Bridging Disciplinary Boundaries (January 11 - 14, 2007)

Purpose: The persistent prevalence of poverty experienced by children despite their parents' employment has long been a conundrum in the United States. Reform efforts that support families' transition from welfare to work contributed to the largest expansion of the federal Earned Income Tax Credit (EITC) during the 1990s, which increased employment of single female family heads and their earnings by subsidizing low wages. By 2003, 17 states offered state EITCs to supplement the federal EITC in support of working families with children. The primary objective of this study is to estimate the contribution of the state's enactment of state EITCs on changes in both welfare caseload and child poverty rates.

Method: To accomplish this objective, this study analyzed state-by-state annual administrative data from 1994 through 2003 (n = 510) from the following sources: U.S. Department of Health and Human Services, Green Book, Bureau of Labor Statistics, the Book of the States, Assessing the New Federalism, and Center for Budget and Policy Priorities. Using a fixed-effect model, regression analyses were conducted to estimate the effect of state EITCs on changes in welfare caseload and child poverty rates, while controlling for work-enforcing welfare policies, minimum wage, demographic, economic, and political variables. This model also controlled for state-specific effect, time-specific effect, and state-specific time trends.

Findings: States with their own state EITC on top of the federal EITC were expected to show higher caseload reduction rates and higher child poverty reduction rates than states without. As expected, states that enacted state EITCs show a greater decline in welfare caseload rates and child poverty rates, respectively, than states that did not enact state EITCs. Results of this study indicate that, holding other factors constant, the states with a state EITC are associated with a 0.25 percent greater caseload reduction rates than states without. States with a state EITC are also associated with a 0.17 percent greater reduction in child poverty rates than states without. These results are robust to the alternative specification. When additional analyses were conducted, the combined effect of both federal EITC and state EITCs on welfare caseload reduction and child poverty reduction was greater than the effect of state EITCs alone. The results suggest that state EITCs could reduce child poverty while creating an incentive for welfare recipients to work and earn income, potentially leading to welfare families' exit from welfare.

Implications: The findings of this study call for a public policy initiative that emphasizes the enactment of state EITCs to improve the lives of working poor parents and their children. This research suggests that state EITCs simultaneously accomplish two critical goals of welfare reform: increasing self-sufficiency rather than welfare dependency and enhancing the economic well-being of children in working-poor families.