Research That Matters (January 17 - 20, 2008)

Purpose: Since the passage of the 1996 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), millions of welfare recipients have left welfare for work but still face serious economic hardship (Blank 2002, 2006; Grogger, Karoly, and Klerman 2002; Grogger and Karoly 2005; Lichter and Jayakody 2002). In an effort to make work pay, federal and state governments have dramatically expanded the Earned Income Tax Credit (EITC) during the past two decades. The EITC operates as a refundable tax credit to subsidize workers in low-income families and is now the nation's largest cash assistance program targeting these families. This study builds upon the limited prior literature and examines how the EITC expansions have helped single mother headed families adapt to the new welfare and work regime. More specifically, what is the effect of EITC expansions on total expenditures in single mother families? Is a more generous EITC associated with more spending on work-related activities such as transportation, childcare, food away from home, and adult clothing, items related to child development or learning, e.g. books, computers etc., and/or household durables, e.g., a car or computer?

Method: This study uses the Consumer Expenditure Survey data for 1993-2004 and examines the associations between state and federal EITC expansions and household expenditures, patterns of expenditures, and ownership of consumer durables for single mother headed families. Expansions in the EITC are measured by the maximum total state and federal refundable credit to which a family with two or more children would be entitled in a specific state and year. Multivariate regression methods with state, year, and month fixed effects are used, controlling for welfare reform, other policy environmental variables, and family demographics. This study also explores the seasonality patterns in the impact of the EITC on family expenditures, i.e., whether families spend more during the months right after receiving the lump-sum tax refunds, by interacting EITC expansions with month of expenditure.

Results: The findings show the most consistent evidence of EITC effects on expenditures for the medium-educated mothers (with a high school degree or some college) – the group that has a high probability of being employed but typically has earnings low enough to be eligible for the EITC, but not for their peers with lower or higher education. Among families headed by the medium-educated mothers, EITC expansions are found associated with more total family expenditures, as well as higher spending on housing, childcare and babysitting, child learning and enrichment activities, children's clothing and footwear, and increased car ownership.

Conclusions and Implications: This study provides new evidence on how expansions in the EITC have helped improve the material well-being of medium-educated single mother families using national household survey data. These findings imply the effectiveness of the EITC as an anti-poverty policy. However, findings of this study do not indicate that these positive effects exist among the most disadvantaged working families, i.e., families headed by low-educated (less than high school) single mothers. Further expansions and reauthorizations of the EITC and other work-support policies should address this urgent issue.