Low-income Tennesseans get punished for making more money. Let's fix that.

Yahoo

2 days ago

Imagine that you are offered a promotion and raise at work. But there's just one catch: If you take it, you will move into a higher tax bracket. The bracket is so high, in fact, that you will actually end up with less take-home pay.
What would you do?
That's the exact situation in which many low-income Tennesseans find themselves. Someone trying to leave welfare for work is likely to run into a phenomenon known as a 'welfare cliff.' That is, the increase in work income can trigger a sudden loss of benefits, potentially leaving them financially worse-off, even when they earn more money.
The loss of benefits operates similarly to a tax hike. Policymakers often debate marginal tax rates because high rates can reduce investment, entrepreneurship, and economic growth. But welfare cliffs can mean that, effectively, some of the highest marginal tax rates fall on low-income Americans trying to work their way out of poverty.
In some cases, especially for those earning between 100% and 250% of the federal poverty level, the marginal tax can exceed 100%. That can discourage those people from pursuing work, marriage, education and other steps toward self-sufficiency.
This is clearly a structural flaw in our approach to helping those in poverty. The purpose of welfare shouldn't be to simply help families endure poverty more comfortably, but to assist them in escaping it altogether.
In a survey of Tennessee welfare recipients, 90% said that if they had financial assistance that would help them through a cliff, they would take a better-paying job even if it meant losing their benefits. Nearly 80% said they would work more hours, 77% said they would take a raise, and 69% said they would pursue additional education opportunities.
Opinion: If Nashville is a welcoming city, why are so many of its residents struggling?
The simplest and most effective way to deal with welfare cliffs would be for Tennessee to establish 'transitional benefits' to offset the loss in benefits that occurs as a recipient earns non-welfare income. Rather than an individual immediately losing benefits when their income reaches the eligibility threshold, benefits would be 'stepped down' in proportion to increases in non-welfare income.
Fortunately, Tennessee policymakers are in a strong position to fix the problem. The state has more than $700 million in unused federal TANF funds that it must spend down, which would allow legislators to undertake large-scale welfare reforms without sacrificing other priorities.
The state should devote a substantial portion of the available funds to addressing the benefits cliff problem.
Moreover, the state has a template for reform. The Martha O'Brien Center has been managing a pilot program that combines transitional benefits with counseling for roughly 600 Tennessee families. The program has developed a web-based calculator that determines an appropriate transitional benefit based on the family's income, current benefits and family composition.
Opinion: Nashville depends on low-wage workers. How do we ensure they can live here?
The pilot is being monitored and evaluated by the Federal Reserve Bank of Atlanta among others. Although it is too early for hard data analysis, anecdotal reports suggest that the program is having a positive effect.
The state legislature is reportedly working on potential solutions for some of the state's worst welfare cliffs, in particular, the state's low-income child care subsidy. By doing so, Tennessee will smooth the transition from welfare to work, leading to more earnings, more self-sufficiency, more innovation, and more efficiently spent welfare dollars.
Michael Tanner is a Senior Fellow, Social Mobility, at the Foundation for Research on Equal Opportunity.
This article originally appeared on Nashville Tennessean: Tennessee can curb welfare cliffs with transitional benefits | Opinion