Low-Income Workers & Families Hardest Hit by Economic Decline Need Help Now...

By Neil Ridley, Elizabeth Lower-Basch, and Matt Lewis / Updated May 5, 2008

American workers and families are being squeezed between a declining labor market and increasing costs for food, fuel, and other basic needs. Low-income workers and families are especially vulnerable to the challenges of a weak economy. The new employment data released last week continue to indicate that the economy is in a downturn—one that will have the most significant and damaging impact on low-income workers and their families. For the fourth month in a row, the Bureau of Labor Statistics (BLS) reports U.S. employers eliminated jobs from their payrolls.1 In addition, the number of unemployed people who had lost permanent jobs reached 2.1 million—nearly half a million more than a year ago.

Action is needed now to help those hardest hit by the economic downturn. Congress and the president should enact a relief package that provides assistance to unemployed workers and disconnected youth, helps low-income individuals and families meet basic needs, and provides targeted state fiscal relief to keep critical services available. This paper describes the economy’s impact on vulnerable adults and youth, and lays out recommendations for action that can make a real difference in the lives of low-income workers and their families.

Workers with the least education and experience have been most vulnerable in past recessions. There is overwhelming evidence that the employment prospects of low-skilled workers are more sensitive to changing economic conditions than those of high-skilled workers. Individuals with limited education and work experience are more likely to experience declining employment and wages as the labor market weakens.2 Employers are sometimes reluctant to let highly skilled workers go even when there is little work, for fear of not being able to replace them when demand picks up; they are more likely to let go or cut the hours of younger, less educated, and less experienced workers.

The weakening economy has already begun to hit vulnerable workers. Adults with the lowest education levels have experienced rising unemployment during the past year. In April 2008, unemployment among both high school graduates and adults with less than a high school diploma was substantially higher than it was in April 2007.

In another indicator of a weak labor market, more people report that they are working part-time even though they want full-time employment. The number of workers in involuntary part-time positions has increased sharply since November 2007 and is up by 849,000 since early 2007. Especially in the service sector, reduced demand is rapidly passed on to workers in the form of reduced hours. However, workers are often required to remain “on-call,” making it difficult for them to take a second job to pick up additional income.

The weakening economy is damaging job prospects for the nation’s youth, which were weak even before the current economic downturn. During a recession, when growing numbers of adults face unemployment, it is even tougher for young people to find jobs. Securing a job this coming summer is likely to be particularly hard. Andrew Sum at the Center for Labor Market Studies has demonstrated that the youth employment-population ratio, which measures the percentage of the nation’s 16- to 19-year-olds who are employed, is a predictor of summer employment conditions. In April 2008 the percentage was about half a percentage point lower than it was in April 2007 and 10 points lower than it was in 2000. Summer jobs are an important way for youth to build work experience, as well as a way for youth to contribute to family income and educational expenses.

Earnings for non-supervisory and production workers continue to decline. According to the Economic Policy Institute, real earnings for those workers grew during most of 2007, but began dropping in October and November due to inflation and declining wage growth. This indicator continued to fall in March 2008.

Low-income workers and families face tough choices as they manage their household budgets. Even in good times, basic needs—food, housing, health care, energy, transportation, and child care—consume most of low-income workers’ budgets. Low-income workers, including many with incomes well above the official poverty line, often find themselves deciding which bills can and cannot be paid each month, and relying on food banks or other community supports to make up any shortfall. When they experience a decline in income due to job loss or reduced hours, or face unexpectedly high costs, there is no fat in their budgets that can be sacrificed—they have to cut into the meat. In particular, there is good evidence that when faced with unusually high heating bills, poor families are forced to spend less on food, sometimes with serious nutritional consequences.

The number of people receiving Food Stamps is reaching record levels, just one example of the effects of the economy on families. As of January 2008, 27.7 million people were receiving Food-Stamp benefits, up 5 percent from a year previously. The Congressional Budget Office projects that more than 28 million people will receive benefits next year, the most in the program’s history. Fourteen states are already serving record numbers. Many families are driven to apply for Food Stamps by the combination of reduced income and sharp increases in the cost of food; energy; and other basic needs, which hit low-income families particularly hard.

However, receipt of Food Stamps is not sufficient to guarantee food security. In fact, more than half of Food Stamp recipients are still considered “food insecure,” meaning that they have had to adjust the quantity or quality of the food they eat due to their limited budgets. In addition, America’s Second Harvest reports rising demand for food assistance from food banks across the country. Many food banks are unable to meet this demand, and are having to turn people away or provide more limited food baskets than usual.

Low-income households have little savings to fall back upon and limited access to credit. Nearly half (44.2 percent) of all households in the lowest income quartile are “asset poor” meaning that they do not have enough net worth to allow them to subsist at the federal poverty level for three months without income. Low-income families also have poor access to mainstream financial institutions, such as bank loans and credit cards. When they are able to borrow money, it is often through mechanisms such as payday loans and bank overdrafts, with extremely high effective interest rates.

Finally, low-income individuals and families that receive help from state programs, such as health care, child support, or community-based services, bear the brunt of any cuts in services. During economic downturns, state tax revenues decrease as demand for assistance increases. There is already evidence that many states, confronted with declining revenues, are cutting programs that serve low-income and vulnerable residents. Large cuts to federal child support enforcement funding add to state budget demands and, if not replaced, will reduce child support income received by low-income families, reduce employment-related services to unemployed non-custodial parents, and compete for funding with other child and family programs.

Recommendations: The evidence of a weakening labor market is unmistakable. While our nation has many programs that are intended to offer relief, they provide an increasingly torn safety net which is allowing too many to fall through. Congress and the administration should take immediate action to help those hardest hit by the economic downturn, and provide targeted, state-fiscal relief to keep critical services available.

In addition to helping the most vulnerable individuals and families, these actions would also stimulate the economy. Economists of all political persuasions agree that the best way to stimulate the economy is to put money in the hands of people who will spend it quickly. Economists also recognize that low-income individuals and families are more likely to immediately spend any money received. Fiscal relief will prevent states from having to cut programs when they are most needed. Both direct assistance to families and state-fiscal relief are needed to address the needs of those most affected by any recession—people who lose their jobs or their health-insurance coverage, and low-income families who were already struggling to make ends meet even under better economic conditions.

Help Unemployed Workers and Disconnected Youth - Ensure Income Support for Unemployed Workers - Unemployment Insurance (UI) is the first-line response to a declining economy. It is a crucial source of temporary financial assistance for jobless workers and their families. As part of the stimulus package, Congress should adopt a temporary program to provide additional weeks of federally-funded extended benefits for workers who exhaust their regular UI benefits, including adequate funding to administer the program. In April 2008, nearly 18 percent of unemployed workers had been out of work for more than six months. As the economy weakens and job prospects diminish, people are more likely to remain unemployed for half-a-year or more.

However, an extension of UI benefits for current recipients is just the first step. Only about two of every five unemployed individuals receive UI benefits. If an extension is approved, it will still leave out large numbers of low-wage, part-time, and other workers in some states. Low-wage workers are twice as likely to be unemployed as high-wage workers; yet, they are half as likely to receive UI benefits, according to the Government Accountability Office. To ensure that low-wage, part-time, and other vulnerable workers have access to UI, Congress should enact provisions such as those included in the Unemployment Insurance Modernization Act. This legislation provides incentive funding to states that count the most recent earnings of workers and extend benefits to part-time workers and others who leave jobs for compelling family reasons.

Direct Funding for Summer Jobs to Areas with High Youth-Unemployment Rates. - A $1 billion summer jobs program would put money in the pockets of thousands of low-income youth in economically distressed communities. These dollars would flow immediately into the local economy. Just as important, these jobs will be the first exposure to the work environment for many youth, and will help them develop appropriate work skills and behaviors, and provide important community service. The program should include a provision that 30 percent of funds can be spent beyond summer months for transitional jobs for out-of-school youth.

The Workforce Investment Act of 1998 substantially curtailed the use of federal funding for summer jobs. Nonetheless, each year, communities across the country mount summer jobs efforts, although at a substantially reduced level from past years, with long waiting lists and thousands of young people turned away. Stimulus money directed to those communities with the summer jobs programs in place could eliminate waiting lists and ensure that these dollars circulate in the local economies throughout the summer.

Help Low-Income Individuals and Families Meet Basic Needs - Expand Food Assistance to Low-Income Individuals and Families. - A temporary increase in Food Stamp benefits to current recipients will help low-income families afford more food. This is critical, both because of the recent increases in the cost of food and because food is a part of the budget that gets squeezed when other living expenses increase. The value of Food Stamps has been eroded over the past decade because of a freeze in the standard deduction, the amount of family income that is assumed to be required for other household needs. An increase in Food Stamp benefits is one of the fastest and most effective ways to put additional spending power in the hands of low-income individuals and families, and thus to stimulate the economy. While the Farm Bill includes some important improvements to the Food Stamp program, these will be phased in over time and will not provide any immediate relief to needy individuals and families.

Increase Funding for Energy Assistance - High energy prices are hurting everyone, but they are especially overwhelming to the budgets of low-income households. While other households may be foregoing extras, low-income households are sacrificing essential needs, including food, medical care, and prescription medications. The Low Income Home Energy Assistance Program (LIHEAP) is targeted to help the elderly, disabled, and households with young children afford their energy bills. However, it only reaches about 16 percent of eligible households and in recent years has covered a smaller fraction of energy costs for those households. Without additional assistance, many households will lose energy in the coming months as winter shut-off moratoriums expire, and state assistance budgets will be strained heading into the cooling season.

Expand and Improve the Dependent Care Tax Credit - One of the largest components of the budget of a low-income family is the cost of child care. The U.S. Census Bureau estimates that the poorest families pay 29 percent of their income for child care while higher income families pay only 6 percent of their income. As family incomes decline during a recession, child care takes larger and larger shares of that income, yet families cannot eliminate the cost—child care is a needed support if parents and guardians are to go to work each day.

The Child and Dependent Care Tax Credit (CDCTC) is the largest tax subsidy for child care; however, the design of the credit means that it is largely inaccessible to low-income families. As part of the stimulus, Congress should take three steps to offset the high cost of child care for low-income families: first, make the CDCTC refundable, so that parents who have no tax liability but need child care to work can benefit; second, increase the limits to better reflect the current costs of child care; and third, permanently index the CDCTC so that the size of the credit grows as inflation increases the costs of child care.

Encourage States to Provide Cash Assistance to Needy Families. - The safety-net role played by Temporary Assistance for Needy Families (TANF) has been greatly diminished in recent years. During the 2001 recession, caseloads continued to decline even as poverty levels rose significantly. The changes made by the Deficit Reduction Act (DRA) of 2005 further restrict state flexibility and discourage states from allowing unemployed workers to receive welfare. While some states have used their own funds to provide assistance outside of the narrow framework of the federal rules, these programs will be under increased pressure as states face budget deficits.

Congress should enact the contingency fund fixes that received bipartisan support in the pre-DRA reauthorization bills in order to make additional funds available to states that experience increases in need, and extend the supplemental grants past FY 2008. Congress should also provide penalty relief to states that experience caseload increases as a result of the recession, so as not to discourage states from letting people back on the rolls. Finally, targeted modifications to the participation rate requirements should be adopted to allow states to count education and training for longer periods during times of economic distress.

Targeted State Fiscal Relief to Keep Critical Services Available - Forty-nine states have constitutional requirements to balance their budgets each year. During an economic downturn, the decisions that state legislatures and governors have to make to keep their budgets balanced—cutting spending, raising taxes, or both—can have the pro-cyclical effect of deepening and prolonging the slump.

Leverage income for single-parent families by restoring child support enforcement. Congress should immediately and permanently reverse the 20 percent federal child support enforcement funding cut included in the Deficit Reduction Act of 2005. States and counties are preparing to lay off staff and cut back on services in the coming months. According to the Congressional Budget Office, $5 billion in support payments to families will go uncollected over the next five years unless funding is replaced. In addition, critical initiatives to help low-income fathers obtain jobs will be eliminated or cut back.

Next to earnings, child support is the second largest income source for poor, single-mother families that receive it—30 percent of the family’s budget. Support payments play a stabilizing role during economic downturns, helping families get from paycheck to paycheck and weather job losses. Families spend the money very quickly. State data suggest that 97 percent of child-support funds dispensed to family debit cards are spent down by the end of the month.
Ensure adequate resources to provide low-income families needed health care. The federal medical assistance percentage (FMAP) for Medicaid should be raised temporarily to ensure that states have sufficient revenues to continue to provide low-income families and individuals access to critical health-care services. This additional federal support will be particularly critical if more individuals lose their jobs and health insurance for themselves and their families.

Congress should also place a moratorium on a number of pending and proposed Medicaid regulations which will siphon off billions of federal dollars currently being used to provide access to essential health-care services. For example, the Centers for Medicare and Medicaid Services (CMS) recently issued regulations which slash federal funds for targeted case management services under Medicaid—an estimated $1.28 billion over five years. These regulations are likely to harm many low-income individuals, particularly children in foster care, children with special education needs, individuals with disabilities, and seniors. Increasing the FMAP will not be as effective if Congress allows CMS to continue to drain billions of federal dollars from the program through the regulatory process.

Our thanks go out to “CLASP” (The Center for Law and Social Policy) for this report. The full version, complete with graphs and charts, can be found at:
http://www.clasp.org/publications/compiled_indicators_piece_may5_cm.pdf

Employment Verification System Dangerous for U.S. Workers & Vulnerable Populations

Attempts are being made to implement a national employment eligibility verification system (EEVS). It is being touted as a way to keep undocumented immigrants from entering the U.S. workforce. However, many experts and advocates believe it will not meet its intended goal and will instead overburden the Social Security Administration and harm workers, the elderly and people with disabilities.

Two bills have been introduced in the House that would mandate the establishment of such a program. One is the Secure America Through Verification and Enforcement (SAVE) Act, H.R. 4088, sponsored by Representatives Heath Shuler (D-NC) and Tom Tancredo (R-CO). The other is the New Employee Verification Act of 2008, H.R. 5515, which was introduced by Representative Sam Johnson (R-TX). Each would require that all 7.4 million employers in the U.S. verify the employment eligibility of every employee with the Social Security Administration (SSA). The system would be modeled after the Department of Homeland Security’s experimental Basic Pilot program, recently renamed E-Verify. Various entities that have reviewed Basic Pilot/E-Verify – including independent researchers commissioned by the U.S. Department of Homeland Security (DHS) in 2007, the Government Accountability Office, and the Social Security Administration’s Office of the Inspector General – have found it riddled with problems.

One of the biggest issues with E-Verify, which raises concerns for the proposed national employment verification system, is the high error rate in SSA’s database. According to SSA’s Office of the Inspector General an estimated 17.8 million agency records contain discrepancies that can cause the system to incorrectly classify someone as ineligible to work. This would mean, according to SSA, that if E-Verify becomes a mandatory national program, 2.5 million workers a year could be misclassified as unauthorized to work. It would be up to each individual to then contest the erroneous classification with SSA.

All of this would have the negative effect of preventing SSA from meeting its current responsibilities. It would most certainly delay the already slow processing of applications for benefits for people with disabilities. It is expected that SSA would have to contend with 3.6 million extra visits or calls made to its field offices per year if EEVS is implemented. As it is SSA is struggling to keep pace with its current caseload. In 2007 there were 1.4 million disability cases pending at the initial claims, reconsideration, and hearing levels. The inevitable slowdown in services would further hamper the agency’s ability to administer benefits and would also hurt individuals’ prospects for work as they wait long periods for their work eligibility issues to be resolved.

A further complication with E-Verify, and consequently EEVS if implemented, is that it provides very few safeguards to workers. The DHS commissioned evaluation of E-Verify found that 22 percent of employers restricted work assignments, 16 percent delayed job training, and 2 percent reduced pay while workers challenged the errors in the SSA database. It also found that some employers did not even notify workers of the database error or discouraged them from contesting the claim, and worse still, that close to half of the employers participating in E-Verify screened workers before they hired them which is against program rules. The National Council of La Raza captures the damaging effects of pre-screening: “Preemployment screening is an extremely harmful practice, because people who are authorized to work but have errors in their records are denied jobs without ever knowing that a database error was the culprit, and without having an opportunity to correct the error.”

Implementing EEVS would not only have adverse affects on the current U.S. workforce and the SSA’s ability to issue benefits, but it would also be costly. The Congressional Budget Office estimates that the implementation of the SAVE Act, which would impose a national EEVS, would cost the federal government $23 billion over 10 years. Additionally, it would decrease federal revenue by $17.3 billion dollars over that same time period.

Republicans have filed a discharge petition to bring the SAVE Act directly to the floor of the House, bypassing any committee review. The petition needs 218 signatures; thus far 185 signatures have been collected. House leadership plans to schedule a series of hearings on EEVS to better educate Members about the inherent problems with this program.

22 States Face Major Budget Shortfalls in 2009; Others Expect Budget Problems

By Elizabeth C. McNichol and Iris Lav

Summary - At least twenty-five states, including several of the nation’s largest, face budget shortfalls in fiscal year 2009. Of these 25 states, specific estimates are available for 22 states and the District of Columbia; the combined deficits of these 22 states plus the District of Columbia are expected to total at least $39 billion for fiscal 2009 — which begins July 2008 in most states. Another 3 states expect budget problems in fiscal year 2010, although some of those gaps may occur earlier than expected. Many of the other states have not yet released information about their fiscal status.

The bursting of the housing bubble has reduced state sales tax revenue collections from sales of furniture, appliances, construction materials, and the like. Weakening consumption of other products has also cut into sales tax revenues. Property tax revenues have also been affected, and local governments will be looking to states to help address the squeeze on local and education budgets. And if the employment situation continues to deteriorate, income tax revenues will weaken and there will be further downward pressure on sales tax revenues as consumers become reluctant or unable to spend.

The vast majority of states cannot simply run a deficit or borrow to cover their operating expenditures. As a result, states have three primary actions they can take during a fiscal crisis: they can draw down available reserves, they can cut expenditures, or they can raise taxes. States already have begun drawing down reserves; the remaining reserves are not sufficient to allow states to weather a significant downturn or recession. The other alternatives — spending cuts and tax increases — can further slow a state’s economy during a downturn and contribute to the further slowing of the national economy, as well.

The Center on Budget and Policy Priorities currently is monitoring state fiscal reports and is in touch with state officials and/or relevant state nonprofit organizations in the 50 states and DC.

The fiscal situation appears to be as follows.
· Over half of the states are anticipating budget problems.
· The 22 states in which revenues are expected to fall short of the amount needed to support current services in fiscal year 2009 are Alabama, Arizona, California, Florida, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Rhode Island, South Carolina, Vermont, Virginia, and Wisconsin. In addition, the District of Columbia is expecting a shortfall in fiscal year 2009. The budget gaps total $38.8 to $40.5 billion, averaging 8.8 – 9.2 percent of these states’ general fund budgets. (See Table 1.)

· Another three states face budget shortfalls that will need to be closed for fiscal year 2009, but information on the size of those deficits is not available. They are Louisiana, Michigan, and Mississippi. Analysts in three other states — Connecticut, Missouri, and Texas — are projecting budget gaps a little further down the road, in FY2010 and beyond.

This brings the total number of states identified as facing budget gaps to 28 — more than half of all states. The remaining 22 states did not foresee FY2009 budget gaps at the time of the survey either because their budgets remain strong or because they have not yet prepared updated revenue and spending projections for fiscal year 2009. The list of states facing budget gaps is likely to grow as additional state budgets are released in preparation for the upcoming legislative session.

Some mineral-rich states — such as New Mexico, Alaska, and Montana — are seeing revenue growth as a result of high oil prices. Other regions’ economies are less affected by the national economic problems. For example, states with high levels of farm exports are benefiting from the high price of corn and soybeans and the falling value of the dollar. This does not mean, however, that local governments in those states will escape fiscal stress. Some states with mineral revenues or farm exports have been affected by the housing bubble and could face widespread local government deficits.

In states facing budget gaps, the consequences could be severe — for residents as well as the economy. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets. Even if the economy does not fall into a recession as it did in the earlier part of this decade, actions will have to be taken to close the budget gaps states are now identifying. The experience of the last recession is instructive as to what kinds of actions states may take.

· Cuts in services like health and education. In the last recession, some 34 states cut eligibility for public health programs, causing well over 1 million people to lose health coverage, and at least 23 states cut eligibility for child care subsidies or otherwise limited access to child care. In addition, 34 states cut real per-pupil aid to school districts for K-12 education between 2002 and 2004, resulting in higher fees for textbooks and courses, shorter school days, fewer personnel, and reduced transportation.

· Tax increases. Tax increases may be needed to prevent the types of service cuts described above. However, the taxes states often raise during economic downturns are regressive — that is, they fall most heavily on lower-income residents.

· Cuts in local services or increases in local taxes. While the property tax is usually the most stable revenue source during an economic downturn, that is not the case now. If property tax revenues decline because of the bursting of the housing bubble, localities and schools will either have to get more aid from the state — a difficult proposition when states themselves are running deficits — or reduce expenditures on schools, public safety, and other services.

Expenditure cuts and tax increases are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy. Tax increases also remove demand from the economy by reducing the amount of money people have to spend.

The federal government — which can run deficits — can provide assistance to states and localities to avert these “pro-cyclical” actions.

States Have Restrained Spending and Accumulated Rainy Day Funds - Many states have never fully recovered from the fiscal crisis in the early part of the decade. This fact heightens the potential impact on public services of the deficits states are now projecting.

State expenditures fell sharply relative to the economy during the 2001 recession, and for all states combined they remain below the FY2001 level. (See Figure 1.) In 18 states, general fund spending for FY2008 — six years into the economic recovery — remains below pre-recession levels as a share of the gross domestic product.

In a number of states the reductions made during the downturn in education, higher education, health coverage, and child care remain in effect. These important public services will suffer even more if states turn to budget cuts to close the new budget gaps they now anticipate.
One way states can avoid making deep reductions in services during a recession is to build up rainy day funds and other reserves. At the end of FY2006, state reserves — general fund balances and rainy day funds — totaled 11.5 percent of annual state spending. These reserves are estimated to decline to 6.7 percent of annual spending by the end of this fiscal year.

Reserves can be particularly important to help states adjust in the early months of a fiscal crisis, but generally are not sufficient to avert the need for substantial budget cuts or tax increases.
Federal Assistance is Needed - Federal assistance can lessen the extent to which states take pro-cyclical actions that can further harm the economy. In the recession in the early part of this decade, the federal government provided $20 billion in fiscal relief in a package enacted in 2003. There were two types of assistance to states: 1) a temporary increase in the federal share of the Medicaid program; and 2) general grants to states, based on population. Each part was for $10 billion. The increased Medicaid match averted even deeper cuts in public health insurance than actually occurred, while the general grants helped prevent cuts in a wide variety of other critical services. The major problem with that assistance was that it was enacted many months after the beginning of the recession, so it was less effective than it could have been in preventing state actions that deepened the economic downturn. The federal government should consider aiding states earlier, rather than waiting until the downturn is nearly over.

Families Helped by Child Tax Credit Expansion Work Hard in Low-Paying Jobs

[A MESSAGE FROM THE CENTER FOR BUDGET AND POLICY PRIORITIES]

Nursing Home Aides, Cooks, Pre-School Teachers & Construction Workers Would Get a Boost


by Sharon Parrott and Arloc Sherman

The House AMT “patch” bill (H.R. 3996) would expand the Child Tax Credit by lowering the earnings threshold that families must meet to qualify for the refundable portion of the credit. Under the bill, law, by contrast, families must have earnings above $12,050 in 2008 to qualify for the refundable child tax credit.

According to the Tax Policy Center, this provision would benefit 13 million children — including
2.9 million children who would become newly eligible for the benefit and 10.1 million children who would see their CTC increased due to this provision. Families that are “newly eligible” are those with incomes between $8,500 and $12,050. A broader group of low-income families would see their


CTC increase as a result of this provision, because the size of their credit is based on the amount by which the family’s earnings exceed the threshold.

Who are these families that would benefit? Census data provides important information about these families and the jobs the parents hold:

• Most of the children helped live in families in which a parent works throughout the year. Some 70 percent of the children who would benefit live in families in which a parent works 30 or more hours per week for at least 50 weeks during the year. A majority of the remaining families experienced periods of unemployment during the year, but when they were employed, worked at least 30 hours per week.

• Many of the children helped live in families that include individuals with disabilities.
Nearly one in ten children — 1.1 million children — who would benefit live in a family where either a parent or a child has a disability. An expanded CTC would provide assistance to these families in which parents struggle to maintain jobs and meet the health and other expenses they incur due to the disability.

• Parents who would be assisted work in a broad range of low paying jobs; many perform difficult jobs that provide critical services, like caring for the elderly or teaching young children.

• 480,000 parents provide health care services to the elderly or the ill as nursing home workers, home health aides, personal care assistants, medical assistants, and other low paid health care professionals.

• 240,000 parents provide child care, serve as teaching assistants, or are preschool or kindergarten teachers.

• 310,000 parents earn a living by cleaning or maintaining the grounds of homes, office buildings, schools, or other community institutions.

• 410,000 parents work as cashiers in grocery stores and a broad array of other businesses.

• 470,000 parents work as cooks, waiters or waitresses, or assist cooks with food preparation.

• 360,000 parents earn a living as construction workers, carpenters, or painters.

• 120,000 parents work as laborers in the agriculture sector.

All of the figures presented here are Center for Budget and Policy Priorities calculations based on the March 2006 Current Population Survey.

Families Helped by Child Tax Credit Expansion Work Hard in Low-Paying Jobs

[A MESSAGE FROM THE CENTER FOR BUDGET AND POLICY PRIORITIES]

Nursing Home Aides, Cooks, Pre-School Teachers & Construction Workers Would Get a Boost

by Sharon Parrott and Arloc Sherman

The House AMT “patch” bill (H.R. 3996) would expand the Child Tax Credit by lowering the earnings threshold that families must meet to qualify for the refundable portion of the credit. Under the bill, law, by contrast, families must have earnings above $12,050 in 2008 to qualify for the refundable child tax credit.

According to the Tax Policy Center, this provision would benefit 13 million children — including
2.9 million children who would become newly eligible for the benefit and 10.1 million children who would see their CTC increased due to this provision. Families that are “newly eligible” are those with incomes between $8,500 and $12,050. A broader group of low-income families would see their

CTC increase as a result of this provision, because the size of their credit is based on the amount by which the family’s earnings exceed the threshold.

Who are these families that would benefit? Census data provides important information about these families and the jobs the parents hold:

• Most of the children helped live in families in which a parent works throughout the year. Some 70 percent of the children who would benefit live in families in which a parent works 30 or more hours per week for at least 50 weeks during the year. A majority of the remaining families experienced periods of unemployment during the year, but when they were employed, worked at least 30 hours per week.

• Many of the children helped live in families that include individuals with disabilities.
Nearly one in ten children — 1.1 million children — who would benefit live in a family where either a parent or a child has a disability. An expanded CTC would provide assistance to these families in which parents struggle to maintain jobs and meet the health and other expenses they incur due to the disability.

• Parents who would be assisted work in a broad range of low paying jobs; many perform difficult jobs that provide critical services, like caring for the elderly or teaching young children.

• 480,000 parents provide health care services to the elderly or the ill as nursing home workers, home health aides, personal care assistants, medical assistants, and other low paid health care professionals.

• 240,000 parents provide child care, serve as teaching assistants, or are preschool or kindergarten teachers.

• 310,000 parents earn a living by cleaning or maintaining the grounds of homes, office buildings, schools, or other community institutions.

• 410,000 parents work as cashiers in grocery stores and a broad array of other businesses.

• 470,000 parents work as cooks, waiters or waitresses, or assist cooks with food preparation.

• 360,000 parents earn a living as construction workers, carpenters, or painters.

• 120,000 parents work as laborers in the agriculture sector.
All of the figures presented here are Center for Budget and Policy Priorities calculations based on the March 2006 Current Population Survey.

Many Cuts Come on Top of Sizable Reductions in Recent Years

THE PRESIDENT'S BUDGET WOULD CUT DEEPLY INTO IMPORTANT PUBLIC SERVICES & ADVERSELY AFFECT STATES

[A MESSAGE FROM THE CENTER ON BUDGET AND POLICY PRIORITIES]

by Sharon Parrott, Kris Cox, Danilo Trisi, and Douglas Rice

The President’s 2009 budget would provide some $20.5 billion less for domestic discretionary programs outside of homeland security — a broad category of programs that includes everything from child care to environmental protection to medical research — than the 2008 level, adjusted for inflation.

The budget calls for reductions in a broad range of services, including some areas that have seen sizable cuts in recent years. For example, the budget would cut child care, environmental protection, and job training — all areas for which funding in 2008 is well below funding earlier in the decade, after adjusting for inflation.

In other areas, the budget does not call for large new cuts, but nor does it reverse sizable cuts that have been made in recent years. K-12 education is such an area. After the No Child Left Behind initiative was enacted, funding for K-12 education increased for several years. Since 2004, however, funding has failed to keep pace with inflation. In 2008, funding for K-12 education is 8.9 percent below the 2004 level, in inflation-adjusted dollars. The President’s proposed funding level falls just short of what would be needed to keep pace with inflation. As a result, under the President's budget, K- 12 funding in 2009 would fall 9.1 percent below the 2004 funding level, adjusted for inflation.

Head Start is another example. Head Start funding has essentially been frozen since 2002, without adjustment for inflation. As a result, when inflation is taken into account, funding in 2008 is 11 percent below the 2002 level. The President’s proposed 2009 funding level falls 12 percent below the 2002 inflation-adjusted level.

As a result, significant additional funding would be needed to restore many programs to the levels in place earlier this decade. For example, in K-12 education alone, an additional $3.7 billion above the President’s 2009 budget request would be needed to restore funding to 2004 levels (after adjustment for inflation). To restore child care and Head Start funding to 2002 inflation-adjusted levels would require an additional $1.4 billion above the President’s budget request.
Many of the proposed cuts in domestic discretionary programs would adversely affect state budgets. A large number of domestic discretionary programs provide funding to states for various types of services such as education, low-income energy assistance, environmental protection, and mass transit. The President’s budget would cut overall funding for domestic discretionary grants to state and local governments by $19.1 billion, as compared to 2008 funding levels adjusted for inflation. (Funding would be $15.1 billion below 2008 funding levels even without adjusting for inflation.)

It is important to note that despite some rhetoric to the contrary, these programs have not grown rapidly in recent years. In 2008, funding for domestic discretionary programs outside homeland security is lower as a share of the economy than it was in 2001. And, between 2002 and 2008, the overall funding level for domestic discretionary programs outside homeland security declined 2.6 percent in real per capita terms.

New Federal Law Could Worsen State Budget Problems

NEW FEDERAL LAW COULD WORSEN STATE BUDGET PROBLEMS:States Can Protect Revenues by "Decoupling"
2/13/08 By Nicholas Johnson

The federal “economic stimulus” package enacted today not only cuts federal taxes, but also threatens to reduce many states’ corporate and personal income tax revenue this year and next year. The potential revenue loss comes at a particularly problematic time for states, because about half the states are already facing budget shortfalls for the current year, the upcoming year, or both; more states will be in trouble if the economic downturn worsens. Some states are already enacting cuts in K-12 education, higher education, health care and human services, among other areas in order to balance their budgets.

The revenue loss results from a provision of the stimulus package known as “bonus depreciation.” Bonus depreciation allows a business to claim an immediate federal tax deduction of up to 50 percent of the cost of new equipment purchases, rather than following the standard accounting approach of depreciating the full cost gradually over the several year useful life of the equipment. Most states’ personal and corporate income taxes are based on federal law. So tax cuts at the federal level that reduce federal taxable income normally reduce state taxable income as well and therefore cost states money.

Because the bonus depreciation provision is retroactive to January 1, 2008, affected states will experience immediate revenue loss in the current fiscal year and the upcoming fiscal year. We estimate that under current state law, some 23 states stand to lose an estimated $1.7 billion in corporate and individual tax revenue in the current and upcoming fiscal years.

There is a way states can protect themselves from this immediate and large revenue loss. States can, at their own option, pass a statute to "decouple" their business depreciation rules from the section of the federal tax code that allows bonus depreciation. During the 2001-04 period, when a similar bonus depreciation provision was in effect, over 30 states fully or partially decoupled from it, with minimal adverse consequences.

What Is Bonus Depreciation? “Bonus depreciation” is a change to the way businesses subtract from their taxable income the cost of purchasing machinery or equipment. Normally, when a business purchases a piece of machinery or equipment, the tax deduction for the cost of the purchase must be spread out over time — up to 20 years, depending on the type of product. (Equipment that is likely to break down or become obsolete more quickly is more rapidly depreciated than more durable equipment. Real estate has an even longer depreciation schedule, and is not eligible for bonus depreciation.) Contrary to the general accounting rules that match the deductions to the approximate useful life of the machine or equipment,, “bonus depreciation” allows businesses that purchase machinery or equipment in 2008 to deduct 50 percent of the cost right away. The remaining 50 percent is then depreciated over the normal depreciation schedule.[1]

The “bonus” applies to machinery and equipment placed in service anytime in calendar year 2008, meaning that businesses can begin immediately to claim the deduction in their estimated tax payments. It expires December 31, 2008, by which time it will have reduced federal taxes on profitable businesses by an estimated $49.5 billion.

Why Are Some States Affected, and Others Are Not? A state might lose revenue due to the new federal “bonus depreciation” law for either of two reasons.

· A state’s tax code might be written in such a way that it automatically reflects any change in federal tax law. This is sometimes called “rolling conformity.” (Note that some states in this category decoupled from bonus depreciation in 2001-04, but the legislation to decouple was written so narrowly that it does not automatically apply to the 2008 bonus depreciation.)

· A state’s tax code might be written in such a way that it reflects the federal tax code as it existed on a particular date, but the practice in the state is that the date is routinely moved forward to incorporate federal tax changes. Specifically, if the state moved the date forward in order to conform to “bonus depreciation” in 2001-04, it is reasonable to expect that — absent specific efforts to “decouple” — the state will incorporate bonus depreciation now and hence lose revenue.

States in either of those categories are shown in Table 1 as being likely to lose revenue. Other states are protected automatically from revenue loss due to “bonus depreciation.” In most cases, this is either because they have fixed-date conformity for their tax code as a whole (or for depreciation provisions in particular), or because they have a specific provision that requires businesses to “add-back” any benefit they receive from Section 168(k) — the section of the federal tax law that allows bonus depreciation.

Such states are shown as having no revenue loss in Table 1. However, it is possible that some of those states might consider enacting legislation that would bring their codes into conformity with the new federal stimulus law and hence lead to lost revenue. Table 2 at the end of this paper provides the potential revenue loss were all states to choose to conform — an unlikely scenario in most states, but perhaps plausible in a few.

How Can States Decouple From Bonus Depreciation? The last time the federal government enacted “bonus depreciation,” in 2002-2004, over 30 states amended their state laws to prevent revenue loss. (Then, as now, states were facing significant budget shortfalls due to an economic slowdown, and could not afford additional loss of revenues.)

The state statutes to decouple from 2002-04 bonus depreciation typically were quite simple: They merely required businesses to calculate their taxable income as if bonus depreciation had not been enacted. Some are more detailed about the steps involved, requiring businesses to add back to their federal taxable income the amount of the bonus depreciation deduction, and then allowing them to subtract the amount of depreciation they would normally have claimed. A few states use variations on the latter approach, for instance requiring that the “bonus depreciation” deduction be spread out over a number of years, which roughly mirrors the normal depreciation law. There is no obvious advantage to any one of these approaches.

However, states should decouple in such a way that the decoupling applies to any future bonus depreciation beyond 2008 — or even better in such a way that the decoupling applies to any future changes in any part of the federal tax law. This would prevent any future federal tax law change from automatically reducing state revenues.

What Are The Short-Term and Long-Term Revenue Implications of Decoupling from Bonus Depreciation? The federal government expects to lose $49.5 billion in federal fiscal years 2008 and 2009 (combined) as a result of bonus depreciation. If the affected states face a proportionately equivalent revenue loss, as it is reasonable to expect they would, this represents potential revenue loss of approximately $1.7 billion, as shown in Table 1.[2] It is somewhat unclear what portion of this revenue would fall in state fiscal year 2008 and what portion would fall in state fiscal year 2009. But in most states the distinction is not very important, because any shortfall in 2008 would have to be made up in 2009.

If the federal government allows bonus depreciation to expire on December 31, 2008, as it is now scheduled to do, then no revenue loss would be expected to occur after 2009. However, there is no guarantee that bonus depreciation will expire on schedule. In the early 2000s, for instance, bonus depreciation was enacted and then a year later extended; in the end bonus depreciation was in effect for more than three years. Moreover, 2008 is an election year, so additional “stimulus” tax cuts (such as an extension of bonus depreciation) are entirely possible, especially if the economy does not recover rapidly.

Some proponents of conforming to bonus depreciation may argue that bonus depreciation is merely a timing shift. A state that loses money from bonus depreciation in 2008 and 2009 might expect to begin recouping a portion of the revenue loss beginning in 2010, because of the way bonus depreciation interacts with the regular depreciation schedule. Since more of the purchase cost is depreciated in the first year, less is depreciated in subsequent years.
This timing shift is likely to be of little solace to states facing budget problems now. Moreover, even in the longer term, states should be suspicious of the “recoupment” argument for the following reasons:

· As noted above, it is not clear whether in fact the federal government will allow bonus depreciation to expire as scheduled. If it does not, recoupment would be substantially delayed.

· Although the recoupment of revenue could begin as early as 2010, the bulk of it would occur after 2011. (Some of it could be recouped as far into the future as 19 years from now, or perhaps never, if corporations go out of business before making up the lost revenue.) This is of little help to states that are legally required to balance their budgets in 2008, 2009, and 2010 as well as all subsequent years, as nearly all states are.

· Allowing corporations to pay less taxes now, based on the premise that they will pay an equivalent amount in increased taxes five, ten or 15 years into the future, is equivalent to giving those corporations an interest-free loans. Like any interest-free loan that gets repaid, there is a hidden cost to the borrower, in this case the state. (As a recent Wall Street Journal article noted, the cost of this “interest-free loan” that results from bonus depreciation is not reflected in the official Congressional cost estimate due to a loophole in federal budget rules.[3])

What Are The Short- and Long-Term Economic Implications for A State of Decoupling from Bonus Depreciation?

Of the measures considered by Congress to stimulate the economy, bonus depreciation is one of the least effective, according to the Congressional Budget Office. Moody’s Economy.com found that for every dollar spent on bonus depreciation, the economy would grow by just 27 cents. Part of the reason this stimulus strategy is considered relatively ineffective is that studies of the 2001-04 bonus depreciation program found that it did little to stimulate business investment. Most of the benefit went to firms that were planning to buy new equipment anyway. A better approach to stimulating a state economy would be for a state to decouple from the federal change and use the revenue to balance the budget — thereby reducing the need for the state to cut spending or raise new revenues. In contrast to the relatively weak stimulus effect of bonus depreciation, Moody’s found that each dollar spent mitigating state budget shortfalls could yield $1.36 in increased economic growth.