Does the House Really Care About Work Incentives?

Jul 13, 2012

By Elizabeth Lower-Basch and Patrick Reimherr

On June 27th, the House Ways and Means Committee held a hearing on how “implicit tax rates” resulting from means tested safety net programs discourage work.   In the hearing announcement, Chairman Davis stated that: “It is not clear that work pays – and in fact additional work may not actually result in additional income”.

Safety net programs that are “means-tested” are only available to individuals or families with incomes below a certain level.  In most cases, once income reaches a certain level, benefits are phased out, so that with every additional dollar earned, slightly less benefit is provided.  The phrase “implicit tax rates” suggests that these phase-outs have the same effect on workers’ net income as a tax.

As explained in C. Eugene Steuerle’s testimony for the committee, and highlighted in a column by Paul Krugman, while any one program has a relatively modest phase-out rate, low-income families receiving multiple benefits can face implicit tax rates far higher than those experienced by the highest earning households.  This is especially likely at the points where a small increase in income can result in a “benefit cliff” because families lose eligibility entirely, as is the case for Medicaid, child care assistance or the Supplemental Nutrition Assistance Program (SNAP, or food stamps).

At the hearing, members expressed deep concern about the possible work disincentives caused by these phase-outs and cliffs.  This professed concern over making work pay stands in sharp contrast with recent legislative proposals coming out of the House, including the repeal of the health insurance subsidies under the Affordable Care Act and the House Agriculture committee’s call to end “categorical eligibility” under SNAP.

Categorical eligibility gives states the option to simplify administration of the SNAP program and align rules across programs.  In particular, it allows states to raise the absurdly low asset limit of $2,000and to provide SNAP benefits to households with high child care, housing and transportation costs whose gross income is slightly above the federal ceiling of 130 percent of the poverty level.  In this way, categorical eligibility helps reduce the implicit marginal tax rate resulting from an increase in earnings.  

If Republicans are truly concerned about work incentives, and not simply trying to undermine public support for the safety net, then they should be proposing extending phase-out ranges or providing services through universal programs, not creating steeper cliffs and hence higher implicit tax rates on low-income people.

For more information on this topic, see CLASP senior policy analyst Elizabeth Lower-Basch’s recent testimony for the record submitted to the House Ways and Means Committee, Plateaus, Cliffs, and Work Incentives.

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