Association for Public Policy Analysis & Management

This study examines the following research question - do financial incentives in the state TANF, the state EITC and the federal EITC programs increase employment, earnings and reduce poverty among recipients? The work-focused nature of federal and state anti-poverty policies is reflected in work requirements and financial incentives adopted under TANF, an expansion of the EITC at the federal level, and a growing number of states that are adopting their own EITC. In recent years, particularly during and after the Great Recession, understanding how these incentives have worked to promote economic well-being of low-income families is essential. The refundable tax credits provided by the federal EITC program are the same in all the states. The interaction between the EITC and the state TANF program creates different work incentives within different states depending upon the state’s TANF program. If a state also has adopted the EITC (such as in case of twenty six states including DC), the interaction between the state’s EITC, state TANF and the federal EITC program creates a different set of financial incentives for work in that state.

To answer this question, I use the Current Population Survey for 2001-2013. I estimate binomial probit models for employment, and income above poverty. To identify the effect of financial incentives under TANF and both the federal and state EITC, I exploit rate changes in the federal, and state EITC between 2001 and 2013 and changes in earned income disregard policies (if any) for the states. State TANF policies have not changed much during this time. I control for state economic indicators, individual demographics, time limits and sanctioning policy and spending on TANF cash and SNAP.

Over the years, the EITC has become the major source of income support for the working poor and TANF’s role as an income support program has declined. A rising share of TANF spending is directed toward work support and other services. Since both of these income support program focus on “making work pay”, it is important to assess how they work together. Understanding how incentives within these income support policies together affect the recipients will help policymakers to develop programs to help their low-income adults who seek greater self-sufficiency via employment.