Issue
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| Vol. 1, No. 6 April 1997 |
Vol. 1, No. 6 April 1997
Earned Income Disregards
by Marie Cohen
Background
In structuring their Temporary Assistance for Needy Families (TANF) programs under the Personal Responsibility and Work Opportunities Reconciliation Act of 1996 (PRWORA), states must choose how much of a recipient’s earned income to "disregard" in determining benefit eligibility and amount. In the first three decades of Aid to Families with Dependent Children (AFDC), no income was disregarded in determining benefits, so that AFDC recipients who went to work lost a dollar of benefits for every dollar they earned. In 1967, based on a concern that AFDC was nurturing a class of permanent welfare recipients, Congress allowed recipients to keep $30 plus one-third of their earned income plus work expenses each month—the so-called 30-and-one-third disregard. In the 1980s, Congress eliminated most of the increased incentive, limiting the $30 disregard to one year and the one-third disregard to four months.
In the 1990s, many states increased their disregards as part of broader welfare reform waiver proposals. Passage of PRWORA gave states unprecedented flexibility to determine the structure of AFDC benefits. Currently, at least 35 states have chosen to expand or extend earned income disregards beyond the old AFDC rules in at least some counties, with most states doing it statewide. Most of these enhanced disregards were begun under waivers approved before enactment of PRWORA.
Policy Issues
Earned income disregards can be used for two separate but related purposes. They can be used to encourage work effort on the part of welfare recipients and as a means to supplement the income of low-wage employees.
Reducing benefits by one dollar for each dollar of earned income may discourage work unless a recipient can make more, after paying work expenses, than the benefits she can receive without working. In 1996, a minimum-wage full-time worker earned barely more than the maximum combined AFDC and Food Stamp payment for a family of three in the median state, and after work expenses, might be considerably poorer. "Disregarding" a portion of earnings allows welfare recipients to increase their incomes by combining work with welfare, thus increasing the incentive to work.
Earnings disregards are also a way to supplement low earnings among the working poor. A single parent working full-time all year at the minimum wage would fall below the poverty line for a family of three, yet would not be eligible for AFDC benefits in the vast majority of states in 1996. Increased income disregards supplement low earnings to improve the standard of living for poor working families. By enabling families to remain eligible for cash assistance, they also
allow families to continue to receive other benefits, such as Medicaid, child care and transportation assistance.
The effect of an earnings disregard on total welfare costs is unclear because a disregard has three separate effects. On one hand, some people who would not have worked will be induced to do so, and they will probably receive lower benefits on average, thus reducing welfare costs. On the other hand, some people who would have worked anyway will collect increased welfare benefits, resulting in increased costs to the taxpayers. In addition, an enhanced disregard may make more people eligible for welfare or encourage them to enter the rolls, also increasing welfare costs.
In constructing an earnings disregard policy, states will want to consider the following issues.
Level of the Disregard. The higher the disregard, the higher the earnings a person can have and still receive assistance, thus increasing caseloads. As mentioned above, the impact on total costs could be positive or negative depending on whether the increased disregard persuades many people to work or mostly rewards people who would have worked anyway. Some observers believe that increasing the disregard may increase the incentive to work part-time rather than full-time, thereby causing some people to work fewer hours than they would with a lower disregard. A very high disregard (such as 100%), continues to reward some full-time workers with the full benefit, but only those whose wages are low enough and their families large enough that their benefits and earnings together are below the poverty level.
Duration of Disregards. States can adopt disregards that are temporary or decline over time. This was the approach taken by the AFDC program in its most recent incarnation. One-third of a recipient’s earnings was disregarded for the first four months of employment only, with an additional $30 per month disregarded for the first year. The only disregards that were not time-limited were a $90 work expense disregard and a child care disregard of up to $160 per child for full-time work. Temporary disregards can be justified as a way to smooth the initial transition to work by helping recipients cope with initial work expenses.
Eligibility for Disregards. As they did under AFDC, most states disregard much less income in the initial determination of eligibility than in determining continuing eligibility and benefit levels. Thus, earnings that would disqualify an applicant from receiving benefits would not disqualify a current recipient. This system not only raises equity issues but may encourage working poor parents to stop working in order to become eligible for benefits. To achieve equity between recipients and non-recipients, equal amounts of income would have to be disregarded in determining eligibility for applicants and for recipients. This would allow many working poor families to enter the welfare rolls and thus increase costs.
Relationship to Time Limits. A disregard may cause people to use up their months of eligibility more quickly because they are less likely to leave welfare entirely when they get a job. Once they use up their benefits, they will not be able to turn to welfare in cases of job loss.
While states that had exemptions or extensions under waivers can continue these policies until their waivers expire, states must thereafter limit benefits to no more than five years for TANF recipients whose benefits are federally funded. They are allowed to exempt up to 20% of their caseload from these limits, but they may be more likely to exempt those recipients who have serious problems impeding their ability to work than those who are working. States can also use their own funds to extend benefits to some recipients beyond the time limits, recognizing that some people will never achieve an acceptable standard of living without some continuing help. For example, Illinois is planning to not count months in which people are working toward their time limits and use state funds to pay for benefits beyond five years. This makes welfare more like a long-term income supplement to the working poor. However, few states have as yet decided to commit their own resources to provide such long-term support. Some states are providing limited extensions or adjustments of the time limits for working recipients, as described below.
Interaction with Participation Requirements. Earned income disregards also interact with the participation requirements instituted by PWRORA. States are required to involve an increasing percentage of TANF recipients in work and work-related activities or suffer financial penalties. Since TANF recipients who are working count as work participants, allowing more workers to receive TANF benefits helps states meet these work requirements. In addition, it is less expensive to have a participant in a job than in a work program slot, which means that a higher participation rate can be achieved for the same expenditure when more income is disregarded.
Implementation. An earned income disregard cannot encourage work unless welfare clients understand it. If clients do not understand the disregard, it will increase the benefits to people who would have worked anyway, leading to higher costs. But it will not encourage other clients to increase their work hours, which would have reduced welfare costs. States have varied in the effectiveness with which they communicate changes in their disregard programs.
Other Approaches. States can use other approaches that are not linked to the welfare system to supplement earnings. For example, they can create earnings supplements. They can also use the tax system by creating state earned income tax credits to reduce taxes on earned income, thus helping all low-wage workers.
Research Findings
Studies have concluded that the addition of the 30-and-one-third disregard in 1967—and its virtual elimination in 1981—had a negligible impact on work effort in the low income population. This is because small increases in employment among AFDC recipients were cancelled out by reductions in work effort by people who would have worked full-time but chose to work part-time in order to receive AFDC. Similar results were obtained by researchers studying demonstrations of the negative income tax concept (see Moffitt articles in bibliography).
Evaluations of a new generation of disregard and related programs, mostly begun under waivers of the AFDC rules, have yielded more encouraging results, showing increased work effort among recipients subject to a higher disregard compared to those on AFDC. Evaluations of these programs suggest that more generous work incentives produce greater impacts on employment. These evaluations do not generally show reduced numbers of people receiving benefits, which raises concerns about what will happen to these recipients when they reach their time limits. The programs also vary in their effect on government budgets. However, they do not show a clear relationship between generosity of the supplement and cost to the government, suggesting that more generous supplements do not always cost more. These studies also suggest that the degree to which a disregard is explained and publicized to clients has a large impact on its effectiveness.
Most of these demonstrations have tested several policy changes at once, making it difficult or impossible to identify the effects of the increased disregards. Also, none of these evaluations assess the effects of the disregards on people not currently on assistance or applying for it, leaving unanswered the question of whether some of those people reduce their work effort to qualify for benefits. Some of these evaluations of welfare reforms begun under waivers are discussed below.
Florida’s Family Transition Program (FTP). As part of a welfare reform package including time limits, increased child care subsidies and enhanced services, the first $200 plus half of remaining earnings are disregarded in determining benefits. An early evaluation by the Manpower Demonstration Research Corporation (MDRC) found that FTP increased employment and earnings among participants, with impacts growing larger over time. FTP had virtually no effect on AFDC receipt, since its main impact was to move non-working AFDC recipients into the workforce but not off welfare.
Minnesota’s Family Investment Program (MFIP). MFIP is a broad welfare reform package that includes a 38% disregard of gross earnings as well as a 20% increase in the base grant for families that work. In an analysis of outcomes 18 months after program implementation (soon to be released), MDRC found that MFIP substantially increased employment and earnings among welfare recipients. However, since it allowed more people with earnings to receive benefits, it increased welfare spending and the number of people receiving welfare.
To Strengthen Michigan’s Families (TSMF). Michigan’s welfare reform, among other changes, allows working AFDC adults to keep the first $200 per month of earnings plus 20% of the remainder. Three years after implementation, Abt Associates found that TSMF modestly increased employment and earnings and reduced welfare participation and payments for families that were on welfare when the program started. Results were mixed for families entering the program after its inception, perhaps due to implementation difficulties.
California’s ‘Work Pays’ Program. California’s Work Pays Demonstration Project tested the impact of removing the time limits on the $30-and-one-third disregard. The evaluators concluded that single-parent families receiving the extended disregards were no more likely to find jobs than those under the traditional disregards, although two-parent families subject to the longer disregards did work more. However, they urged caution in interpreting the results because the changes were not implemented until nine months after data collection began, and some counties were slow in implementing the program and informing clients of the changes.
Earnings Supplements Not Linked to Welfare. Both New York State and Canada have tested disregards that are not attached to the welfare system and are also more generous than the welfare disregards studied. New York State’s Child Assistance Program, an alternative to the state’s AFDC program, combined greatly enhanced earned income disregards (90% of the first several hundred dollars earned and 33% thereafter) with a lower base benefit, along with the requirement that participants have at least one child support order. Abt Associates, in a three-county evaluation, found that the group allowed to participate in the program earned 20% more than the control group, resulting in a small reduction in government spending on benefits. There were dramatic differences between the counties studied, with a county that marketed the program intensely showing much larger impacts than a county that was less enthusiastic. Canada’s Self-Sufficiency Project provides monthly earnings supplements for up to three years to single parents who leave welfare for full-time work. This supplement effectively doubles the earnings of most low-wage workers. An early evaluation found large increases in full-time employment, hours worked and earnings. However, costs were higher than for welfare, apparently because SSP paid benefits to people who would have gone to work in the absence of the program.
Innovative Practices
States have adopted a wide variety of earned income disregards under TANF, many continuing policies begun under waivers from the AFDC rules. A number of examples are provided below, including states disregarding a flat percentage of earnings, states disregarding a flat amount plus a flat percentage of earnings, those disregarding a declining percentage of earnings, and some with more complex formulas.
Some examples of each of these disregard types are given below. Most of the disregards mentioned are used for determining continuing eligibility for recipients as well as benefit levels for applicants and recipients. Most are not used in the initial determination of eligibility, when most states disregard only $90 as under AFDC. However, some states have enhanced disregards for determining applicants’ eligibility. In such cases, this is mentioned; otherwise, it should be assumed that the disregards apply to current recipients only. Because of the close relationship between disregards and time limits, as discussed on page 2, information on both is included.
States Disregarding a Flat Percentage of Earnings
Connecticut disregards all of the earnings of TANF recipients, allowing them to receive the entire benefit until their earnings alone reach the poverty level. When earnings reach the poverty level, eligibility ends completely. As a result of this generous disregard, more than 40% of Connecticut AFDC families were working in November 1996, compared to fewer than 10% of AFDC families nationwide in 1995. Connecticut has a strict time limit of 21 months in a lifetime. Contact: Nancy Wiggett, Manager, Family Support Team, Connecticut Department of Social Services, (860) 424-5329.
Illinois is continuing its Work Pays policy, begun under a waiver, of disregarding two-thirds of the earnings of TANF recipients. Families can receive assistance until total income reaches the federal poverty level. The portion of the caseload that is working has nearly quadrupled under Work Pays. Illinois does not count months in which a family has earnings toward the time limits. This allows families to stay on assistance beyond five years. The state plans to use its own funds to pay for continued assistance to these families. This plan must be approved by the Illinois Legislature. Contact: Peggie Powers, Chief, Bureau of Planning, Illinois Department of Public Aid, (217) 785-0754.
Oregon, starting July 1, will disregard 50% of earnings in determining TANF benefits. Any month a parent earns wages equal to full-time work at the minimum wage is treated as two-fifths of a month in calculating time on assistance. Families are limited to 24 months of aid in a 7-year period. However, time limits are not applied to recipients who are cooperating with their approved plans. These plans generally encourage achievement of self-sufficiency through full-time work at adequate pay. Contact: Eliza Devlin, Program Analyst, Adult and Family Services, (503) 945-6092.
New Jersey disregards 50% of earnings for both applicants and recipients, except that a recipient who goes to work gets a 100% earnings disregard for the first month only. There is a 60-month time limit on benefit receipt, but full-time workers who are eligible for disregards can be given up to 12 months in extensions, in increments of 6 months. Contact: Terry Castro, Chief, Office of Policy and Standards, Division of Family Development, (609) 588-2282.
New Hampshire disregards 50% of recipients’ earned income in eligibility and benefit determination and 20% in determining initial eligibility for applicants. There is a 60-month time limit on receipt of benefits. Contact: Judy Lowell, TANF Specialist, NH Department of Health and Human Services, (603) 271-4860.
States Disregarding a Flat Amount Plus a Flat Percentage
Vermont, continuing its Welfare Restructuring Project begun under waivers, disregards the first $150 plus 25% of the balance of a recipient’s earnings. There is no time limit for parents who work enough hours, usually 20 for single parents with children under 13 and 40 hours for those with older children or those in two-parent families. The state plans to continue this exception for working parents until its waiver expires in 2001. Contact: Jackie Levine, Staff Assistant to the Commissioner, VT Department of Social Welfare, (802) 241-2853.
Utah disregards the first $100 plus 50% of earned income in determining benefits and continuing eligibility. For initial eligibility determination, $100 of earnings is disregarded. There is a 36-month lifetime limit on benefits, but the state can provide up to 60 months of benefits to families who have worked for a specified time period. Contact: John Davenport, Family Employment Program Specialist, Utah Department of Workforce Services, (801) 526-4375.
Massachusetts disregards $30 plus half the remainder of earned income for recipients who are "not exempt," which means those who are considered able to work. Exempt recipients, who include those with very young children, get a smaller disregard of 30-and-a-third but have a higher payment standard. Nonexempt recipients are limited to 24 months of benefits within a 60 month time period. However, these time limits can be extended on a case-by-case basis for people with hardships, which might include having low earnings and large families. Contact: Margaret Mulligan-O’Brien, Director of Policy and Program Management, MA Department of Transitional Assistance, (617) 348-8470.
Michigan disregards the first $200 per month of gross earnings plus 20% of the remainder. Benefits are not time-limited for clients who comply with the contracts worked out with their caseworkers. Michigan will use state funds to continue benefits to such families who have reached the federal five-year limit. Contact: Kathy Tobin, Policy Advisor/Federal Liaison, Michigan Family Independence Agency, (517) 335-4727.
Florida disregards the first $200 of earnings plus half of the remainder for TANF recipients. Most recipients are limited to 24 months of benefits in a 60-month period, with a lifetime total of 48 months. Contact: Pat Hall, Program Administration, WAGES Integration Unit, Florida Department of Children and Families, (904) 921-5574.
States with Disregards That Decrease Over Time
Iowa, continuing its policy begun under waivers, disregards all earnings in the first four months of new employment for recipients with low earnings in the past 12 months. After this period, 20% of earned income is disregarded as a work expense and 50% of the remaining earned income is disregarded. A three-person family can make almost $17,000 and still be eligible for some cash aid. Each family has an individualized time limit. As in Oregon, recipients who are complying with their approved plans will not lose their benefits. Recipients who are working but still receiving benefits as their time limit approaches are generally required to take further steps toward self-sufficiency, like finding a better job or obtaining more education or training. Iowa has not decided whether to modify these policies in light of the TANF time limits. An evaluation of the Iowa program by Mathematica Policy Research Inc. will be released shortly. Contact: Ann Wiebers, State Welfare Reform Coordinator, Iowa Dept of Human Services, (515) 281-7714 or Tom Fraker, Mathematica Policy Research Inc., (202) 484-9220.
Nevada disregards all earned income for three months, 50% of gross earnings for the next nine months, and $90 or 20% of gross earnings (whichever is greater) thereafter. Families are limited to 60 months of benefits in total. Contact: Leslie Caldwell, Program Specialist, Nevada Department of Human Resources, (702) 687-4976.
Indiana continues to use AFDC policy in determining eligibility and cash benefits, disregarding $30 for 12 months and one-third of earnings for four months. However, starting in June, TANF recipients whose earnings increase enough to eliminate their cash benefits will remain eligible for associated benefits like child care, Medicaid and supportive services as long as their countable income remains below the federal poverty level. This creates a group of "zero-grant" recipients who are nonetheless receiving some non-cash assistance. There is a two-year lifetime limit on cash benefits. An individual can earn credit for one month of assistance for every six consecutive months employed, but cannot retain credit for more than 24 months at any time. Contact: Charlene Burkett-Sims, Manager, Coordination and Innovation Section, Division of Families and Children, (317) 232-4903.
States with More Complex Formulas
In determining eligibility for applicants and continuing eligibility for recipients, Virginia disregards all earnings, as long as the family earns less than the federal poverty level, which is almost $13,000 for a family of three. In determining the amount of the grant, the state again disregards all earned income, allowing TANF recipients to receive the maximum benefit, until a family’s net earnings and benefits combined exceed the federal poverty level for its size. In calculating net earnings, the state uses the old AFDC disregards of $30 for one year and one-third of earnings for four months. When net earnings plus benefits exceed the poverty level, benefits are reduced to keep the total at the poverty level. Thus, benefits do not cease until net earnings reach the poverty level. This generous policy, among other reforms, contributed to an employment rate of 50% for participants in VIEW, Virginia’s welfare reform program. VIEW participants are limited to 24 months of benefits in every 60-month period. Contact: Marcia Sharp, Acting TANF Program Manager, VA Department of Social Services, (804) 692-1730.
Under Minnesota’s state plan, which slightly modifies its welfare reform waiver, an employed recipient will receive the lower of: (1) the maximum grant increased by 10%, minus 64% of earned income, or (2) the maximum grant. Only 18% of earned income is disregarded for applicants. There is a five-year time limit on benefits. However, because Minnesota has combined AFDC and Food Stamps, the state exempts from time limits those families receiving only the "Food Stamp part," approximately one-third of the maximum grant. Therefore, some working recipients will continue receiving benefits beyond the time limit. Contact: Chuck Johnson, Minnesota Family Investment Program Project Director, MN Department of Human Services, (612) 297-4727 or Virginia Knox, MDRC, (212) 532-3200.
Earnings Supplements Not Linked to Welfare
The New Hope Project, currently being piloted in Milwaukee, offers an earnings supplement check, along with health insurance and child care subsidies, to people working at least 30 hours per week but having income below the poverty level. Contact: Julie Kerksick, Executive Director, (414) 342-3338.
The Self-Sufficiency Project, being tested in the provinces of British Columbia and New Brunswick, provides income supplements for welfare recipients who leave the rolls and take a job for at least 30 hours per week. Contact: Gordon Berlin, MDRC, (212) 532-3200.
The federal Earned Income Tax Credit and the state-level earned income tax credits implemented by seven states reduce the taxes paid by working poor families and thus increase the net income for assistance recipients who take low-wage employment.
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