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Washington, District of Benefit Cliffs


April 26, 2024

As the welfare state expands while policymakers struggle to contain its costs, one unintended result is the creation of significant benefit cliffs. A little-noticed September 2023 report authored by Elias Ilin and Alvaro Sanchez of the Federal Reserve Bank of Atlanta (“Mitigating Benefits Cliffs for Low-Income Families: District of Columbia Career Mobility Action Plan as a Case Study”) explains the dynamics at work:

The structure of the United States social safety net features phaseouts of public assistance as household income increases, which can function as an effective marginal tax on wage gains, commonly referred to as a “benefits cliff.” These so-called benefits cliffs create a disincentive for low-income workers, especially those with children, to accept higher-paying jobs or promotions.

The report cites research suggesting that benefit cliffs (which are sometimes called “poverty traps”) can “effectively lock low-income workers into poverty”:

Strikingly, Altig et al. (2023) finds that a quarter of low-income workers face lifetime effective marginal tax rates (EMTRs)—or the percentage of resources, defined as net wealth plus human wealth, that workers lose due to a phaseout of public assistance and an increase in taxes following a $1,000 increase in income—above 50 percent. These results suggest that high EMTRs effectively lock low-income workers into poverty.

Benefit plateaus, in which household financial resources do not increase over a wide span of earnings, also harm the prospects of those seeking more or higher-paying work:

In some cases, the loss of eligibility for public assistance or tax credits can even leave families financially worse off (a benefits cliff) or no better off (a benefits plateau) than before an increase in income. When that happens, workers can be motivated to either forgo higher paying job opportunities or to decline promotions to retain eligibility.

These dynamics are especially pronounced in Washington, DC, where per capita public welfare expenditures exceed any state. Ilin and Sanchez count over two dozen “major” local and federal assistance programs available in DC, including TANF welfare checks, SSI and Social Security disability payments, EITC and CTC payments, food stamp, WIC, and school meal benefits, nine local and federal housing and utility programs, and six child care and health care programs. They add that list “is not complete and does not include smaller and more targeted local public assistance programs and tax credits.” In sum, they find “The social safety net in DC is one of the most generous in the nation” and “provides a good illustration of how benefits cliffs and high EMTRs, along with a high cost of living, can financially affect families.”

How generous is the safety net in DC, exactly? As depicted below, a representative family consisting of a single parent and three-year-old child can receive government benefits exceeding $70,000 per year, provided the parent has low earnings from work. However, if that parent works and earns more, benefit phaseouts and growing payroll and income taxes combine to wipe out any improvement in their finances. The shocking bottom line is that

due to benefits cliffs and the co-occurring phaseouts of multiple transfer programs, the hypothetical family is as financially well-off at $11,000 as it is at $65,000 of earned income. In other words, due to the structure of the combined federal and local DC social safety net, an increase in employment income by $54,000 does not result in any gains in net financial resources for this family.

Figure 1 below is copied from the report.

Ilin and Sanchez conduct a similar analysis for a single parent with two children ages three and five, finding that at low earnings their benefits can total $90,000. It’s awfully hard for appeals to the dignity of work to compete with that. The authors highlight a new policy “solution” adopted by DC and some states—to provide additional benefits as earnings rise to offset current benefit phaseouts, reducing EMTRs yet imposing additional costs on taxpayers.

More attention should be paid to simpler solutions initiated a generation ago, such as ensuring that low-income benefit programs are temporary, which would reduce the incidence of benefit cliffs. For example, when TANF was created, it included a five-year lifetime limit on benefit receipt and allowed states to set shorter limits. But as the report highlights, DC offers among the highest TANF benefits in the nation and “has lifted” time limits altogether, providing welfare checks “in perpetuity.” Those policy choices increase the degree to which DC’s safety net too often discourages the type of consistent work needed to lift families out of poverty for good.