Establish a State Franchise Tax Credit to Encourage Businesses to Hire AFDC Recipients

The Legislature should establish a state franchise tax credit to encourage businesses to hire recipients of Aid to Families with Dependent Children.

Several states and the federal government have offered a tax credit to businesses tha t hire recipients of Aid to Families with Dependent Children (AFDC). According to a recent U.S. General Accounting Office (GAO) report, the federal credit has been successful in encouraging employers to hire such persons. AFDC provides payments to low-inco me families with children who lack the support of one parent due to absence, death or unemployment.

For the current biennium, Texas appropriated more than $1 billion for AFDC grants. Currently, an AFDC grant for one adult and two children in Texas is $184 per month, plus $292 in food stamps. Medicaid for one adult and two children in Texas costs approximately $305 per month.

Although food stamps are 100-percent federally funded, AFDC and Medicaid are about 36-percent funded from state general revenue and 64 percent from federal matching funds. Consequently, both the state and the federal government save money if more AFDC reci pients find jobs.

The federal government and other states also extend the credit to other disadvantaged groups who do not receive AFDC funds. However, since Texas does not make payments to these groups, extending the credit to their employers would result only in a net loss with no compensating gain from reduced AFDC payments.

Programs offering tax credits to employers who hire persons receiving public assistance have proven viable. For example, a February 1991 GAO study of the federal Targeted Jobs Tax Credit (TJTC) found that nearly half of all employers using the credit made some special effort to recruit, hire and retain target group members. The remaining half took advantage of the tax credit without making special efforts to hire members of the targeted groups. A 50-50 record is considered worthwhile given the cost of not being employed. The GAO reported that the Department of Labor found that welfare recipients represent about 25 percent of all TJTC participants. 1

The federal tax credit for all except youths working summer jobs was 40 percent of the first year s wages, up to $6,000 in wages per employee, or a maximum credit of $2,400 per employee. Under the provisions of the Tax Reform Act of 1986, employers had to attest to the IRS that each employee under the TJTC program was employed for at least 90 days or had completed at least 120 hours of work for the employer. This f ederal program expired on June 30, 1992.

The TJTC employee certification process in Texas was the responsibility of the Texas Employment Commission (TEC). Employers could receive a TJTC certificate in three ways: place a job order with TEC for TJTC eligib le applicants; hire an applicant with a TJTC voucher proving eligibility; or request that a new hire be considered for TJTC eligibility.

TEC and other organizations that serve targeted workers, such as Job Training Partnership Act (JTPA) sponsors, vocational rehabilitation agencies, welfare agencies and Social Security offices issued eligibility vouchers to their clients. In calendar 1991, TEC issued 70,961 vouchers to eligible applicants; 60 percent of these obtained employment. The State of Texas has ha d the highest number of TJTC certifications among states. In Texas, disadvantaged youth were the largest group certified with 63 percent of the total, while AFDC recipients were the second-largest group with 18 percent, or 7,793 certifications.

Many states have adopted variations of the TJTC in their franchise or state income tax law. A review of the states franchise and income tax laws found that 20 states have a provision for a job tax credit. Job credits granted by some states are related more clo sely to economic development, since they are tied to enterprise zones or new employment, while other states tie the credit to the poor or specific groups such as military, handicapped persons or teachers. A few states give higher credits for longer employe e retention.

The Texas franchise tax is imposed on corporations that have a Texas charter or a certificate of authority to do business in Texas. The tax is based on the corporation s net taxable capital plus a surtax on net taxable earned surplus. The tax rate on taxable capital is 0.25 percent per year; the rate on earned surplus is 4.5 percent per year.

In the case of Texas franchise tax, a corporation certified as a qualified business, as provided by the Texas Enterprise Zone Act, may be granted a refund if the business has created ten or more new jobs in an enterprise zone. The amount of refund is equa l to the lesser of $5,000 or 25 percent of the amount of taxes paid for any one privilege period. (As of October 1992, the Comptroller s office had not yet granted any refunds under this provision.)

To ensure that the state would maintain a net gain to the General Revenue Fund, a franchise-tax jobs credit in Texas should be designed differently than the federal credit, with stricter hiring standards; the employer also should provide medical insurance.

The Tax Code should be amended to give a corporation franchise credit for hiring Texas residents eligible for the Aid to Families with Dependent Children (AFDC) program.

To realize savings from this recommendation, the Legislature must reduce its appropriation for the Department of Human Services by the amount of AFDC savings indicated in the fiscal impact table.

AFDC recipients would have to be employed for at least one year with sufficient salary to end dependency on AFDC and would have to have health insurance coverage at the time the credit is claimed. At least 80 percent of this insurance would be paid by the employer equivalent to a maximum $300 deductible with a minimum of 70 percent paid by the insurance company.

The credit would be limited to one year per recipient and be equivalent to 20 percent of wages paid in the first tax year, up to $10,000, for a maximum credit of $2,000. The credit would be allowed in the year the employee has been employed for at least on e year, provided the employer meets the other stipulations.

This recommendation would help more AFDC recipients find jobs, giving them the opportunity to become financially independent. It would also save g eneral revenue because the resultant reduction in AFDC and Medicaid payments would outweigh the impact of the tax credit. The credit would help taxpayers defray some of their administrative and training costs associated with hiring AFDC recipients.

Fiscal Impact
The net savings of this recommendation would equal the amount of AFDC and Medicaid saved due to increased employment of AFDC recipients, less the credit s cost to the state.

Insufficient data exist to determine the length of time a recipient st ays off of AFDC once employed. The estimate assumes that a recipient would remain off AFDC for two years at a savings of $4,415 and off Medicaid for one year at a savings of $3,649. The state share of the total savings would be $3,007. The state s maximum cost for one tax credit would be $2,000. The net savings thus would be $1,007 for each recipient employed. The savings rate for the state would vary slightly from year to year because of federal matching rate changes.

The estimate also assumes that 10 percent of the 7,793 AFDC recipients certified by TEC would be hired during the first two years of the program as a result of extra efforts by employers, rising to 20 percent in the third year and capping at 25 percent in the remaining years.

Additional efforts to educate and train AFDC recipients and move them into the labor force in future years could increase these savings. Estimated savings to the state over the next five fiscal years total more than $6.5 million.

In addition to a net savings to general revenue, the state also would save money for the federal government. The federal government s share of the $8,075 total savings per recipient would be $5,068. Federal savings over the next five fiscal years would total more than $28 million.

Gross Savings Reduction in Net Savings to the
Fiscal to the General Franchise Tax General Revenue Reduced Cost to Change in
Year Revenue Fund Receipts Fund 001 Federal Funds FTEs

1994 $ 623,000 $ 0 $ 623,000 $1,097,000 0
1995 2,315,000 1,558,000 757,000 3,978,000 0
1996 2,956,000 1,558,000 1,398,000 5,058,000 0
1997 4,953,000 3,118,000 1,835,000 8,499,000 0
1998 5,790,000 3,896,000 1,894,000 9,948,000 0

1 U.S. General Accounting Office, Targeted Jobs Tax Credit: Employer Actions to Recruit, Hire, and Retain Eligible Workers Vary (GAO/HRD-91-33, February 20, 1991).