans, at least partially replacing the federal tax credits that expired at the end of last year.

The state assistance, some of it offered through programs that existed before the federal subsidies expired, is helping hundreds of thousands of people lower their monthly premium payments, which otherwise would have surged to double or even triple what they were before the expiration of the federal aid. The savings can total hundreds of dollars per month.

But only New Mexico is completely filling the gap left by the expiration of the federal help by offering it to people of all incomes; for most Americans buying Obamacare plans, the end of the federal aid means much higher prices. And New Mexico and the other states that are trying to cushion the blow for their residents will face increasing budget pressures as health care costs continue their inexorable rise.

In addition to the expiration of the federal subsidies, the cost of Obamacare coverage has increased because of other factors, including labor shortages and the rising cost of prescription drugs, driven in part by the growing demand for GLP-1 drugs such as Ozempic and Wegovy.

The enhanced federal subsidies were made available by the American Rescue Plan Act in 2021 and later extended through the end of 2025 by the Inflation Reduction Act. Designed as a temporary pandemic-era measure, they helped boost the number of people buying health coverage from the insurance marketplaces created under the Affordable Care Act — Obamacare’s formal name — from 11.4 million people in 2020 to 24.3 million last year.

The enhanced subsidies were available to everyone, regardless of income. Additional federal aid provided to some of the lowest-income households entirely eliminated premium payments for some people.

Congressional leaders let the subsidies expire on Dec. 31. As of the end of last month, the number of people enrolled in marketplace coverage was down by about 1.2 million compared with last year, according to federal data.

Last year, the Congressional Budget Office estimated that the expiration of the federal subsidies would increase the number of people without insurance by 4.2 million by 2034.

Under the Affordable Care Act, each state can either use the federal government’s online insurance marketplace, HealthCare.gov, or operate its own state-run exchange. Only the 21 states plus the District of Columbia with state-run marketplaces can offer state-funded tax credits or subsidies, and at least 10 of them (California, Colorado, Connecticut, Maryland, Massachusetts, New Jersey, New Mexico, New York, Vermont and Washington) are doing so.

Matt McGough, a policy analyst at health care research group KFF, said many of the people who buy Obamacare plans “have fallen between the cracks of the health care system.”

“They might not work a job or work enough hours at a job to be eligible for health benefits. They are too young for Medicare. They make too much to be eligible for Medicaid, and they really have no other option but to go to the marketplace,” McGough said.

He warned that relatively healthy people are the ones most likely to forgo marketplace coverage rather than pay more for it. That will leave the exchanges with the people who have the greatest health needs, raising costs and premiums for everyone. To avoid that scenario, he said, states “want to be able to keep as many people in the marketplace as possible.”

A big commitment in New Mexico

In New Mexico, Democratic Gov. Michelle Lujan Grisham and state lawmakers earlier this year tapped the state’s 5-year-old Health Care Affordability Fund for an additional $17.3 million so they could entirely replace the expired federal subsidies through June 30 for all enrollees, regardless of income.

The vast majority of the 82,400 New Mexicans who buy coverage from the state marketplace are eligible for state help. Perhaps as a result, New Mexico is one of only a handful of states where the number of people buying Obamacare plans has increased this year: Enrollment is up 18% in New Mexico, while there have been single-digit increases in the District of Columbia, Maryland and Texas.

“We feel really great about having come together to really focus on these affordability challenges for New Mexicans, and really proud of the gains that we’ve made in coverage while we’re seeing losses elsewhere,” said Kari Armijo, cabinet secretary for the New Mexico Health Care Authority. She noted that a handful of Republican state lawmakers have joined Democrats in supporting the aid.

The money in New Mexico’s Health Care Affordability Fund comes from a 3.75% surtax levied on insurance companies. When the fund was created, the surtax was expected to generate about $165 million in new revenue annually.

Currently, the state uses nearly half of the revenue from the surtax to fund other parts of its budget. But the New Mexico House earlier this month approved a bill that would gradually increase the portion of the surtax allocated to the Health Care Affordability Fund, from the current 55% to 100% in 2028.

Legislative financial analysts recently questioned the long-term sustainability of that approach. Armijo acknowledged that continuing to replace the expired federal subsidies “will deplete the fund over time.”

“It is a pretty substantial amount of money, and it is going to strain the programs that we can provide with that funding,” Armijo said.

Paul Gessing, president of the Rio Grande Foundation, a conservative-leaning think tank in New Mexico, said the state is “flush with oil and gas money” now, enabling it to “spend money in ways that don’t make a great deal of sense for the population as a whole and instead benefits a small sliver of relatively well-off New Mexicans.”

Gessing said the state should focus on reducing health care spending by recruiting and retaining more doctors and nurses to lessen its shortage of providers and by overhauling medical malpractice laws.

“I don’t think the state should make it a practice to use state funds to fill in the gap when federal funding is shifted or eliminated,” Gessing said.

Other states

In California, where 1.9 million people were enrolled on the state’s exchange in 2025, enrollment is already down by 32% from last year, according to state figures.

The state has opted this year to spend $190 million to fully replace the lost federal subsidies for people earning up to 150% of the federal poverty level ($23,940 for an individual), and partially replace them for people making between 150% and 165% of the federal poverty level — just above eligibility for Medicaid in the state. About 390,000 enrollees are receiving the state-based subsidies this year.

Like New Mexico, California in 2021 created a Health Care Affordability Reserve Fund, funded through general revenue and penalties some people have to pay when they file their taxes.

The state budget Democratic Gov. Gavin Newsom proposed last month envisions a “modest projected deficit” of $2.9 billion for fiscal year 2026-2027, but that could grow to $22 billion the next year. California has a total annual budget of about $350 billion.

“Any amount of money that you can put into affordability is meaningful,” said Jessica Altman, executive director of California’s marketplace. “Thinking about those trade-offs is a challenging conversation, but an important one at the state level.”

In Colorado, the state is offering financial help through a new program called the Colorado Premium Assistance program. It came together during an August 2025 special session, when Colorado lawmakers approved up to $110 million this year to partially replace the federal subsidies. Help will be available to anyone making between 133% and 400% of the federal poverty level, or between $43,890 and $132,000 for a family of four.

“It is clear that this is a value for Coloradans. And having a state based marketplace like we do in Colorado, it really allows us to develop state-specific solutions and have our policies and changes driven by the needs of the people who live here,” said Nina Schwartz, chief policy and external affairs officer for Colorado’s marketplace.

Schwartz emphasized, however, that the state help won’t entirely replace the expired federal aid, and that as a result, the number of people buying coverage on the exchange is declining. Cancellations are up 83% compared with last year.

“We’re seeing an increase in the number of cancellations, with the number of people nearly doubling who canceled their plans during open enrollment compared to last year,” she said.

Other states also are opting for limited assistance. Connecticut, for example, is offering aid to households with incomes up to 200% of the federal poverty level, and the state announced it would spend $115 million in 2026 to partially offset the expiration of the federal subsidies.

Massachusetts has set aside $250 million to enhance its existing state subsidy program, helping to keep around 270,000 enrollees with incomes below 400% of the federal poverty level enrolled with stable premiums. As of early January, around 25,000 people in Massachusetts had already canceled their marketplace plans.

Maryland has a new premium assistance program that fully replaces the federal aid for enrollees earning below 200% of the federal poverty level and partly replaces it for those earning between 200% and 400% of the federal poverty level. Since last year, New York has offered help to marketplace enrollees with incomes up to 400% of the federal poverty level. And since 2023, Washington has offered state subsidies to anyone earning below 250% of the federal poverty level.

Stateline reporter Shalina Chatlani can be reached at schatlani@stateline.org.