Off the Charts Blog | Center on Budget and Policy Priorities

We sat down with Arloc Sherman, Senior Researcher, to discuss what to look for in the Census Bureau’s upcoming release of data on poverty in 2009.

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Arloc, tomorrow, the Census Bureau will release official data on national poverty, income, and health insurance coverage in 2009.  Let’s focus on poverty.  How does the Census Bureau define poverty?

The official poverty definition accounts for cash income before taxes. So it includes earnings and government cash benefits like unemployment benefits for jobless workers. It does not include tax credits or noncash benefits (such as public housing or food stamps). In 2009, a family of four was considered below the poverty line – or officially “poor” – if their cash income was less than about $22,000.

What do you expect the poverty data for 2009 to show?

We expect a large increase for 2009 in both the number of Americans in poverty, and the share of the population that were living in poverty. This is a reflection of the effects of the severe recession and the unusually large amount of long-term unemployed workers. The longer people are out of work, the more likely they are to fall into poverty. The increase in poverty may even be among the largest single-year increases in many years.

Earlier, you mentioned that the poverty definition excludes non-cash income like food stamp benefits. Weren’t those significant parts of the Recovery Act of 2009 that were intended to lessen the harmful effects of the recession? How do we regard the Census poverty data if it’s missing a large share of the government’s anti-poverty efforts?

You’re right. The Census numbers released on Thursday will leave out tax credits and non-cash assistance, which make up the majority of the help to families under the 2009 Recovery Act. However, a broader definition of poverty is due out at the end of the year. It’s called the Supplemental Poverty Measure, and Census plans to unveil a preliminary version of it, and it will include tax credits and food stamps and other non-cash benefits. The new measure will do a better job of showing how the Recovery Act has helped mitigate the true rise in poverty over the course of the recession.

Will this new measure show that poverty in the country isn’t really that dire?

Actually, it is still quite dire. It’s just that poverty hasn’t necessarily risen as much as the official numbers will show. Moreover, there is an even darker cloud looming on the horizon: The Recovery Act provisions that have proven so successful in shielding people from deeper poverty levels are set to expire at the end of this year. That means this extra help will evaporate, and assuming the labor market is as troubled as the predictions forecast, poverty could go even higher.

What should policymakers do?

Congress can take three key steps:

• One: Extend the unemployment benefits for the long-term unemployed, which are due to expire November 30
• Two: Extend the child tax credit for lower-income working families with children. The Recovery Act broadened that to cover more families, so don’t let that run out.
• Three: Extend a highly successful little jobs program called the TANF Emergency Fund, which has placed a quarter of a million people in jobs and is set to expire at the end of September.

You can download a podcast of this conversation here or on iTunes.

What do you call parents who work at very low-wage jobs to support their families — say, a single mother raising two children and working at a nursing home, or a construction laborer trying to support his wife and children?  Until recently, policymakers have called them welfare-reform success stories:  people who have chosen work over welfare.  Now, however, there is a risk that it is becoming fashionable to call them “freeloaders” for whom the Internal Revenue is a “sugar daddy” dispensing tax benefits.

Here’s the issue:  a significant number of low-wage workers with children qualify for an earned income tax credit (EITC) and a child tax credit whose combined value exceeds what they pay in federal income and payroll taxes.  Some critics are using this fact to argue for cutting the EITC and child credit, both of which received temporary expansions in last year’s Recovery Act.  Those critics need to consider the following realities:

• The EITC is essential to ensuring that work is better than welfare. Congress created the EITC in 1975 specifically to encourage work:  only working people qualify, and the amount of the credit grows with each additional dollar of wages up to a maximum value.  And it has succeeded.  President Reagan called the large EITC expansion he signed in 1986 “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and the Committee for Economic Development (an organization of 250 corporate executives and university presidents) said in 2000 that “The EITC has become a powerful force in dramatically raising the employment of low-income women in recent years.”
• Over time, EITC recipients pay much more in federal taxes than they receive in EITC benefits. This is because more than half of them get the credit only for one or two years at a time, such as when their incomes drop due to a temporary layoff.  Taxpayers who claimed the EITC at least once during an 18-year period paid a net $473 billion in federal income tax revenues over that period (in 2006 dollars), according to a 2008 study by Tim Dowd of Congress’s Joint Tax Committee and John B. Horowitz of Ball State University.
• Low-income workers pay a disproportionate share of state and local taxes. The lowest-income fifth of taxpayers pay 11 percent of their income in state and local taxes, nearly double the rate that the top 1 percent of taxpayers pay.  (Most states rely heavily on sales taxes, which eat up a larger share of the income of lower-income families than of affluent ones.)  The EITC and child credit can help offset this tax burden for many low-income working families.
• The child tax credit both helps offset the large cost of raising children and encourages work. Congress created the credit in 1997 to help families meet the costs of raising children, and lawmakers expanded it in 2001 and 2009.  The full credit is worth $1,000 per child.  As with the EITC, only working families qualify.The 2009 expansion made the child credit a more effective work incentive by making millions of low-income families eligible for it for the first time and expanding the credit for many other low-wage families who’d only qualified for a small credit under the old rules, such as those headed by a minimum-wage worker.  This change gave unemployed parents a more powerful reason to look for and take offers of even very low-paying or part-time jobs if those are all they can find.

• Taking money out of low-wage workers’ pockets is the last thing the economy needs now. A family headed by a full-time, minimum-wage worker with two kids will lose nearly $1,500 next year if Congress doesn’t extend the Recovery Act improvement in the child credit.  Since low-income families generally spend all of their income on basics like housing and food, a cut in their income means they’ll spend less.  And less spending, in turn, means fewer jobs and a slower-growing economy.

Low-wage working parents aren’t “freeloaders” sitting home on the couch eating potato chips.  These people are working to make ends meet for their families — on wages that often don’t make that possible.  We should help them succeed.

A number of 2010 gubernatorial candidates propose to reduce or eliminate their state’s corporate income tax, saying this will stimulate growth and create jobs.  But, while states are understandably eager to get their economies moving again, corporate tax cuts will not likely work. Among the most important reasons why:

• The resulting budget cuts or other tax increases would cancel the short-term stimulus. Unlike the federal government, states are required to balance their budgets.  So states must fully offset the revenue loss from corporate tax cuts.  That means some combination of cuts in services and increases in other taxes.  So even if corporations boosted a state’s economy by spending their entire tax cut in-state (which is very unlikely, as noted below), there would be no net stimulus.  The economy would lose as much as it gains.

• Corporate tax cuts could even reduce the total amount of economic activity in the state. Some of corporations’ tax savings would likely go to their out-of-state shareholders in the form of higher dividends, which is good for the shareholders but of no value to the state that cut the taxes.  And some of the savings would go toward paying more federal income tax.  That’s because businesses can deduct their state corporate tax payments when calculating their federal corporate income taxes; a cut in state taxes means less to deduct, so higher federal taxes.  Meanwhile, the state revenue loss from the tax cut would likely mean lower public-sector spending on goods and services, nearly all of which is in-state.

• Corporate tax cuts do little if anything to boost corporate investment over the long run. Numerous studies have found that cutting businesses’ total state and local tax bill by 10 percent would likely boost economic output and jobs by 2-3 percent.  But, since corporate income taxes account for less than 10 percent of total state and local business taxes in the vast majority of states, eliminating the corporate tax wouldn’t generate 2-3 percent more long-term growth. And, even these modest positive effects assume a state wouldn’t cut public services or increase other business taxes to offset the lost revenue. That’s unlikely, given states’ balanced-budget requirements.

• Corporate tax cuts weaken long-term growth by leading to cuts in public services. Businesses need and demand high-quality education systems to produce skilled workers. They need well-functioning infrastructure to get their employees and supplies to their plants and their products to customers.  They need police and fire protection for their facilities, which need to be located in areas with good schools and recreation to attract senior managers, engineers, and other highly paid personnel.  If states help pay for corporate tax cuts in ways that impair the quality of these services, even the tax cuts’ modest positive potential impacts will not likely materialize.

The one recent example of a state eliminating its corporate income tax is Ohio, which phased out its tax from 2005 to 2009.  Despite a more than $1 billion annual reduction in business taxes, Ohio’s shares of national income, employment, and investment have all fallen since 2005.

Here are three things to keep in mind in examining the official figures on poverty in 2009, which the Census Bureau will release on Thursday:

1.  Poverty may increase by a record amount in 2009. Both the number and percentage of Americans in poverty could show record one-year increases, in data that go back to 1959.  (The existing records are increases of 3.2 million and 1.3 percentage points, both in 1980.).

The expected large increase reflects the recession and the unusually high degree of long-term unemployment.  Between the start of 2008 and the end of 2009, the number of jobs fell by over 8 million.  Further, by late 2009, the proportion of unemployed workers who had been out of work for more than six months topped 40 percent, another record.  The longer people are out of work, the more likely they are to fall into poverty.

Even worse, the current economic downturn follows an economic recovery that was the first on record in which poverty was higher — and median income for working-age households lower — at the peak of the recovery (2007) than in the previous recession (2001).

2.  Thursday’s figures will omit the impact of large parts of the 2009 Recovery Act. The Census Bureau’s official poverty data account for the cash income that households receive, including unemployment benefits for jobless workers, but they leave out any assistance that families receive in the form of tax credits or non-cash benefits.  So Thursday’s data won’t show the poverty-reducing impact of tens of billions of dollars’ worth of Recovery Act tax credits for low-income working families (such as the new Making Work Pay Credit) and expanded food stamp benefits.

3.  Poverty will likely rise even higher next year if recovery provisions are allowed to expire. Forecasters generally expect unemployment to remain high through 2011, and poverty will likely remain high even longer than unemployment does.  In each of the last three recessions, the poverty rate did not begin to decline until a year after the annual unemployment rate started to fall.

Many pieces of the Recovery Act aimed at low- and moderate-income households are scheduled to expire soon.  If Congress fails to act, extra weeks of unemployment benefits for the long-term unemployed will expire on November 30, the TANF Emergency Fund jobs program will expire on September 30, and the expanded Child Tax Credit for working families will expire after 2010.  If these measures do not continue, poverty — particularly as measured by an expanded poverty measure the Census Bureau will issue this fall, which includes tax credits and non-cash benefits — will likely go up in 2011.

On Thursday, we’ll post an analysis of the new data.

Since last October, the Office of the Actuary at the Centers for Medicare & Medicaid Services has issued several projections of national health spending under various versions of health reform legislation, the most recent of which came out last Thursday.  Each time, health-reform critics have contended that the projections show that health reform won’t slow the growth of health care costs.  And each time (see here, here, and here), we have explained why the critics are wrong.  So here we go again.

As we and others have made clear, health reform will increase national health spending at first, because it greatly expands coverage and insured people receive more health care than uninsured ones.  In its new report, the actuary’s office estimates that the Affordable Care Act will reduce the number of uninsured Americans by 32.5 million by 2019.  The increase in total health spending, however, is very small — only 0.3 percent of gross domestic product in 2019.

More important, health reform aims to slow the growth rate of health costs, generating savings that will grow over time.  The new projections confirm that the Affordable Care Act will modestly reduce the rate of growth of national health expenditures over the 2014-2019 period.  The actuary’s projections don’t extend beyond 2019, but the Congressional Budget Office estimates that, over the following decade, the federal government will spend less on health care than it would have without the new law.