Association for Public Policy Analysis & Management

As of 2015, 12.7 percent (15.8 million) of all households in the United States were food insecure at some point during the year (Coleman-Jensen et al., 2016). While the prevalence of food insecurity has declined, it still exceeds the pre-2007 recession level of 11.1 percent (13 million). This, combined with the numerous negative health outcomes associated with food insecurity (Gundersen et al., 2011), reinforces the socio-economic importance of food insecurity, particularly as a measure of economic well-being.

Many programs attempt to improve economic well-being. Food and nutrition assistance programs, such as the Supplemental Nutrition Assistance Program (SNAP), are designed to address the lack of economic resources necessary to purchase food and are intended to improve food insecurity. Previous research supports the proposition that receipt of SNAP benefits reduces food insecurity (Gregory et al., 2015). However, less is known about the effect of non-food assistance programs on food insecurity, particularly the extent to which additional non-food resources facilitate greater expenditure on food-related needs. Recent evidence suggests that both cash- and food-based assistance from well-known federal welfare programs reduces food insecurity (Schmidt et al., 2016).

When focusing on the effect of tax policies on food insecurity, research has almost universally examined the Earned Income Tax Credit (EITC). The EITC is a lump-sum, refundable tax credit administered through the U.S. tax system for working low-income households. Focusing on the lump-sum payment, Barrow and McGranahan (2000) found that EITC-eligible households spend 9 percent more on durable goods in the month of February than non-eligible households. While a lump-sum payment may be beneficial for addressing seasonal needs, alternative tax policies may address continual needs, including food, rent and medical expenses. Changes in federal payroll taxes have the potential to overcome the annual lump-sum shortcoming of the EITC since payroll tax reductions are realized each paycheck. Hence, changes in federal payroll taxes may be more effective at addressing monthly food needs for working low-income households.

This study examines how changes in federal payroll taxes affect food insecurity by utilizing exogenous variation in federal payroll tax rates. In year 2011, the federal government reduced the payroll tax rate by 2 percentage points, from 6.2 to 4.2 percent, while Illinois increased its state income tax rate at the same time by the same percentage point margin, from 3 to 5 percent, thereby creating a quasi-natural experiment. Following the recommendations of Rabbitt (2013, 2016), we utilize a difference-in-differences behavioral Rasch model to conceptualize the continuum of food insecurity. Estimates indicate food insecurity and very low food security increased by 6.3 and 4.1 percent in Illinois, respectively, relative to the rest of the United States as a result of the increase in state income taxes that offset the federal payroll tax cut. Additional analyses indicate these estimates are robust to various sources of bias and numerous alternative comparison groups.