1. ALABAMA Economic Report on Alternative Child Support Cost Schedules and Related Issues R. Mark Rogers Economic Consulting Copyright 2006 March 31, 2006 Judicial Building Montgomery, Alabama

2. 2 R. Mark Rogers Economic Consulting  Alabama’s current BCSO schedule under Rule 32 and the 2004 Policy Studies, Inc., proposed BCSO schedule are based on intact family data.  Use of intact family data overstates available income and, in turn, child costs. Intact family data do not reflect the parents’ actual ability to pay.  There are two economic solutions to a guideline presumption using intact family child costs:  Make adjustments to the intact family data to reflect the additional adult overhead from two single-parent households compared to one intact household, or  Use single-parent child costs based on an average of the two parents’ incomes. Basic Child Support Obligation Schedules and Intact Family Data

3. 3 R. Mark Rogers Economic Consulting  A legal presumption should be based on facts that are similar to those in situations to which the presumption is applied.  Child support guidelines are applied to non-intact families.  Non-intact families do not have the ability to pay that is assumed with intact family data—cost of extra household (rent/mortgage and utilities) reduces available income.  It is inappropriate to apply a presumption to a situation in which the underlying facts no longer exist. See Leary v. United States, 395 U.S. 6 at 32-37 (1969) and especially footnote 68. Why Intact Family Data Is an Important Issue

4. 4 R. Mark Rogers Economic Consulting Example:  Assume mother and father earn $4,000 each in monthly gross income.  Child has spending based on $8,000 in monthly income.  Each parent spends on himself or herself based on $4,000 in monthly income. Use of Intact Family Data Gives Child the Right to Higher Standard of Living than Parents

5. 5 R. Mark Rogers Economic Consulting  Kansas has a second household adjustment in its Income Shares BCSO. Virginia has conducted research on this issue.  Second household adjustment is just for the adult’s added housing costs.  Non-custodial parenting time costs are an issue that is separate from the cost of an additional housing unit. The second household costs exist even if the non-custodial parent incurs no child costs.  Basic idea is to deduct the cost of the second household from available income. Adjusting Income Shares BCSO for Second Household

6. 6 R. Mark Rogers Economic Consulting 1)Determine the traditional adjusted gross income for both parents; 2)Determine each parent’s share of the traditional combined adjusted gross income; 3)Determine appropriate cost of maintaining a second household (mortgage or rent and utilities but not the cost of parenting time—the appropriate cost should vary by income); 4)Subtract the cost of maintaining the second household from combined adjusted income; and 5)Look up the Basic Child Support Obligation reflecting combined adjusted gross income less the cost of maintaining the second household. Steps in the Second Household Adjustment

7. 7 R. Mark Rogers Economic Consulting Data Source for One-Adult Monthly Housing Costs CountyFamily of 2 or less Family of 3 Family of 4 or more Autauga County 9121,0731,234 Baldwin County 9661,1371,307 Barbour County 7789161,053 Bibb County 7658991,034 Blount County 8409881,136 Bullock County 7508821,014 Butler County 709834959 Source: U.S. Department of the Treasury, Internal Revenue Service, Collection Financial Standards, Alabama - Housing and Utilities Allowable Living Expenses, effective 1/1/2005.

8. 8 R. Mark Rogers Economic Consulting  Based on IRS Allowable Living Expenses for Housing & Utilities.  One-adult housing costs are calculated by subtracting one child costs from the “Family of 2 or less” costs.  One-child housing costs are defined as “Family of 3” costs less “Family of 2 or less” costs.  Income data from U.S. Census by county.  One-adult housing costs estimated statistically at $50 increments income.  Income taxes paid on housing costs are added since BCSO table is based on pre-tax income and housing is paid out of net income. Housing Cost Estimates for Alabama

9. 9 R. Mark Rogers Economic Consulting  One-child case with non-custodial parent’s monthly gross income at $5,000 and custodial parent’s at $3,000. Combined income is $8,000.  Cost of second house at average income of $4,000 is $761 without taxes and is $1,020 with income taxes.  Subtract $1,020 from $8,000 combined income—result is $6,980 in available income.  Look up one-child costs for $6,980—which is $836.  Child costs for BCSO with second household adjustment is $836 for $8,000 in combined income instead of the standard $921 (2004 PSI proposed BCSO). Example of Calculating BCSO with Second Household Adjustment

10. 10 R. Mark Rogers Economic Consulting  Cost Shares is based on data on direct spending on children instead of indirect income equivalence used by Income Shares.  Cost Shares is the approach used by nearly all states for “add-ons”—such as day care and medical expenses.  Full Cost Shares has been considered in legislation in Minnesota and in Georgia but not adopted.  Cost Shares methodology has been favorably received by child support agency in Montana and by guideline review panel in New Hampshire.  Full Cost Shares methodology includes sharing child-related tax benefits and includes a parenting time adjustment. This report initially focuses only on the BCSO schedule portion of Cost Shares. Cost Shares as Alternative BCSO

11. 11 R. Mark Rogers Economic Consulting  Two key data sources: U.S. Dept. of Agriculture’s Expenditures on Children by Families published annually by the Family Economics Research Group (FERG), and U.S. Dept. of the Interior’s Regional Quarters Rental Survey Covering Government-Furnished Quarters.  The FERG (USDA) report has child costs by categories-- housing, food, transportation, clothing, health, child care & education, and “other.”  FERG estimates are on a marginal cost basis, except for the housing, transportation, and other miscellaneous cost estimates, which are per capita (household costs are allocated equally to all household members, including children). Cost Shares as Alternative BCSO Continued

12. 12 R. Mark Rogers Economic Consulting  Per capita components of USDA figures overstate child costs.  Cost Shares replaces or adjusts the per capita components to marginal cost basis.  Housing costs are taken from U.S. Dept. of the Interior for cost of additional housing for children. For three children, the added cost is two bedrooms and an additional bath room. USDA proportions are used to allocated housing costs for one, two, and three children and for income levels. Utilities costs added.  Interior Department data for housing are for owner-occupied types of housing.  Two-parent USDA costs for transportation, and “other” are used as estimates for marginal costs for single-parent households. Cost Shares as Alternative BCSO Continued

13. 13 R. Mark Rogers Economic Consulting  Day care and medical expenses are deducted from standard cost figures except for retained $250 per child per year in out-of-pocket medical expenses.  Day care and private school tuition are excluded and treated as add-ons. Miscellaneous school expenses are included in BCSO.  FERG data are for one, two, and three children. The BCSO schedules were expanded for up to six children with equivalence scales from National Research Council.  Cost Shares BCSO for Alabama has self-support adjustments in the BCSO in part. Cost Shares, Additional Detail

14. 14 R. Mark Rogers Economic Consulting  The self-support level is based on three economic calculations: 1)The obligor’s available income above the self-support reserve of $798 per month (2005 US HHS poverty threshold). 2)The portion of available income, above the reserve, that is to be allocated for child support. The obligor is allowed to retain a portion of income above self-support for work incentive. The shares going to child support for respective children are: one, 90%; two, 91%; three, 92%; four, 93%; five, 94%; and six, 95%. 3)The income level at which the self-support award equals the standard child cost figure as based upon the economic data. At this point, the self-support section stops. Cost Shares, Self-Support Calculation for BCSO

15. 15 R. Mark Rogers Economic Consulting  Two children, non-custodial parent has monthly gross income of $1,400: Cost Shares, Self-Support Example Gross income $1,400 Net income $1,172 Poverty threshold $798 Net income above poverty threshold $374 Children’s share (91%) $340  The two-children cost figure would be $376 without this adjustment.

16. 16 R. Mark Rogers Economic Consulting  Use of gross income. Cost schedule is expressed in gross income but takes into account income taxes paid.  Child-related tax benefits. Are not taken into account in the BCSO schedule as cost offsets. Must be done separately.  Income assumed to be taxable. Parents incomes are assumed to be taxable.  BCSO schedule does not include expenditures on child care, extraordinary medical, children’s share of medical insurance premiums, and private tuition for children’s education.  BCSO includes ordinary medical care--$250 per child per year.  Schedule based on average expenditures on children, ages 0 through 17.  Non-custodial parenting time not taken into account in BCSO.  Self-support reserve built in and based on poverty threshold of $798 per month. Cost Shares Key Assumptions or Underlying Facts

17. 17 R. Mark Rogers Economic Consulting Alabama One-Child Costs Alternative Methodologies

18. 18 R. Mark Rogers Economic Consulting Alabama Two-Children Costs Alternative Methodologies

19. 19 R. Mark Rogers Economic Consulting Alabama Three-Children Costs Alternative Methodologies

20. 20 R. Mark Rogers Economic Consulting Alabama Four-Children Costs Alternative Methodologies

21. 21 R. Mark Rogers Economic Consulting Alabama Five-Children Costs Alternative Methodologies

22. 22 R. Mark Rogers Economic Consulting Alabama Six-Children Costs Alternative Methodologies

23. 23 Comparison of Key Characteristics of Alternative BCSO Schedules Rule 32, CurrentPSI 2004 Proposal PSI 2004 Adjusted for Second Household Cost Shares Underlying study Espenshade, 1984 Betson, 2001Betson, 2001 and Rogers 2006 USDA 2004 and Rogers 2006 Key data sources 1972-73 CEX1996-99 CEX1996-99 CEX, 2005 IRS Collection Financial Standards 1990-92 CEX updated with 2004 CPI, 2005 Dept. of the Interior Quarters Survey Estimation technique Engel income equivalence based on food shares of household Rothbarth income equivalence based on spending on adult clothing Modified USDA for reported marginal child costs R. Mark Rogers Economic Consulting

24. 24 Comparison of Key Characteristics of Alternative BCSO Schedules, Cont. Rule 32, CurrentPSI 2004 Proposal PSI 2004 Adjusted for Second Household Cost Shares Intact family or single-parent data Intact Intact adjusted for second household expenses Two single-parent households Parenting time adjustments Not built into schedule Child-related tax benefits Vast majority not built into schedule Not built into schedule Child costs marginal or average cost basis Marginal Day careExcluded—treated as an add-on Medical expenses “$200 per family of four per year” Includes $250 per year per child R. Mark Rogers Economic Consulting

25. 25 Comparison of Key Characteristics of Alternative BCSO Schedules, Cont. R. Mark Rogers Economic Consulting Rule 32, CurrentPSI 2004 Proposal PSI 2004 Adjusted for Second Household Cost Shares Self-supportBuilt into schedule but no alternative calculation in Rule 32 worksheet; out- of-date 1987 poverty threshold basis Built into schedule but no alternative calculation in Rule 32 worksheet; based on 2003 poverty threshold Built into schedule but no alternative calculation in Rule 32 worksheet; based on 2005 poverty threshold Lower limit of schedule $500 in monthly combined gross income $900 in monthly combined gross income $950 in monthly combined gross income Upper limit of schedule, mo. $10,000 combined$20,000 combined Realigned for distribution of AL income to US Realigned Not realigned

26. 26 R. Mark Rogers Economic Consulting Awards Under Alternative BCSO Schedules One Child, CP Gross Income Is 50% of NCP Gross Income

27. 27 R. Mark Rogers Economic Consulting Awards Under Alternative BCSO Schedules One Child, CP Gross Income Equals NCP Gross Income

28. 28 R. Mark Rogers Economic Consulting Awards Under Alternative BCSO Schedules Two Children, CP Gross Income Is 50% of NCP Gross Income

29. 29 R. Mark Rogers Economic Consulting Awards Under Alternative BCSO Schedules Two Children, CP Gross Income Equals NCP Gross Income

30. 30 R. Mark Rogers Economic Consulting Awards Under Alternative BCSO Schedules Three Children, CP Gross Income Is 50% of NCP Gross Income

31. 31 R. Mark Rogers Economic Consulting Awards Under Alternative BCSO Schedules Three Children, CP Gross Income Equals NCP Gross Income

32. 32 One adult, under age 65$9,827 One adult, one child$13,020 One adult, two children$15,219 One adult, three children$19,223 Standard of Living Comparisons  How do the alternative BCSO schedules impact the standard of living of both households?  A traditional standard-of-living comparison uses the federal poverty threshold as a benchmark. Poverty thresholds vary according to household size. R. Mark Rogers Economic Consulting Poverty Thresholds, Annual, U.S. Census, 2004

33. 33 Custodial Parent (CP) Non- custodial Parent (NCP) One child case$12,222$10,625 Two children case$13,871$11,175 Three children case$16,874$12,176 Standard of Living Comparisons, Cont.  Poverty thresholds can be adjusted for 75/25% parenting time. R. Mark Rogers Economic Consulting Parenting Time Adjusted Poverty Thresholds, 2004, Annual

34. 34 R. Mark Rogers Economic Consulting  If parents’ incomes are equal, then after-tax, after-child support transfer, standards of living should be equal or approximately equal.  If one parent has a significantly higher income than the other, the child support award might narrow the gap somewhat (but not entirely)—regardless of whether it is the non-custodial or custodial parent with the higher income.  The child support award will not widen the standard of living gap when one parent has a higher income than the other. Expectations of Standard of Living Outcomes of Child Support Awards

35. 35 R. Mark Rogers Economic Consulting Example of Standard of Living Calculation Two Children Case, Equal Incomes Annual DataNCPCP Gross income$48,000 After-tax income$35,854$40,209 Presumptive child support (Rule 32)-$8,364+$8,364 After-tax, after-presumptive child support income (2005 tax code)$27,490$48,573 Adjusted poverty threshold$11,175$13,871 Income as multiple of threshold2.4603.502 Custodial parent’s higher (+) or lower (-) standard of living compared to NCP +42%  Despite equal incomes, the CP ends up with a 42 percent higher standard of living than the NCP. Due to no adjustments for parenting time nor sharing child-related tax benefits and cost schedule issue.

36. 36 Standard of Living Impact: Rule 32, Two Children CP’s % Higher/Lower SOL to NCP NCP Monthly Gross Income: 1,5002,0002,5003,0003,5004,0004,5005,0005,5006,000 CP Gross = 50 % Less NCP Gross 24211611851-4-8-11 CP Gross = 30 % Less NCP Gross 534437282217141196 CP Gross = NCP Gross 85715848454240363126 CP Gross = 30 % More NCP Gross 109897973706560544844 CP Gross = 100 % More NCP Gross 1541471371251161091041009896 R. Mark Rogers Economic Consulting

37. 37 Standard of Living Impact: PSI 2004, Two Children CP’s % Higher/Lower SOL to NCP NCP Monthly Gross Income: 1,5002,0002,5003,0003,5004,0004,5005,0005,5006,000 CP Gross = 50 % Less NCP Gross 383723127-7-10-13-16 CP Gross = 30 % Less NCP Gross 70 5738281797654 CP Gross = NCP Gross 105755841363534333028 CP Gross = 30 % More NCP Gross 124917364626058555149 CP Gross = 100 % More NCP Gross 155138127119114111109106104103 R. Mark Rogers Economic Consulting

38. 38 Standard of Living Impact: PSI 2004 with 2 nd Household Adjustment, Two Children CP’s % Higher/Lower SOL to NCP NCP Monthly Gross Income: 1,5002,0002,5003,0003,5004,0004,5005,0005,5006,000 CP Gross = 50 % Less NCP Gross 19201771-3-9-14-17-19 CP Gross = 30 % Less NCP Gross 494434201573110 CP Gross = NCP Gross 837048393330 282725 CP Gross = 30 % More NCP Gross 108837061575553514946 CP Gross = 100 % More NCP Gross 147135121113109107106104103101 R. Mark Rogers Economic Consulting

39. 39 Standard of Living Impact: Cost Shares, Two Children CP’s % Higher/Lower SOL to NCP NCP Monthly Gross Income: 1,5002,0002,5003,0003,5004,0004,5005,0005,5006,000 CP Gross = 50 % Less NCP Gross 29301860-6-11-16-19-22 CP Gross = 30 % Less NCP Gross 605134191141-3-4 CP Gross = NCP Gross 96704835312827242220 CP Gross = 30 % More NCP Gross 116826558545149464442 CP Gross = 100 % More NCP Gross 146129119109103101100 R. Mark Rogers Economic Consulting

40. 40 R. Mark Rogers Economic Consulting  All BCSO schedules boost the custodial household substantially when using the standard Rule 32 worksheet.  When incomes are equal, the custodial parent ends up with a significantly higher standard of living than the non-custodial parent. This occurs more so for two and three children cases than for one child cases.  For moderate income situations, when the custodial parent has less income than the non-custodial parent, the custodial parent often ends up with a higher standard of living than the NCP.  For moderate income situations, when the custodial parent has the higher income, the custodial parent often ends up with an even higher standard of living than starting out. Standard of Living Outcomes

41. 41 R. Mark Rogers Economic Consulting  The standard of living outcomes do not conform to standards of equity: When incomes are equal, the standard of living outcome should be nearly equal. When incomes are significantly different, the award may narrow the standard of living gap but not widen the gap.  The standard of living outcomes are due to: Upward biases in some of the BCSO; Lack of parenting time adjustments; and Lack of sharing child-related tax benefits.  The standard of living methodology is based in part on Engel equivalence and likely understates the custodial household standard of living. This methodology has biases that are not appropriate at higher incomes.  Alimony should be the method of addressing standard of living differences and should be used more frequently. Standard of Living Outcomes, Continued

42. 42 R. Mark Rogers Economic Consulting  Are child-related tax benefits already taken into account in the BCSO schedule?  From Rule 32: “Other assumptions incorporated in the Schedule of Basic Child Support Obligations include: Tax exemptions. The Schedule of Basic Child Support Obligations assumes that the custodial parent will take the federal and state income tax exemptions for the children in his or her custody;”  From the 2004 Policy Studies, Inc. report in Summary of Key Assumptions: In converting the schedule to a gross income base, we have assumed that the obligor claims one exemption (for filing, two for withholding) and the standard deduction...... [T]he most realistic presumption for development of the Schedule is that the custodial parent claims the exemption(s) for the child(ren) due child support. Income Shares and Child-Related Tax Benefits

43. 43 R. Mark Rogers Economic Consulting  These citations are frequently interpreted to mean that no further consideration is needed for both parents to be sharing child-related tax benefits.  However, what do the actual economic methodologies of developing the cost schedule by Policy Studies, Inc., indicate as to whether child-related tax benefits are fully taken into account in the cost schedule for sharing the tax-benefits as cost offsets between both parents?  One will see that the child-related tax benefit issues are condensed to:  The “grossing up” technique (of grossing child costs up in terms of gross income instead of net income) is confused with the issue of treating child-related tax benefits as a cost offset.  How much of the child-related tax benefits is not taken into account in the cost schedule and needs to be addressed separately in the work sheet or in some other manner? Income Shares and Child-Related Tax Benefits

44. 44 R. Mark Rogers Economic Consulting  The Income Shares BCSO is based on a layering of cost and income figures—all for intact families except for the very last step.  Estimates go from child costs as a percentage of total household spending to child costs as a percentage of household net income—all for intact families with key costs expressed in net income terms.  Child costs are dollar values corresponding to a net income dollar amount.  Then child costs are converted to shares of gross income by converting the net income figures to gross income figures by using the ratio of gross income to net income using income tax rates for a single tax payer.  At no point in this process are child-related tax benefits treated as a cost offset. Income Shares and Child-Related Tax Benefits

45. 45 R. Mark Rogers Economic Consulting  At no point in the estimation process are child-related tax benefits treated as cost offsets. Income Shares child costs converted from share of total household spending to share of gross income: Income Shares and Child-Related Tax Benefits

46. 46 R. Mark Rogers Economic Consulting  Child-related tax benefits as cost offsets cannot be built into the BCSO schedule because these benefits vary in size by income level. The BCSO schedule is based on combined income and one does not know how much of the combined income is for the custodial parent—all, none, or somewhere in between.  Some states correctly state in guidelines that Income Shares cost tables do not take into account child-related tax benefits. From Indiana’s guidelines: “Development of these Guidelines did not take into consideration the awarding of the income tax exemption.” Income Shares and Child-Related Tax Benefits

47. 47 R. Mark Rogers Economic Consulting  Some Income Shares states acknowledge that tax benefits are not taken into account in Income Shares BCSO schedules by ordering that child dependency exemptions be pro-rated between the parents: Arizona: “In any case in which the current child support obligation is at least $1,200 per year, there should be an allocation of the federal tax exemptions applicable to the minor children which as closely as possible approximates the percentages of support being provided by each of the parents.” Colorado: “Unless otherwise agreed upon by the parties, the court shall allocate the right to claim dependent children for income tax purposes between the parties. These rights shall be allocated between the parties in proportion to their contributions to the costs of raising the children.” [Note: Policy Studies, Inc., is in Denver and helped developed Colorado’s guidelines.] Income Shares and Child-Related Tax Benefits

48. 48 R. Mark Rogers Economic Consulting  Some Income Shares states acknowledge that tax benefits are not taken into account in Income Shares BCSO schedules by adjusting the award for the value of child-related tax benefits and sharing between the parents. Two different approaches: Kansas: Kansas uses a formula for the value of the child-related tax benefits. Formula is tied to the dollar amounts for standard deductions and dependency exemptions and the custodial parent’s marginal income tax rates. Idaho: Idaho creates a table of values for child-related tax benefits similar to a BCSO schedule. Income Shares and Child-Related Tax Benefits

49. 49 R. Mark Rogers Economic Consulting  Policy Studies, Inc.’s position is the BCSO schedule understates child costs because net income for a given level of gross income would be higher if the schedule were grossed up using married tax payer status.  However, the parties are not married after the divorce and it is not appropriate to use married tax status.  The real issue related to PSI’s position is that there is one parent with head of household status and one parent that is a single tax payer. The net income that is “left out” is the additional net income the custodial parent receives from child-related tax benefits.  How much of the extra net income would be spent on the child? This is how much of child-related tax benefits are taken into account with PSI’s argument that net income is understated in the BCSO schedule.  Extra net income not spent on the child is how much is not taken into account in the BCSO schedule. Income Shares and Child-Related Tax Benefits

50. 50 R. Mark Rogers Economic Consulting  What are child-related tax benefits?  The child-related tax benefits received by custodial parents can include:  Head of household tax payer status,  Child dependency exemptions,  Child tax credits,  Additional child tax credits,  Child care tax credits,  Higher earned income credits for low-income working custodial parents, and  Higher marginal tax rates starting at higher incomes than for single tax payers.  The value of child-related tax benefits is defined as the difference in after-tax income for a parent with the child-related tax benefits versus without the child-related tax benefits. Income Shares and Child-Related Tax Benefits

51. 51 R. Mark Rogers Economic Consulting Child-Related Tax Benefits, Full, 2005 Alabama and Federal Full child-related tax benefits are typically $250 to $400 in extra after-tax income each month.

52. 52 R. Mark Rogers Economic Consulting Child-Related Tax Benefits, 2005, Alabama & Federal Exemptions & Child Tax Credit Only Even for only exemptions and child tax credits, child-related tax benefits are typically $100 per child each month.

53. 53 R. Mark Rogers Economic Consulting Marginal Percentages of Net Income Spent on Children Marginal spending rates come from changes in BCSO costs to changes in net income. Values are smoothed.

54. 54 R. Mark Rogers Economic Consulting Custodial Parent's Child-Related Tax Benefits Not Taken Into Account in BCSO Schedule Tax benefits not taken into account are full child-related tax benefits times (1 minus marginal propensity to spend on children).

55. 55 R. Mark Rogers Economic Consulting  Are a non-custodial parent’s incurred child costs for “standard” parenting time already taken into account in the BCSO schedule? Rule 32 commentary gives the impression that “standard parenting time” costs for the non-custodial parent are taken into account in the presumptive child cost schedule. From Rule 32: Other assumptions incorporated in the Schedule of Basic Child Support Obligations include: (3) Visitation. The Schedule of Basic Child Support Obligations is premised on the assumption that the noncustodial parent will exercise customary visitation rights, including summer visitation. Any abatement of child support because of extraordinary visitation should be based on visitation in excess of customary visitation. Income Shares and Parenting Time

56. 56 R. Mark Rogers Economic Consulting The developer of Income Shares, Robert G. Williams, specifically states in the original manual issued by the federal government for developing child support guidelines that the Income Shares costs tables are based on intact family data. That is, all of the child costs in the cost tables are assumed to be in one household—there are no built-in parenting time adjustments. “The Income Shares model calculates child support as the share of each parent’s income estimated to have been allocated to the child if the parents and child were living in an intact household. A basic child support obligation is computed based on the combined income of the parents (replicating total income in an intact household).” Robert G. Williams, Development of Guidelines for Child Support Orders, U.S. Department of Health and Human Services, Office of Child Support Enforcement, September 1987, p. II-68. Income Shares and Parenting Time

57. 57 R. Mark Rogers Economic Consulting  Policy Studies, Inc. (PSI) continues to document that visitation costs of a non-custodial parent are not taken into account in Income Shares cost schedules. See, for example, a 2001 report for Oregon: “Visitation costs are not factored into the schedule. Since the Schedule is based on expenditures for children in intact households, there is no consideration given for visitation costs.”  Finally, Policy Studies, Inc., states in its 2004 report to Alabama Administrative Office of the Courts that the cost schedule is based on intact family data—the children live in only one household and the expenses reflect those of one household. “The child-rearing expenditures discussed in this report are estimates from samples of two-parent households.” Income Shares and Parenting Time

58. 58 R. Mark Rogers Economic Consulting An Example: A true parenting time adjustment depends not just on parenting time shares but also on each parent’s income. If the cost schedule is based on combined income, you do not know each parent’s share from the table. Assume: 1)Combined income of $10,000/month; 2)Child cost of $1,000 per month; and 3)Non-custodial parenting time of 25 percent. Use straight-line allocation of parenting time. Compare outcomes with different shares of combined income to each parent. Parenting Time Adjustment Cannot Be Built Into BCSO Schedule

59. 59 R. Mark Rogers Economic Consulting Scenario 1: CP has $7,000 income, NCP has $3,000. Child costs of $1,000 are pro-rated by 75/25% parenting time and then each parent shares in the other parent’s child costs. Parenting Time Adjustment Cannot Be Built Into BCSO Schedule CPNCP Gross income/month$7,000$3,000 Child costs by parenting time$750$250 Share of combined income.70.30 Share of other’s costs (other’s costs times own share of combined income) $175$225 Net cash paid for support $50

60. 60 R. Mark Rogers Economic Consulting Scenario 2: CP has $3,000 income, NCP has $7,000. Same parenting time assumptions. CPNCP Gross income/month$3,000$7,000 Child costs by parenting time$750$250 Share of combined income.30.70 Share of other’s costs (other’s costs times own share of combined income) $75$525 Net cash paid for support $450 Parenting Time Adjustment Cannot Be Built Into BCSO Schedule Scenario 1 and Scenario 2 have very different parenting time adjusted awards even though they have the same combined income.

61. 61 R. Mark Rogers Economic Consulting  Alabama’s presumptive child Cost schedules do not include any built in adjustments for “standard” parenting time  All Income Shares studies are found to be based on intact family data, the child lives in only one household, and there is no provision for the child’s expenses in any other household, and  It is not mathematically possible to correctly incorporate a built in adjustment in the presumptive child cost schedule that takes into account standard parenting time of the non- custodial parent (or any other parenting time share). Parenting Time Adjustment Cannot Be Built Into BCSO Schedule

62. 62 R. Mark Rogers Economic Consulting  To apply a standard of equal duty of support, a parenting time adjustment is necessary. The Arizona adjustment is recommended.  Key reasons for adopting the Arizona parenting time adjustment include: Alabama’s BCSO does not take into account any parenting time costs of the non-custodial parent. Nor do other BCSO schedules. Application of equal duty of support takes into account both parents’ child costs—not just the custodial parent’s costs. 35 states have guideline formulas for parenting time adjustments. Of the 34 Income Shares states, only five states do not have a parenting time adjustment formula. The Arizona approach has been in use for ten years and has not seen problems related to non-custodial parents “gaming” for additional parenting time. Recommendations for Parenting Time Adjustments

63. 63 R. Mark Rogers Economic Consulting  Alabama’s presumptive child Cost schedules are based on indirect child cost estimation techniques.  Indirect methodologies are used by Policy Studies, Inc., due to difficulties in separating who uses what portions of shared items such as housing and food.  Over the years, PSI changed methodologies for cost schedules.  Original study used was by Thomas Espenshade in 1984 based on method developed by Ernst Engel.  Later studies were by David Betson of Notre Dame, basing his research on a method developed by Erwin Rothbarth.  It is alleged that the Engel technique overestimates child costs and the Rothbarth underestimates child costs—both “bracketing” where “true” child costs lie. “Bracketing” Issue: Engel and Rothbarth Child Cost Methodologies

64. 64 R. Mark Rogers Economic Consulting  Both the Engel and Rothbarth methodologies are based on “income equivalence” measures.  Both compare some measure of adult or family well-being before and after having children or additional children.  When different size families (with and without children) are equally well off financially, it is because additional income has restored the level of well-being to the before children level. When different size families have compensating income to make them equally well off, child costs are the differences in household spending between the two families.  Engel compares changes in household spending on food shares.  Rothbarth compares changes in levels spent on purely adult goods—such as adult clothing. Engel and Rothbarth Are Income Equivalence Techniques

65. 65 R. Mark Rogers Economic Consulting  Engel believed that one could look at a household’s spending patterns on food items to determine how economically well off various households were to each other.  Because food is a necessity, the higher the percentage of a family’s spending is on food, the less economically well off that family is compared to a family that spends a smaller percentage of their total spending on food.  Child costs are defined as the difference in total spending for two families of different size (with number of children being the difference in size) when both families spend the same share of their budget on food. The Engel Methodology

66. 66 R. Mark Rogers Economic Consulting The Engel Methodology

67. 67 R. Mark Rogers Economic Consulting  The two curves represent the relationship between total expenditures and the share of total expenditures spent on food for a couple with one child (FS = 3) and a couple with no children (FS = 2).  Both curves show food shares declining as total expenditures increase (due to higher income) and reflect an increasing standard of living for the household.  If the household with a child has total expenditures X3 [point (1)], then Θ3 will be spent on food. A couple with X3 dollars of total expenditures without a child, however, will enjoy a higher standard of living [point (2)].  For this couple to enjoy the same level of living as the couple with the child, they would only require X2 dollars of total expenditures [point(3)]. The difference in levels of total expenditures, X3 – X2, represents the cost of the child, CCE. From David M. Betson, Alternative Estimates of the Cost of Children from the 1980-86 Consumer Expenditure Survey, Department of Economics, University of Notre Dame, Notre Dame, Indiana 46556, September 1990, p. 12. The Engel Methodology

68. 68 R. Mark Rogers Economic Consulting “The validity of the Engel estimator [of child costs] is critically dependent on the assumption that the percentage of the family’s expenditures on non-food items that should be attributed to the family’s children is the same as the percentage of the family’s food expenditures that is attributable to the family’s children.” “There is reason to believe that this assumption is invalid; children are probably relatively “food-intensive.” That is to say, the percentage of the family’s food that is consumed by children is probably greater than the percentage of non-food items consumed by children. If this is the case, then the Engel estimator overestimates [emphasis original] the true expenditures on children.” From Burt S. Barnow et al., Estimates of Expenditures on Children and Child Support Guidelines, Submitted to Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, Submitted by Lewin/ICF, Washington, D.C., October 1990, page 2-28. The Engel Methodology

69. 69 R. Mark Rogers Economic Consulting  After a number of years use with Espenshade-Engel based Income Shares cost schedules, a consensus developed that these cost schedules were too high—close to “per capita” estimates.  PSI turned to the Rothbarth methodology used by David Betson with the University of Notre Dame.  Rothbarth is based on a household’s economic well-being based on the level of spending on selected goods consumed only by the adults in the household. The higher a household’s spending level is on these adult goods, then the higher the household’s economic well-being.  For a given level of income, as children are added to the family, the amount of household spending on adult goods falls.  For households of two different sizes (with children being the difference in size), child costs are the difference in total spending when both households spend the same amount on those adult goods. The Rothbarth Methodology

70. 70 R. Mark Rogers Economic Consulting The Rothbarth Methodology

71. 71 R. Mark Rogers Economic Consulting  The two curves in the figure represent the relationship between total expenditures (X) and expenditures on adult goods for a household of a couple without children (FS = 2) and a couple with a child (FS = 3). The curves are upward sloping, indicating that the adults’ standard of living rises with total expenditures and higher adult goods spending.  “Now if the household with a child has total expenditures X3, it will spend A3 on adult goods [point (1)]. If the child was not present in the household, the adults would reach a higher standard of living (spend more on adult goods) [point (2)]. For.. [the] same standard of living in the absence of the child as with the child, Rothbarth assumes that the household should spend not more but the same amount, A3, on adult goods [point(3)]. The level of total expenditures for a household without children that is consistent with spending A3 dollars on adult goods is X2. The difference between these two level[s] of total expenditures (X3 – X2) is equal to the cost of the child (CCR).” From David M. Betson, Alternative Estimates of the Cost of Children from the 1980-86 Consumer Expenditure Survey, Department of Economics, University of Notre Dame, Notre Dame, Indiana 46556, September 1990, pp. 10-11. The Rothbarth Methodology

72. 72 R. Mark Rogers Economic Consulting  The alleged reason that the Rothbarth methodology understates child costs is that children affect adult use of shared household goods. Since adults have less use of shared goods, they change preferences to adult goods. “[A]dults in households with children may have a tendency to substitute away from those goods which involve a large degree of sharing and into those goods that need not be shared (i.e., adult goods). In sum, adults in households with children, particularly those with large numbers of children, have an economic incentive to spend a disproportionately smaller percentage of their total expenditures on goods that are consumed by both children and adults, and a larger share on adult goods. While this type of “selfishness” strikes many observers (especially parents) as unlikely, it is, nonetheless, a possibility that should ideally be considered.” From Burt S. Barnow et al., Estimates of Expenditures on Children and Child Support Guidelines, Submitted to Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, Submitted by Lewin/ICF, Washington, D.C., October 1990, pp. 2-25 through pp. 2-26. Theoretical Reasons for Rothbarth Underestimating

73. 73 R. Mark Rogers Economic Consulting  A required assumption in this claim is that adults behave in a “selfish” manner—it requires that adults not like sharing shared goods with children.  Importantly, Barnow, et al raise the issue that the Rothbarth methodology may actually overestimate child costs if adults do not behave selfishly related to sharing shared goods with children. From footnote 37: “There is, of course, the possibility that adults behave “selflessly,” and that the substitution mechanism works in the opposite manner of that which is outlined here. In this case, the validity of all the estimation procedures discussed here is called into question.”  Everyday context—do adults like spending time with children with shared items such as watching videos? If so, the floor argument is false. From Burt S. Barnow et al., Estimates of Expenditures on Children and Child Support Guidelines, Submitted to Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, Submitted by Lewin/ICF, Washington, D.C., October 1990, page 2-26. Theoretical Reasons for Rothbarth Underestimating

74. 74 R. Mark Rogers Economic Consulting  Another key assumption in the claim that the Rothbarth methodology underestimates child costs that is that parents do not get enjoyment from having children. “Finally, it is important to note that some researchers have argued that the standard approaches [such as Engel and Rothbarth] used to estimate expenditures on children are fundamentally flawed because the decision to have children usually is voluntary. If adults decide to have children and if they behave rationally, then the adults’ well- being should be at least as much as when they were childless. … All the methods for estimating expenditures on children [inclusive of Engel and Rothbarth] are based on the assumption that adding a child does not increase the well-being of the adults in the family.” From Burt S. Barnow et al., Estimates of Expenditures on Children and Child Support Guidelines, Submitted to Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, Submitted by Lewin/ICF, Washington, D.C., October 1990, page 2-32.  If parents do enjoy having children one cannot claim that the Rothbarth methodology underestimates child costs. Assumption of No Sense of Well-Being from Children

75. 75 R. Mark Rogers Economic Consulting  The Engel methodology is generally recognized as being excessive and above actual child costs. The economic rationale for this belief is realistic and credible—that children are more food intensive that adults.  To make the claim that the Rothbarth methodology understates child costs, two highly unlikely assumptions must be made: 1)Parents do not like sharing shared household goods with their children, and 2) Parents get no sense of well-being from their children.  If these assumptions do not hold true, the Rothbarth methodology likely overstates child costs. It is more likely that parents do like to share shared household goods with their children and also that parents do get a sense of well-being from their children. The Rothbarth methodology likely overstates child costs.  While it is reasonable to state that true child costs lie below Engel estimates, there is no sound economic basis for making the claim that true child costs must lie above Rothbarth estimates. Summary of Engel and Rothbarth “Bracketing” Issues

76. 76 R. Mark Rogers Economic Consulting  Self-support adjustment built into BCSO table assumes custodial parent has no income.  When CP has no income, self-support adjustment “works” and leaves low income obligor with modest income above poverty level.  When NCP has income in self-support “zone” of BCSO but CP has income, presumptive award can leave NCP with income below poverty level.  Self-support zone in BCSO schedule has child costs rising essentially as fast as combined income. When CP has income—but less than NCP’s, NCP’s obligation rises sharply due to child costs rising essentially equal with combined income and the NCP’s share being high.  When the CP has income, an additional self-support step is needed to make sure the low-income NCP is not pushed below the poverty level. For Low Income Self-Support, Additional Steps Are Needed

77. 77 R. Mark Rogers Economic Consulting  Example: Two-children case with the obligor earning $1,200 gross income monthly. CP has zero income. NCP net income is $1,020 per month. Presumptive award is $248 per month, leaving the obligor with $772 per month after taxes and after child support—which is above the poverty threshold of $748 per month (for 2003 as available to PSI). If the custodial parent has $500 in monthly gross income, the award is $350 per month, leaving the obligor with $670 per month which is below the poverty level. Award should be the lesser of the two calculations. Alabama does not have an obligor-only calculation for self-support purposes. For Low Income Self-Support, Additional Steps Are Needed

78. 78 R. Mark Rogers Economic Consulting  Some argue that there should not be a self-support calculation for the obligor since there are times that the low-income non-custodial parent can end up with a higher standard of living than the custodial parent household with the children.  The only time the self-support reserve calculation comes into play and the non-custodial household has a higher standard of living is when the custodial parent has nearly zero income. Essentially, the custodial parent is not even providing adequate support for his or herself.  Should the self-support calculation still be applied in these cases? For Low Income Self-Support, Additional Steps Are Needed

79. 79 R. Mark Rogers Economic Consulting  Arguments in favor of applying self-support in low income cases include the fact that custodial parents generally have means tested income that is not part of that parent’s gross income.  These types of income include WIC (Women, Infants, and Children program), TANF (Temporary Assistance to Needy Families), Food Stamps, and in some cases subsidized housing. These sources of income generally are not available for non-custodial parents—or at least only fractionally available.  it is unlikely that pushing an obligor below the poverty level actually increases the amount of cash child support actually paid. Creating such an obligation more likely results in the obligor not paying and accruing arrearages instead of generating more child support. For Low Income Self-Support, Additional Steps Are Needed

80. 80 R. Mark Rogers Economic Consulting  Federal child care tax credits are significant—can be up to 35 percent of gross child care costs.  Child care tax credits are cost offsets—not taking them into account means custodial parent is reimbursed twice for some costs.  Child care expenses can qualify for tax credits only for children ages 13 and under.  Only a custodial parent can claim work-related child care expenses for child care tax credits.  Qualifying expenses in calendar 2005 were up to a ceilinf of $3,000 annually for one child and up to $6,000 for two or more children.  Child care tax credit percentages apply to lower of ceiling and actual expenses. Day Care Expenses and Child Care Tax Credits

81. 81 R. Mark Rogers Economic Consulting Child Care Tax Credits If line 7 is: DecimalDecimal But not amount amount Over over is is $0—15,000.35$29,000—31,000.27 15,000—17,000.3431,000—33,000.26 17,000—19,000.3333,000—35,000.25 19,000—21,000.3235,000—37,000.24 21,000—23,000.3137,000—39,000.23 23,000—25,000.3039,000—41,000.22 25,000—27,000.2941,000—43,000.21 27,000—29,000.28 43,000—No limit.20 From IRS Form 2441, calendar 2005, Line 8: Enter on line 8 the decimal amount shown below that applies to the amount on line 7 [adjusted gross income].

82. 82 R. Mark Rogers Economic Consulting  Some states build in an adjustment to gross day care expenses to take into account child care tax credits as a cost offset.  North Carolina is a good example. Custodial parent can claim only 75 % of actual costs once a threshold income level is met. Threshold is needed to recognize that below that level, CP does not have enough taxable income (after deductions and exemptions) to use the child care tax credits.  From North Carolina’s child support guidelines: “Child Care Costs Reasonable child care costs that are, or will be, paid by a parent due to employment or job search are added to the basic child support obligation and prorated between the parents based on their respective incomes. [continues.] Day Care Expenses and Child Care Tax Credits

83. 83 R. Mark Rogers Economic Consulting [North Carolina guideline section continues.] When the gross monthly income of the parent paying child care costs falls below the amounts indicated below, 100% of child care costs are added. 1 child = $1,100 2 children = $1,500 3 children = $1,700 4 children = $1,900 5 children = $2,100 6 children = $2,300 At these income levels, the parent who pays child care costs does not benefit from the tax credit for child care. When the income of the parent who pays child care costs exceeds the amounts indicated above, only 75% of actual child care costs are added (because the parent is entitled to the income tax credit for child care expenses).” Day Care Expenses and Child Care Tax Credits

84. 84 R. Mark Rogers Economic Consulting Recommendations Revisions to the Alabama Child Support guidelines should:  Be viewed strictly as a legal presumption and not as a policy choice and should include no arbitrary components;  Apply a standard of equal duty of support;  Reflect up-to-date child costs; and  Reflect actual case circumstances that households are no longer intact and that the parents do not have the ability to pay as if they were living in one household. Based on these criteria, the following modifications are recommended:  Update the Basic Child Support Obligation schedule with either the Income Shares BCSO schedule adjusted for second household costs or the Cost Shares BCSO schedule; [Continues.]

85. 85 R. Mark Rogers Economic Consulting Recommendations, Continued  Adopt a self-support calculation that includes both the standard Income Shares calculation and the obligor-only calculation;  Presumptively share the child-related tax benefits either by pro- rating the child-dependency exemptions according to shares of combined adjusted gross income or by developing a schedule of the value of child-related tax benefits and treating them as a cost offset in the award calculation;  Adopt the Arizona parenting time adjustment;  Change the assumption for included medical expenses to $250 per year per child (from the current $200 per year per family) to reflect higher out-of-pocket medical expenses as incorporated in all three of the newer alternative BCSO schedules;  Add a formula to take into account child care (day care) tax credits when day care is an add-on.

86. 86 R. Mark Rogers Economic Consulting  Child support guidelines should be viewed strictly as a legal presumption and not a policy choice. Should be based on actual costs, apply equal duty of support, and include no arbitrary components.  States typically use child support guidelines to incorporate “alimony”— the part of an award that exceeds actual child costs based on non-intact data and applying equal duty of support.  Traditionally (prior to the federal Family Support Act), states used alimony for standard of living issues when appropriate. Now, child support typically includes alimony components even when the custodial parent has higher income than the non-custodial parent.  Child support under current schemes, rewards having children and not loyalty to a marriage. Encourages unwed child birth and lowers the personal cost of divorce for custodial parents. Increases divorce rates.  Alimony should be reinvigorated as a common practice when appropriate. Child Support Guidelines as Part of Comprehensive Policies