The effect of welfare on work and marriage: a view from the states.

• Author: Hepner, Mickey

Over the past 20 years, the U.S transfer system has seen a substantial shift in responsibility from the federal government to state governments. States have been given increased flexibility in setting parameters for income assistance, childcare assistance, and health care programs, among others. Despite this increased responsibility, state policymakers are often only dimly aware of the consequences of their decisions for work and family structure incentives.

This study examines the impact of state-determined tax and transfer parameters on work and family structure incentives for welfare recipients. While our work focuses on tax and transfer programs in place during July 1999 in the state of Oklahoma, we believe that the general results of our analysis are applicable elsewhere. In particular, we demonstrate how state-determined programs often have large work and family structure disincentives. While one could imagine that these disincentives represent strategic tradeoffs made in pursuit of other goals, our experience suggests that this is rarely the case: Policymakers are frequently unaware of the existence of these tradeoffs. It is our hope that this study will stimulate a greater appreciation of the potential consequences that state-determined programs have for the work and family structure decisions of public assistance recipients.

A major obstacle in identifying the incentives and disincentives of state-determined programs lies in the fact that incentive effects can vary widely by program participation and family characteristics. We follow the previous literature in working through a small set of common scenarios meant to represent typical experiences of welfare recipients. However, this study also includes an Excel spreadsheet program that makes available to interested readers the complete set of permutations for program participation and family characteristics. This spreadsheet may be downloaded from the Web site: http://facultystaff.ou.edu/R/William.R.Reed-1/ Papers/index.html. Once downloaded, a user-friendly interface allows the reader to experiment with alternative combinations of program participation and family characteristics. In addition to allowing the reader to investigate scenarios that may be of special interest, it also allows one to check our claim that the incentive effects we identify are robust for a wide variety of program participation and family characteristic scenarios. We believe this represents a valuable innovation to the existing literature.

A further complication lies in accounting for the complicated interactions between programs. Our study is unique in that it is

* the most extensive study of tax and transfer programs

* the only study to include childcare subsidies

* the only study other than Acs et al. (1998) to calculate realistic childcare expense schedules based on market rates

* the only study to incorporate changes that occurred after both PRWORA (1) and SCHIP (2)

* the only study to examine the incentive effects of welfare on both work and marriage.

This study first examines the impact of tax and transfer programs on work incentives, and then examines the impact on family structure incentives.

Work Incentives for a Female-Headed Household with Two Children

We begin by illustrating the work incentives for a representative family: a single mother with two preschool children, ages 1 and 3, living in Oklahoma in July of 1999. We assume that she participates in the following set of transfer programs as long as she is eligible: Temporary Assistance to Needy Families (TANF), Food Stamps, Medicaid, Earned Income Tax Credit (EITC), and Oklahoma's Daycare Subsidy Program. Each of these programs enjoys wide participation among public assistance recipients. (3)

Relationship between Earned Income and Total Resources

Table 1 shows this mother's total resources (i.e., the dollar value of her income and benefits net of taxes, work, and daycare expenses) for alternative wage and hours-of-work possibilities. (4) Column 1 shows her total monthly income and benefits assuming that she does not work. Column 2 reports total income and benefits assuming that she works 20 hours a week at a minimum-wage job ($5.15/hour). Column 3 assumes she works full time (40 hours per week) at a minimum wage job. Subsequent columns show the impacts of working full time at increasingly higher wage rates.

Figure 1 illustrates the complex, nonlinear relationship between the mother's earned income and her corresponding total resources. The first column bar represents total income and benefits when the mother does not work. In this ease, she receives monthly total resources valued at $828, with $292 coming from TANF, $329 from Food Stamps, and $207 from Medicaid. She pays no taxes and has no work expenses given her zero hours of work.

[FIGURE 1 OMITTED]

When she increases her work effort to 20 hours per week at a minimum wage job, she earns $446 in income. She also begins to earn benefits of $179 from the EITC. Out of this sum she must pay non-daycare related work expenses (estimated at $34), FICA ($34), and state taxes ($1). (5) In addition, her TANF income decreases $163, and her Food Stamp benefits drop $18, respectively (Medicaid stays the same), yielding her total monthly income and benefits of $1,204.

Note that by working part-time, the mother incurs monthly childcare expenses for her two children of $390. (6) However, Oklahoma's childcare subsidy pays these costs in full, and thus these expenses do not affect her income and benefits. Had the subsidy left some of her childcare expenses unpaid, we would have counted her copay as an additional work expense. In this way, the childcare subsidy enters the income and benefit calculation only indirectly, by reducing her work expenses.

As the mother increases her labor supply from 20 hours to 40 hours per week at the minimum wage, she earns an additional $446, as well as further EITC benefits of $139. However, this time she sees a much smaller increase in total monthly income and benefits. Monthly total resources increase from $1,204 per month when working 20 hours per week, to only $1,381 per month when working twice that much. The smaller increase is largely due to the decrease in transfer program benefits. Food Stamps decline from $311 to $223. Medicaid decreases from $207 to $121 as the parent loses eligibility for Medicaid benefits. TANF goes to 0. In addition, her taxes go up, along with her non-daycare related work expenses (now estimated to be $67). She also starts to pay a monthly daycare copay of $32.

Moving further right in Figure 1, we see the effect of wage increases on the mother's income and benefits, assuming she works 40 hours per week. There is relatively little reward for achieving wage gains beyond the minimum wage. Remarkably, the welfare recipient would have to earn $15/hour (approximately $30,000 a year assuming full-time, full-year work) before she was able to attain the same level of total resources she receives when she is working part-time (20 hours per week) at the minimum wage ($5.15/hour).

A striking characteristic of Figure 1 is the substantial drop in income and benefits that occurs after the mother's hourly wage increases from $11 to $12 dollars. This income "notch" is primarily due to Oklahoma's childcare subsidy program. We will have more to say about childcare subsidies below.

Public Assistance and Marginal Tax Rates

Figure 2 converts the total income and benefit schedule to a marginal tax rate schedule. Marginal tax rates (MTR) are calculated as

(1) MTR = 1 - ([DELTA] in total resources)/([DELTA] in earned income).

[FIGURE 2 OMITTED]

Changes in total resources and earned income are calculated for adjacent columns, moving from left to right.

The practical value of the MTR schedule is that it allows one to gauge the impact of the combined tax and transfer programs on the returns to becoming progressively more engaged in the labor market. We can imagine participation in the labor market as a series of steps: The first step consists of moving from not working at all to working part-time (20 hours per week) at the minimum wage. The next step consists of working part-time at the minimum wage to full-time at the minimum wage. Subsequent steps consist of moving from lower-paying jobs to jobs requiring greater skills and responsibilities, with correspondingly higher wages. The MTR/schedule allows us to assess the rewards to the mother of progressing on to the "next step."

Figure 2 illustrates the combined effect of the respective tax and transfer programs (TANF, Food Stamps, Medicaid, EITC, and Childcare Subsidy Program). For a mother of two children (ages 1 and 3) in daycare, these programs serve to facilitate initial entry into the labor market. The MTR associated with moving from not working at all to working part-time at the minimum wage is 16 percent. In other words, for every dollar of earned income over this range, the mother is able to retain an average of 84 cents after taxes and work expenses. Consequently, this represents the true net return to working. As we...