Remaking the Tax Code to Help the Working Poor

By: U.S. Reps. Tom Petri (R-WI) and Niki Tsongas (D-MA)

Published in Politico (online and on page 19 of the print edition)

July 8, 2013

In his State of the Union address to Congress this past February, President Barack Obama made a commitment to strengthening and encouraging prosperity for low-income families by making it easier for low-income couples to get married. His goal? “Removing financial deterrents to marriage to create stronger families, stronger communities and a stronger America.”

We share the president’s vision. No American should be deterred from marriage or from obtaining a better job because it could make him or her worse off. Marriage should be encouraged. Working harder and getting better jobs should be encouraged. But in some cases, the government’s policies have the opposite effect for low-income families.

Most benefits for low-income families phase out as income rises. Taken separately, these reductions are understandable and reasonable. But combined, they effectively act as high tax rates — reducing take-home pay for low-income workers — and create a disincentive to work harder. Low-income families can thus find themselves in a situation where receiving a raise or promotion results in losing more in benefits than they receive in additional earnings.

Consider this scenario: A single mother with two children living in Wisconsin earns $17,000 per year (slightly more than she would earn full time at the minimum wage). She participates in the federal Supplemental Nutrition Assistance Program (formerly known as food stamps) and Wisconsin’s W-2 Child Care subsidy program and files both federal and state income tax returns claiming all available deductions and tax credits.

Let’s suppose that this single mother receives a $4,000 raise, pushing her income to $21,000. With tax and benefit adjustments, she will see only about $540 in additional disposable income out of the $4,000 raise. If this same mother receives another raise, this time only $1,000, bringing her income to $22,000, she will actually have less disposable income than she had with earnings of $21,000, due largely to the benefits she loses. With another $1,000 raise, she loses her eligibility for SNAP and her take-home pay plunges accordingly.

Such disincentives continue as this mother’s income increases, all the way until her earnings reach $40,000.

This parent, who has worked hard for her money, is seeing a smaller payoff the more she makes — hardly an incentive to work harder. By comparison, if a single mother with two children making $55,000 receives a $5,000 raise, she would see almost $3,000 more of the raise than the low-income mother who received the same amount.

There are also disincentives for low-income couples to marry. Using this same scenario, consider if this low-income single mother wanted to marry, and both spouses had similar incomes, for a total household income of $40,000. Because benefits are based on combined income, this couple would lose eligibility for many benefits after marriage and would actually have approximately $8,000 less in disposable income than if they chose to live together, unmarried. This is not the message we want to be sending to young couples.

According to a Pew Research Center study in 2011, 51 percent of U.S. adults are married, down from almost 75 percent in 1960. There are many reasons for this trend, and we do not suggest that government is entirely responsible. But we should consider whether the very structure of our federal and state safety net is contributing to this decline.

No solution to this complex problem will come overnight, but the conversation should start now. That is why we have introduced bipartisan legislation — the Making Work and Marriage Pay Act — so that this issue can be studied and solutions found. This bill is an important first step toward better coordinating low-income benefits and helping American families avoid the poverty trap.

With bipartisan cooperation, we can make the necessary improvements to these programs so that they support, not hinder, individuals and families working to improve their lives.

Rep. Tom Petri, a Republican, represents Wisconsin’s 6th Congressional District; and Rep. Niki Tsongas, a Democrat, represents Massachusetts’s 3rd Congressional District.