Research Report Balancing at the Edge of the Cliff
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Experiences and Calculations of Benefit Cliffs, Plateaus, and Trade-Offs
Theresa Anderson, Amelia Coffey, Hannah Daly, Heather Hahn, Elaine Maag, Kevin Werner
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Public benefit programs have the potential to help stabilize families when their income drops and can provide support as parents enter or reenter the workforce. As a family’s earnings rise, though, those earnings increases are often offset by declines in public assistance benefits (commonly called “benefit cliffs” when the declines are sharp) and increases in taxes owed.

Complex program rules can make it difficult for participants to know how the benefits interact with new employment income. And benefit reduction rates can compound when people participate in multiple programs.

This report summarizes insights from qualitative interviews with 43 respondents who currently or recently received TANF about how they experience tradeoffs between benefits, taxes, and work. It also reports results from microsimulation modeling of how benefits and taxes respond when income changes. The report includes 2018 data from Colorado, Minnesota, and New York. We examined the effects for families with various starting incomes and earnings increases.

Families turn to benefits as a last resort

Our interviews shed light on the considerations families are making around benefits and work:

  • Parents in all three states overwhelmingly said that they preferred to earn money from employment instead of receiving public benefits. 
  • Trade-offs around work and benefits are complicated, and rather than choosing among clear options for supporting their families, many parents are acting in an environment of fear, anxiety, and confusion. 
  • Parents feared losing critical supports, and many feared their child care benefits would be changed or lost.  
  • Housing is among the biggest challenges to making ends meet, even with available resources from employment and benefits. 

Families face challenges predicting how earnings increases may affect their net income

Our findings underscore the challenge families have in predicting how earnings increases may affect their net income: the complex interactions among earnings, benefits, and taxes vary depending on where they live, their starting income, and the size of the earnings increase.

We found that for TANF recipients with starting incomes below the poverty level:

  • Many families receiving TANF would lose more than half of $2,300 in new income in benefit reductions and increased child care costs. Fewer than 6 percent of families would see a rise in child care expenses and benefit reductions that exceed the new earnings. 
  • A tax refund would add to new earnings. In many cases, refundable tax credits more than offset the increases in taxes owed by families who received TANF and had starting incomes below the poverty level. 
  • Combining the effects of child care expense increases, benefit reductions, and taxes shows that most families would be better off with $2,300 more in earnings. But because tax refunds and benefit reductions often happen on different timelines, families may not feel the full payoff from work in their monthly budgets. 

Suggested Changes

Parents offered several suggestions for clarifying the interactions among earnings, benefit programs, and taxes, and for improving their ability to support their families:

  • Benefits could not drop so quickly after an increase in earnings or offer a grace period for families to stabilize their new employment situation.
  • Benefit program staff could help program participants effectively use programs, including understanding the interactions between work, benefits, and taxes. The government could also create public resources to help people better understand program interactions, such as an online calculator, or simplify the rules and interactions among public assistance programs and the tax system.
  • Benefit amounts could increase to better fill the gap between earnings and the cost of meeting basic needs. If some supports, especially related to housing and child care, could be universal, it would provide certainty and stability that may help parents feel more confident fully transitioning off public assistance.
  • The labor market could reduce barriers to parents getting well-paid, quality jobs and compensate workers at higher wages.
  • Finally, the government could pay some or all tax credits monthly. This would allow families to include them in their regular budgets, making drops in benefits less severe.

 

Research Areas Families
Tags Earned income tax credit
Policy Centers Income and Benefits Policy Center Center on Labor, Human Services, and Population Urban-Brookings Tax Policy Center