EITC, TANF and the Benefits Cliff

The “Benefit Cliff” for a mother with two children in Albemarle County. As income rises, SNAP, TANF, Medicaid, housing assistance and other benefits disappear.  This example does not include the Earned Income Tax Credit.  Source: VA DSS

For low income families receiving assistance in Virginia, their cash benefit from the federal Earned Income Tax Credit (EITC) is larger – often substantially larger – than the cash provided by Temporary Assistance for Needy Families (TANF).

A single mother with two small children who has a full-time minimum wage job ($7.25 per hour) qualified for EITC benefits of $436.33, in an example provided by the Virginia Department of Social Services based on 2015 data.  The EITC is paid out as a lump sum but the example broke it into monthly increments.  Doing that underlines its origin as a form of guaranteed minimum income, with the grant adding the equivalent of an additional $2.50 per hour to income.

TANF payments reflect local cost of living.  The TANF payments for the same 3-person family were $389 a month in Alexandria, $320 a month in Albemarle County and $292 a month in Accomack County.  TANF disappears as income passes $10 per hour, while EITC doesn’t fade out until about $20 per hour.

DSS estimates that Albemarle family actually needs $75,000 per year income to be self sufficient.

The data is posted by DSS with the backup spreadsheets attached, and there are short illustrative videos.  It is the longer (11-minute) video in the center which gets into the most depth about the financial impact (beneficial) of EITC and the related Child Tax Credit.

The recent federal tax changes had an impact on the numbers, and an even more important change involves the expansion of Medicaid.  The DSS examples presume the mother eventually gets coverage through the subsidized Affordable Care Act programs, but in 2019 she might switch over the Medicaid, saving her out-of-pocket funds.

While out of date, the examples are still worthwhile.  The family in that example has discretionary income (beyond the basic bills) when earning minimum wage but is underwater once income reaches or passes $20 a hour.

Virginia DSS Commissioner Duke Storen used the video and other data in a presentation Tuesday to the Commission on Youth.  His main target was a problem that has been discussed for years but never solved, the “benefit cliff” phenomenon where rising pay trims benefits so drastically that raises take you backwards. TANF disappears as income passes $10 per hour, while EITC doesn’t fade out until about $20 per hour.  SNAP food assistance and housing allowances scale down on different schedules.

Virginia has always been tight with cash benefits, and the federally-funded TANF program is a block grant allowing states flexibility.  The T for Temporary is an accurate description and families do not qualify for lengthy payment periods.  That’s another big difference with the EITC, which does not have a time limit and can continue indefinitely if your income stays below the ceiling.

The financial incentive to work is preserved with the system as it now stands.  If that mother has a job, she is better off than if she does not.  But as income rises the benefit cliff looms and eventually the family might be underwater with housing, insurance and other costs far exceeding its resources.  They fall into that category the United Way has dubbed ALICE – asset limited, income constrained but employed.

The problem is even worse if families fail to apply for the EITC or child tax credit, which was doubled by the new federal tax law. The child tax credit is also “refundable,” meaning once the tax liability is zeroed out the leftover credit becomes a cash payment.

Storen told the Commission his department will be working on smoothing out the cliff, but there was no specific endorsement of increasing the basic TANF benefits or adjusting the underlying standard of need estimates.  The TANF income cutoffs and benefit payments have barely budged in over 30 years, meaning inflation has deeply eroded them.  The state maximum of $344 per month for a family of three is only 20 percent of the federal poverty level, down from 40 percent back in the 1980s.

Virginia could easily improve that.  The federal grant is about $158 million a year, with less than 20 percent used for cash benefits in 2018 (about $30 million) and only 14 percent earmarked for that purpose in 2020 ($22 million.)  The improving economy reduces the case load and cash payments, but the grant amount stays steady.

Some of the additional TANF grant funds support the job training programs, and a small sum helps with child care, but the majority of TANF funds go to programs, some public and some private, intended to serve that population.  Some of it flows to the private agency I’m most familiar with, Families Forward, and is used for home visiting by nurses and educational trainers.   A serious effort to bump up benefits or expand eligibility would cut into those discretionary programs.

But we are about to enter a debate of how best to help this population, with a proposal coming to create a state version of the federal cash payments under the Earned Income Tax Credit.  Where that illustrative young mother is receiving $436 from EITC per month, the proposal would presumably add another 20 percent from the state – $88 (close to $1,050 annually) – to help with her monthly costs.  The total cost could be ten times higher than the amount current spent on TANF grants.

Proponents may use those DSS examples as evidence that even families with the full range of available benefits are still struggling, but the stronger impression is the real struggle starts when the benefits run out and people reach a decent wage of $20, $25 an hour or more. The claim that true self-sufficiency comes only at even higher incomes is valid, so where should the focus be?

A hard look should be taken at TANF.  Why not use more of the federal dollars that are already given to Virginia for this purpose before asking Virginia taxpayers to start chipping in far more of their own?  Granted the EITC proposal is more generous and lasting, but should it be the next step?  The deepest part of the cliff on that chart will not be changed.  

Additional background on the TANF program (which in 1996 replaced AFDC, or Aid to Families with Dependent Children) can be found here.

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3 responses to “EITC, TANF and the Benefits Cliff

  1. Good Post! I’m adding a chart below that illustrates how EITC works at the various income and numbers of kids level:

  2. And this chart is the Federal Govt poverty levels – which are used in determining eligibility for various benefits including MedicAid and Obamacare.

    138% is the threshold for Obamacare and 400% is the threshold where folks can still buy Obamacare but get no subsidies.

  3. The benefits drop-off is astonishing. I wonder if it is severe enough to create a poverty trap. Does it corrode peoples’ willingness to work hard, get an education, and rise up the pay ladder? Do some people say, screw it, it’s not worth the effort? Have you seen any research on that?

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