Imagine that you are offered a promotion and raise at work. There’s just one catch: If you take it, you will move into a higher tax bracket — so high, in fact, that you will actually end up with less take-home pay. What would you do?
That’s exactly the situation that many low-income Utah residents find themselves in. Someone trying to leave welfare for work is likely to run into a phenomenon known as a “welfare cliff.” That is, as they begin to earn more work income, they can face the sudden loss of welfare benefits, potentially leaving them worse off financially.
In terms of its functional impact, the loss of benefits operates similarly to a tax hike. Policymakers often debate marginal tax rates. They worry, correctly, that high marginal tax rates can reduce investment, entrepreneurship and economic growth. But welfare cliffs can mean that some of the highest marginal tax rates (or their equivalent) fall on low-income Americans trying to work their way out of poverty. In some cases, especially for those earning between 100 and 250% of the federal poverty level, the marginal tax can exceed 100%. That can discourage them from pursuing work, marriage, education and other steps toward self-sufficiency.
It is hard to deny the importance of work to any long-run strategy for reducing poverty. It is unfortunate, then, that many social welfare programs are designed in ways that discourage work. Welfare cliffs effectively penalize welfare recipients for taking exactly those steps toward self-sufficiency that policymakers should want them to.
As researchers at Weber State University in Ogden put it, “Workers make job and career decisions based on short-term financial considerations. Benefit cliffs hurt the families who are worse off financially despite moving ahead, hurt businesses who experience churn and struggle to fill open positions and retain workers, and hurt taxpayers who bear the cost of elevated need for public benefits.”
This is clearly a structural flaw in our approach to helping those in poverty.
Utah has long been known as a leader on welfare reform. Its “One Door” policy, combining welfare support with workforce development, is a model for the nation. Solving welfare cliffs would be the next logical step in the state’s efforts to encourage people to transition from welfare to work.
The simplest and most effective way to deal with welfare cliffs would be for Utah to establish “transitional benefits” to offset the loss in benefits that occurs as a recipient earns non-welfare income. Rather than an individual immediately losing benefits when their income reaches the eligibility threshold, benefits would be “stepped down” in proportion to increases in non-welfare income. This would be similar to an approach passed, but not yet implemented, by Missouri last year. Several states, including Massachusetts and Tennessee, are also experimenting with pilot projects utilizing a transitional benefit approach.
The Utah Legislature is reportedly working on potential solutions for some of the state’s worst welfare cliffs. By doing so, Utah will smooth the transition from welfare to work, leading to more earnings, more self-sufficiency, more innovation and more efficiently spent welfare dollars.