January 8, 2020
Peter S. Fisher is research director of the Iowa Policy Project, which he helped to form as a charter member of its board of directors in 2001. He is a national expert on public finance and has served as a consultant to the Iowa Department of Economic Development, the State of Ohio, and the Iowa Business Council. His reports are regularly published in State Tax Notes and refereed journals, and he is widely quoted in the Iowa media on economic development and tax issues. His book Grading Places: What Do the Business Climate Rankings Really Tell Us? was published by the Economic Policy Institute in 2005, with an updated edition published by Good Jobs First in 2013. He also has developed a website, launched by the Iowa Policy Project, to follow up on that work, Grading the States, found at www.gradingstates.org. Fisher holds a Ph.D. in Economics from the University of Wisconsin-Madison, and he is professor emeritus in the School of Urban and Regional Planning at the University of Iowa.
Working full time, year round does not guarantee a middle-class standard of living. About 1 in 5 working Iowa families, in fact, do not earn enough to meet basic needs. A number of policies could help such families move into the middle class and improve the labor market. On the demand side, we need more middle-class jobs with decent wages and benefits. On the supply side, more workers need the education and skills to qualify for most good-paying jobs.
Here we focus on a set of “work support” policies that help low-wage working families survive, keep their children out of poverty, and provide a pathway to a better education and a better job.
• Food assistance or SNAP
• The Low Income Home Energy Assistance Program (LIHEAP)
• Child Care Assistance (CCA)
• Public health insurance: Medicaid and hawk-i (Iowa’s child health insurance program)
• Subsidies for the purchase of health insurance through the Affordable Care Act (ACA)
• Tax credits: state and federal Earned Income Tax Credits (EITC), state and federal Child and Dependent Care Credits (CDCC), and the federal Additional Child Tax Credit.
These are two major problems with these work supports: First, it makes sense that as you earn more, work supports are reduced. But most work support programs fall to zero well before a family earns enough to meet basic needs on their own.
The second problem: The issue of what is known as a “cliff effect.” See the graph at right and table below. (Find a more detailed graph in the full report, “Strengthening Pathways to the Middle Class,” on the IPP website.)
Child Care Assistance Produces a Large Cliff Effect — Loss of Benefits
Net resources change as earnings rise for single parent with one preschool-age child
That example stresses the abrupt “cliff effect” in Child Care Assistance (CCA), which stands in stark contrast to programs such as the EITC that gradually phase out benefits. In CCA and also in adult Medicaid, a modest raise takes a family to a “cliff,” resulting in a large loss of benefits and a net loss of resources. As shown in the table below, a single parent with a preschool-age child loses $3,100 in adult Medicaid benefits when reaching $11.25 per hour in wages. When the wage rises a little more, the parent loses another $4,600 in CCA benefits that the parent needs to work at all.
Where Cliff Effects Hit as Wages Rise for a Single Parent with One Preschool-age Child in Iowa
Where Cliff Effects Hit as Wages Rise for a Two-Earner Couple with Two Children Ages 4 and 7
We lay out a set of policies to strengthen these pathways to the middle class:
• Reform Iowa’s Child Care Assistance program to eliminate a huge disincentive called the cliff and to make it more effective as a help to parents trying to improve their skills and raise their wage level.
• Expand the Earned Income Tax Credit to provide even stronger support to low-wage workers, encourage more work effort, and keep children out of poverty.
• Expand the Child and Dependent Care Credit to cushion the loss of Child Care Assistance.
These reforms should be combined with education policies that ensure future generations of Iowans receive a quality and affordable education, from preschool through post-secondary institutions. These policies would require:
• Expansion of the universal preschool program.
• Support of K-12 education through adequate funding of state supplemental aid, which has been held at about 1.7 percent per-pupil spending growth, well below the increased costs of operating schools, and which would demonstrate a commitment to young people choosing whether to teach or go into another line of work.
• Stronger efforts to make post-secondary education more affordable by restraining tuition growth, inevitably requiring better state support of the community colleges and regents institutions.
See the full report by IPP’s Peter Fisher and Natalie Veldhouse at www.iowapolicyproject.org.
Natalie Veldhouse is a research associate with the Iowa Policy Project. She previously conducted education and health policy research with the University of Iowa Public Policy Center. As a former AmeriCorps VISTA, Natalie coordinated research efforts for the Johnson County Hunger Task Force. She holds a Master of Social Work degree and a bachelor’s degree in Ethics and Public Policy from the University of Iowa.
This is part of the seventh edition of The Cost of Living in Iowa. As a supplement to that full report, we offer a separate focus on work supports and how they affect basic family budgets. This includes illustrations of the cliff effects in certain programs, particularly child care assistance, and the way in which the whole range of work supports help provide a pathway to self-sufficiency for working Iowa families.
The full Cost of Living in Iowa report includes basic family budgets for 10 family types, and the living wage for each family type: the hourly wage that would provide after-tax income sufficient to meet basic needs for a full-time worker. For the first time, both the budgets and the living wage information are available for all 99 counties. This report also includes new estimates of the proportion of Iowa families whose income falls below the basic needs level. These estimates had been provided in a separate report in previous years.
These budgets are based on living costs for calendar 2018, and state and federal income taxes for tax year 2018, with one exception: Health care costs reflect insurance rates in effect for calendar 2019. Because premiums for health insurance plans offered on the federal exchange for 2019 were available in December 2018, and because health insurance premiums have increased substantially while most other areas saw only modest increases, or none at all, using 2019 health insurance premiums ensures that the budgets presented here are relevant today and throughout the year.
This edition reflects some changes since the previous edition was released in July 2018. Health costs in the basic needs budgets in this report represent an average of costs under two scenarios: (1) The family is covered by health insurance from an employer, and so pays the employee share of premiums plus out-of-pocket expenses, or (2) the family purchases a bronze plan on the ACA exchange and pays a share of premiums (depending on the premium assistance they would receive) plus out-of-pocket expenses. The previous edition presented separate family budgets for the two scenarios. For most households, costs under the two scenarios are not very different, so we changed to a single average cost in the interest of simplicity and ease of interpretation.
The second change consists of new estimates of transportation costs. These estimates reflect the wealth of data recently made available from the 2017 National Household Travel Survey conducted by the Federal Highway Administration. This survey is conducted only once every eight years.