States Looking for More Accurate Ways to Measure Poverty
By Jennifer Burnett, CSG Program Manager, Fiscal and Economic Policy
Many experts believe the reason poverty is still a problem for humanity is because it is such a hard problem to solve.
Housing, the growing income gap, providing an affordable education, services for the poor and even how those services are delivered—all of these are complex and costly issues that must be confronted if state policymakers want to start making a dent in their state’s poverty rate.
Here, briefly, are some of the big issues facing those who live in poverty and some innovative ideas states are using to try to address those issues.
On Education, Oregon Wants to ‘Pay it Forward’
As student loan debt continues to rise along with tuition, some states are working to help cut costs for higher education.
Oregon has developed a creative idea to replace tuition with post-graduate contributions into a state trust fund.
“It’s sort of like Social Security in reverse,” said Rep. Michael Dembrow, who proposed the legislation in the House. “With Pay It Forward, you get the benefit up front and the state picks up the cost of tuition.”
The concept is the brainchild of a capstone course, “Student Debt, Economics, Policy and Advocacy,” at Portland State University. In cooperation with the Economic Opportunity Institute in Washington state, research turned up a similar program in effect in Australia. Students lobbied legislators and the ensuing bill passed both chambers unanimously in July. House Bill 3472 directs the Higher Education Coordinating Committee to design a pilot program that will be considered by the legislature in 2015.
In essence, the program would be a deferred tuition payment program with income-based repayment after students graduate. The Oregon Department of Revenue and the IRS are discussing how the payment collection process will work. It will not replace need-based aid, federal aid, institutional or other financial assistance such as Pell Grants. The Economic Opportunity Institute in Seattle calls Pay It Forward a “pragmatic business model for funding higher education.”
Students will attend college without upfront costs and, upon graduation, contribute a fixed percentage of their income for a predetermined number of years to a higher education trust fund. This fund will enable access for future postsecondary students. Students who earn an associate degree will pay 1.5 percent of their monthly income, while those receiving a four-year degree will pay 3 percent.
Startup funding for the pilot is likely to come from state bonds allowing for “human infrastructure.”
Voters will consider a constitutional amendment on the project in November 2014. In the interim, the Higher Education Coordinating Commission is working with state legislators and other stakeholders to develop the pilot program.
“We aren’t doing away with tuition,” said Dembrow. “It really does have potential to tackle this big problem in a creative way.”
States Address Homelessness
The state of homelessness in America is getting better.
The National Alliance to End Homelessness, based in Washington, D.C., issued a report in April showing that, overall, the homeless population decreased by less than 1 percent from 2011 to 2012, but the number of people experiencing chronic homelessness decreased significantly.
The alliance attributes the improvement primarily to increased federal investment in solutions, such as permanent supportive housing and more aid to communities. But some states are working to increase aid to homeless individuals and families as well.
Massachusetts, for instance, is partnering with nonprofit social service providers to expand programs for the homeless. The state, under a directive of the Executive Office for Administration and Finance, will provide financing after its partners have shown some success in the program. The legislature authorized spending up to $50 million on this initiative in 2012.
The goal of the initiative will be to improve the well-being of homeless people while simultaneously reducing housing and Medicaid costs for the state.
The provider chosen to negotiate a contract for the homeless initiative is the Massachusetts Housing Shelter and Alliance, which works with housing organizations. The alliance will provide housing and support services such as medical care and vocational training.
“Its greatest achievement will be utilizing social innovation financing to leverage better integrated use of current resources, incentivizing long-term systems change and reducing reliance on emergency resources,” Joe Finn, president of the alliance, told Capitol Ideas.
The group will work with both the Department of Housing and Community Development and the Department of Health and Human Services to achieve its goals. Project partners anticipate service delivery will start in late 2013 or early 2014.
New Ways to Measure Poverty
Since its adoption in 1969, the official federal poverty measure has undergone few changes despite growing concern over its accuracy. The current poverty measure used by the U.S. Census Bureau—called the federal poverty threshold—uses before-tax cash income to determine what qualifies as “poor” for statistical purposes.
For several years, policymakers, researchers and advocates have increasingly called for an alternative means of estimating poverty, which led the Census Bureau to release the Supplemental Poverty Measure in 2011.
Federal Poverty Threshold
Rate of poverty—15 %
Uses before-tax cash income to determine what qualifies as “poor” for statistical purposes
One measure for the continental United States
Poverty rate for those age 65 and older is 7.8 percent
Poverty rate for African-Americans is 23.6 percent
Supplemental Poverty Measure
Rate of poverty—16.1 %
Adjusts income for tax and transfer programs, like the earned income tax credit and food stamps
Takes into account geographic differences, which are based on differential housing costs
Poverty rate for those age 65 and older is 12.6 percent
Poverty rate for African-Americans is 20.6 percent
States Funding Student Aid Based on Merit and Need
While states are working to open higher education to more students, The American Council on Education also characterizes the last decade as a push by states toward higher completion and graduation rates. That’s one reason states are offering financial aid based on a combination of need and merit.
”Over the last couple of years, states have been looking at their budgets with an eye toward the return on their investments,” said Frank Ballmann with The National Association of State Student Grant & Aid Programs. “States are looking to attract employers with higher education programs.”
In addition, Ballman said states want to fund programs students are most likely to complete.
In fact, 20 percent of state grants for higher education in the 2011–12 school year were based on a combination of need and merit, according to the most recent annual survey report from Ballman’s association. Aid with both need- and merit-based components has increased each year for the past six years. A January 2013 National Bureau of Economic Research paper found that linking financial aid to academic achievement was more effective at boosting graduation rates than utilizing needs-based aid alone.
States increased total aid to students by 1.8 percent to $11.1 billion in the 2011–12 school year. Seventy-four percent of those grants had some need-based component in 2011–12, up from 71 percent over the previous year. Twenty-six states had some sort of grant program based solely on merit; these programs accounted for 19 percent of all aid. Grant programs based solely on need represented 47 percent of aid dollars to undergraduates in the 2011–12 school year.
Despite the growth in need-based aid, four states—Georgia, New Hampshire, South Dakota and Wyoming—award no grants based on need. With an eye toward college readiness, South Dakota puts all of its $4.1 million in grants toward its merit-only Opportunity Scholarship, which requires four years of math, science and English at a higher standard than the minimum graduation requirement.
States also are investing at different levels. Eight states—California, Illinois, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Washington—represent 70 percent of all need-based aid dollars. Those states represent only 43 percent of the U.S. population, according to the Census Bureau.
Fast Cash from Benefits Can be Costly
While states may save money by using electronic benefit transfer—or EBT—cards for cash benefits such as unemployment and welfare assistance, the cards can be costly for people who get those benefits.
That’s because recipients may have to pay surcharge and transaction fees when withdrawing cash from the cards, which results in a reduced benefit amount.
The move to electronic cards started with food stamps; all states and territories are required to use them. The U.S. Department of Agriculture says EBT cards have reduced food stamp fraud by eliminating trafficking in the benefits. The illegal sale of benefits for cash has been reduced to one penny out of every dollar, according to the USDA.
In California, there is a charge of 80 cents for ATM withdrawals over a set limit of four free withdrawals per month. ATM surcharge fees can range from $1 to $4. Some California ATMs do not charge surcharge fees and county welfare officials try to publicize the surcharge-free ATMs. In West Virginia, recipients have two free cash withdrawals per month; after that, they’ll pay an 85 cent transaction fee plus any applicable surcharge fee for the ATM after that.
Washington state came under fire after a 2011 media report publicized that JP Morgan Chase collected more $100,000 a month in ATM fees from welfare recipients. During subsequent contract negotiations in 2012, JP Morgan Chase eliminated the 85 cent transaction fee and reduced the administrative costs the state pays. ATM card holders may still be charged a surcharge for cash withdrawals from ATMs.
Income Inequality Gap in the United States
The Congressional Budget Office in 2011 reported the top 1 percent of the population realized a 275 percent increase in their real income after federal taxes and transfers between 1979 and 2007, whereas the income of the middle 60 percent grew by slightly less than 40 percent. On average, the top 1 percent brought in more than $1 million in after-tax income, while the middle 60 percent earned $51,400 in after-tax income in 2005 dollars.
Part of the problem is globalization and rapid technological advances, former U.S. Labor Secretary Robert Reich, now a professor of public policy at the University of California-Berkeley and an expert on income inequality, told Capitol Ideas.
In addition, he said, “less-educated and less-connected Americans (are) in direct competition with low-wage workers abroad or with software that can replicate their jobs at lower cost.”
A 2013 Economic Policy Institute study found that 30 percent of the rise in income inequality is due to tax and budget policies at the federal level.
One-third of the increase in the total share of income of the top 1 percent is attributed to a shift from labor income to capital income, also due to tax policies that give preferential treatment to capital gains.
The widening gap between the upper and middle class has taken a toll, and Americans are taking notice.
A 2012 Heartland Monitor poll found that 46 percent of Americans believe only the upper class is able to pay for their children’s college education, and another 40 percent believe only the upper class can save enough to retire comfortably.
The individual savings rate bears that out. An analysis of data by the Federal Reserve Bank of St. Louis shows that Americans are not putting money away for a rainy day like they used to. That is, the personal savings rate—the fraction of personal income set aside as a cushion for bad times or retirement—has declined from 8.8 percent of income to 2.4 percent from 1979 to 2007.
Reich blames this inequality on “the failure of government policies to adapt much of the American workforce to these structural changes.”
He cites the lack of investment in education, policies that favor business outsourcing, deregulation of Wall Street and capital and labor markets, changes in tax policy and the decline of labor unions among the factors that have led to greater income inequality.
Source: Congressional Budget Office
Earned Income Tax Credits to Fight Poverty
The federal earned income tax credit has proved to be one of the most effective tools for alleviating poverty among the working poor, according to the Center for Budget Policy and Priorities. Twenty-four states and the District of Columbia have followed the federal government’s lead.
The earned income tax credit reduces the tax bill of working families and, for those in the lowest income ranges, provides a refund. The state credits often piggyback on the federal program and pay a percentage of what the federal program pays to an eligible family. The center estimates that the federal EITC program in 2009 lifted 6.5 million people out of poverty, with state tax credits bringing even more people out of poverty.
In 1987, Maryland was the first state to adopt the program. Since then, states have steadily added programs to their anti-poverty efforts, according to Michael Leachman, director of state fiscal research at the Center on Budget and Policy Priorities.
Three states—Michigan, New Jersey and Wisconsin—have scaled back their programs since 2008, but most states have held steady despite the Great Recession. In fact, Iowa recently expanded its program by increasing the phase-out threshold so the families keep more money, Leachman said. Oregon’s law was due to sunset, but lawmakers extended the program.
Washington state approved an earned income tax credit despite having broad-based income taxation, but it is currently unfunded. The Center on Budget and Policy Priorities reasons the tax credit helps to offset some of the regressive nature of property taxes common to such states. The center also cites this as evidence that states without income taxes can still implement an EITC program.
Because these tax credits can be a little confusing, the Internal Revenue Service offers a program called VITA—Volunteer Income Tax Assistance—that uses trained volunteers from local organizations to help poor families fill out their tax forms.
A Brookings Institute/Urban Institute study found that those seeking assistance filling out tax forms tend to be lower earners.
Seniors and Poverty
While Social Security and Medicare have long been thought to reduce poverty among the elderly, a new report finds that nearly half of all seniors live in such tenuous financial situations that they are just one shock away from real hardship or destitution.
“Seniors are particularly vulnerable because they live on fixed incomes and it is not easy for them to adjust to shocks, such as a major health issue,” said David Cooper, co-author of a recent study on the economic security of the elderly completed this summer by the Economic Policy Institute. He said older Americans who suffer an unexpected financial shock may not recover because, unlike younger people, working more to increase their income is seldom a realistic option.
“More shocking than our finding that nearly half of seniors are economically vulnerable is that for certain groups, the numbers are even higher,” Cooper said. “The majority of elderly blacks and Hispanics—63.5 percent and 70 percent—fall below two times the supplemental poverty threshold, as do 58.1 percent of seniors over 80 years old.”
The majority of older women also are likely to be economically vulnerable—52.6 percent compared to 41.9 percent of men.
Like many poverty researchers, Cooper finds the official federal poverty level to be an inadequate measure of economic insecurity. While Social Security payments typically keep seniors just above the official poverty line, the EPI report points out, “this support is by no means lavish and households that rely on Social Security for a significant share of their income often live dangerously close to the poverty line.”
For that reason, the EPI report relies on the Census Bureau’s supplemental poverty measure and defines seniors with incomes below two times the supplemental poverty measure as economically vulnerable.
In 10 states—Arkansas, California, Florida, Georgia, Hawaii, Louisiana, Mississippi, New York, Rhode Island and Tennessee—plus the District of Columbia, more than half of the elderly are economically vulnerable. In another 21 states, 45 percent or more of seniors are economically vulnerable.
New data on the financial insecurity of seniors comes at the same time the federal sequester has reduced funding to states under the Older Americans Act. According to the National Association of States United for Aging and Disabilities, 9 percent of funding, or $180 million, has been cut from the 2013 fiscal year funding for senior services, including nutrition programs, home-based supportive services and caregiver support programs.
Early Childhood Education’s Impact on Poverty
Spending on early childhood development programs regularly ranks near the top in terms of return on state investment. But with shrinking state budgets, those programs are often among the first to go, a move that California Assemblymember Anthony Rendon warns against.
“It makes no sense for government to ignore the tremendous return on investment that building up early education can produce with regard to reducing dropout rates, criminal behavior and, ultimately, poverty,” Rendon told Capitol Ideas.
The National Institute for Early Education Research, in its yearly report on pre-k education, “The State of Preschool,” found that total pre-k funding fell more than half a billion dollars, adjusted for inflation. Per child funding is now $1,000 less than a decade ago, and state funding decreased in 27 of the 40 states examined.
Rendon, the former executive director of Plaza de la Raza Child Development Services Inc. that provides Head Start and Early Head Start services, touts the benefits of early education and its far-reaching effects on public policy.
“California is facing a problem with declining student test scores and a prison overcrowding crisis,” he said. “These are also major factors that play a role in societal poverty. All research shows that the investment in quality early education improves student performance and reduces the likelihood of criminal conduct.”
Universal early child development programs help all children, but are especially beneficial to disadvantaged children. This occurs for two reasons, according to Steven Barnett of the National Institute for Early Education Research.
Disadvantaged children benefit from attending preschool programs with their more privileged classmates. In addition, when children have more classmates who have attended preschool, they see substantial spillover benefits in kindergarten through third grade, according to Barnett’s research.
Forty states offer state funded pre-k to 4-year-olds. Of these 40 states, Florida tops the list with 79.4 percent of 4-year-olds enrolled, while Rhode Island has less than 1 percent of 4-year-olds enrolled.
Child Care Assistance for Working Families
Twenty-five states have child and dependent care tax credits to help families, especially those with low incomes, meet the high costs of child care, according to data compiled by The Hatcher Group, a public affairs and communications firm that connects nonprofits and foundations to policymakers and the media. Of those states, 11 offer refundable tax credits.
Refundable tax credits make it possible to reduce tax liability below zero, potentially allowing individuals and families to receive money back to further offset child care costs. States with a child and dependent care tax program fund depending on the number of children in the family. Every state with a child and dependent care tax credit doubles the credit for a second child, but does not increase it for additional children after two. Four states—Arkansas, Kentucky, Oklahoma and South Carolina—set a $210 maximum credit for one child/dependent. By contrast, New York’s one child/dependent maximum is $1,555.
The value of the credits vary from state to state, ranging from 7 percent of federal child and dependent care tax credit funding in South Carolina to 110 percent in New York, according to The Hatcher Group.
Feds Leave State Energy Assistance Out in the Cold
The U.S. Energy Information Administration predicts another winter with high energy costs this year. National average prices of natural gas, heating oil and electricity all are expected to be nearly as high as last year’s prices—if not more.
States work with the federal government to provide energy assistance to low-income families. The federal grant program responsible for energy assistance—Low Income Home Energy Assistance Program, or LIHEAP—was victim to budget cuts in 2011 and 2013 and may face another round of cuts this winter.
States will have to make cuts or make up the difference as federal support dwindles. Vermont, for instance, chose to dip into its own reserves and divert funds from weatherization and corrections in 2012, while Maine was forced to cut its average benefit by nearly half.