Negotiating Compromises between income provision (adequacy), work incentives, and cost minimization Today’s readings: DeParle, Ch 16: Boyfriends: Milwaukee, Spring 1999

Next time: Wednesday, April 4, 2007 Readings Greenstein, The Earned Income Tax Credit: Boosting Employment, Aiding the Working Poor, DeParle, Ch. 17: Money: Milwaukee, Summer 1999

Today’s Topics How TANF negotiated the compromises between income provision (adequacy), work incentives, and cost minimization

Why is welfare so hard to reform? We can gain insight into the difficulty of reforming welfare by considering the implications of the break-even earnings formula: E B =G/t + D

Why is welfare so hard to reform?, cont. Traditionally, policy makers heed three goals: –Adequacy or income provision –Cost minimization –Encouraging independence through work

Why is welfare so hard to reform?, cont. Policy makers have three parameters they can alter to achieve these goals: –G, maximum guarantee –t, marginal tax rate –D, the earnings disregard Given the relationship of G, t, and D, at most two of the three goals can be achieved at any one time.

GtD Adequacy  Cost Minimization  Work incentives  E B = G/t + D

Why is welfare so hard to reform?, cont. Welfare is so difficult to reform, that is it is difficult to find a long-lasting policy equilibrium, because our political parties differ in the emphasis they give the three goals. Traditionally, –Republicans pursed cost minimization and promoting work above adequacy (which are at odds), while Democrats championed adequacy.

Why is welfare so hard to reform?, cont. Does TANF resolve the tradeoffs between the goals of: –Cost minimization –Income provision –Work incentives? Recall that every State can devise its own program. The parameters, G, t, and D vary across states. For details of the States’ plans see the Office of Family Assistance:

TANF Cost Minimization Block Grants –States receive block grants for cash welfare, child care and job training. The federal guarantee of cash assistance to low-income mothers and children is ended. Basic Grants –States will receive a family assistance grant based on the amount of federal money spent on AFDC, JOBS, Emergency Assistance, and AFDC Child Care programs in FY 1994.

TANF Income Provision Maximum benefits –The value of G ranges from $164 in Alabama to $633 per month in Massachusetts. Time Limits –The federal guarantee of cash assistance to low- income mothers and children is ended –Recipients are ineligible to receive assistance (not limited to cash) for more than sixty months (five years). –States can exempt up to 20% of their families from the time limit if the family includes an individual who has been battered or subjected to extreme cruelty.

TANF Income Provision, cont. Family Cap –States have the option to deny cash assistance to children born to families already receiving aid. Sanctions –If an individual in a family receiving assistance refuses to engage in required work, a State has the option to either reduce or terminate the amount of assistance payable to the family, subject to good cause.

TANF Income Provision, cont. “Generally, States that pay high benefits, take as their goal raising work levels, while those that pay low benefits usually prefer to reduce dependency.” –Lawrence M. Mead, Government Matters, p. 129

TANF Work Incentives: Carrots and Sticks Work Requirements –States must require a parent to work after two years of assistance. It is up to the States to determine what constitutes work (a job, job search, education, or training) and how may hours per week must be spent on the job. If an adult refuses to engage in work, the State is required to reduce the amount of aid or terminate aid, unless the parent cannot find childcare. –A State risks a fiscal penalty if it fails to meet certain participation rates. In 1997, 25% of all families must have a parent who works at least 20 hours each week. By 1999, 50 percent of parents must work at least 30 hours. Sanctions

TANF Work incentives, cont. Once an individual is on the rolls, many states manipulate G, t and D to “make work pay” and to assist the transition from welfare to work. –Marginal tax rates range from 0% to 90%. They are often time limited. –Most States have a disregard (D). The range is from $90 to $250 dollars a month. –Example: Texas disregards $120 and 33.3% of the remainder for 4 months. (t =66.7%)

Conclusions By dramatically reducing case loads through diversion, sanctions, and job placement (and hence placing low priority on poverty reduction), TANF achieves cost minimization while maintaining work incentives and, in some States, adequacy for remaining families.