Does Work Pay?

The Gains from Work in Maryland's Temporary Cash Assistance Program

August 1999

The creation of the federal Temporary Assistance for Needy Families (TANF) block grant in 1996 gave states increased responsibility for meeting the needs of very low income families with children. States have responded to the new federal law by making significant changes to their cash assistance programs. Among those changes was to create work-focused programs.

Most states support their new programs with enhanced policies to make work pay. In the 14 months immediately after passage of the federal law, 42 states changed their rules regarding how recipients could combine work with cash assistance. Many states changed their rules to ensure that families would not leave assistance until earnings at least reached the poverty level. However, the policies enacted in Maryland regarding the treatment of earnings are at a stark contrast to those in virtually every other state.

In 1998, Maryland ended eligibility for cash assistance at a lower level of earnings than all but two states --Texas and West Virginia.
Maryland was one of four states that ended eligibility for cash assistance when earnings were less than half of the federal poverty level for a family of three. In contrast, 17 states allowed recipients who began working to reach or exceed a poverty-level income before terminating eligibility.

The cause for these low rankings is Maryland's earned income disregard policies--rules that determine how quickly benefits phase out for recipients who begin to work.

Maryland is in the minority of states that begin reducing benefits starting with the first dollar of earnings. In contrast, 16 states allow families to earn at least $200 per month before benefit reductions begin; another 16 states allow families to earn between $100 and $200 per month before reductions begin.

Maryland reduces benefits by $0.74 for every dollar earned. This benefit reduction rate -- the rate at which benefits phase-out once reductions begin -- is faster than in all but five states. However, none of these five states begin reductions at the first dollar of earnings, as Maryland does.

These policies make it difficult for families beginning work to make work pay.

After benefit reductions and federal payroll taxes, a family working half-time at the minimum wage (earning $450 for 87 hours of work) would see an immediate increase in monthly income of only $72.

As shown in the paper, this modest increase in monthly income is eventually increased by the federal and state earned income credits. These credits are important components of efforts to make work pay--however, claimants generally do not receive their credits until the following year when they file their income tax returns.

Policy options are presented that would enhance the returns to work for recipients making the transition off of welfare. One approach would allow family income to reach poverty before benefits end. Achieving a poverty level income is important for two reasons: to allow families to have a minimally adequate standard of living; and, to avoid the impact that even short term poverty can have on child development.

Update: August 1999

Since publication of Does Work Pay? several stories about welfare reform have been emerging.

Dramatic caseload declines are continuing. Between January 1995 and May 1999 caseloads in Maryland fell by 62 percent.
As few as half of those who have left experience continued employment; even for those who are working, most have earnings below the poverty level.
Virtually every state, including Maryland, has has a substantial surplus of unspent federal welfare funds.

The decline in caseloads, combined with a surplus of federal funds and in many cases, the need to increase state spending to avoid federal penalties, has created an environment where more states are investing in their cash assistance programs. Because of the changing environment, state policies and rankings that appear in Does Work Pay? may no longer be accurate for every state.

For example, since January 1998, at least 11 states have increased benefit levels. A few states have made changes to their earnings disregard policy. Maryland has changed both.

In October 1998, Maryland made a modest annual adjustment to the basic cash benefit. The maximum benefit for a family of three was increased by $11 to $399. During the 1999 Legislative Session, the Maryland General Assembly passed a modest increase in the earnings disregard policy -- boosting the disregard from 26 percent for recipients up to 35 percent. The 20 percent disregard for applicants remained unchanged.

The impact of these changes -- the modest benefit and disregard increases -- was to increase the earnings level at which a family of three would become ineligible for cash assistance to $640. While this represents an improvement over prior law, it still ranks Maryland in the lowest quintile of states for the earnings level at which eligibility ends for recipients who begin to work. That is, these modest policy changes have increased Maryland's ranking from 49th among states to 42nd.

Of note, the two states that ranked lower than Maryland in 1998, as shown in Table 1 of the report, also increased benefit levels. West Virginia has enacted a $100 two-step increase in their basic benefit. Texas instituted a modest benefit increase, and will disregard 90 percent of earnings for the first four months of work.