The issues covered in this report — in particular, the prevalence of poverty among working families — do not avail themselves of simple solutions. Persistent poverty in the face of an enormously productive economy remains a central paradox of American society. The proposals offered here may not solve all of the problems described above but they could, at a modest cost, make a material difference in the lives of thousands of Massachusetts families.
Index the Minimum Wage
To stop the steady erosion of the real value of the minimum wage due to inflation, Massachusetts should consider indexing the minimum wage for inflation. Although it would be preferable if federal policy makers acted to index the minimum wage nationally, there are no good reason that state officials should not act in the absence of federal legislation.
A periodic, recurring debate at both the federal and state legislative levels is whether to enact legislation to raise the minimum wage. Each increase in the minimum wage is a hard-fought victory for low-wage workers, but inflation starts eating away at the minimum wage as soon as a new level is in place. In 1981, for instance, the federal minimum wage was raised to $3.35 an hour, but then stayed stagnant until 1990 while the cost of living rose 48 percent. In 1990 and 1991, the federal minimum wage rose in two steps to $4.25, and then stood still again until 1996. While periodic increases are important, the intervening erosion due to inflation can be devastating. And a central result of this pattern is that, over time, the inflation-adjusted value of the minimum wage has fallen.
Before federal legislation was finally enacted in 1996 to raise the minimum wage to $4.75 an hour, with another increase slated for July 1997 up to $5.15 an hour, the inflation-adjusted minimum wage was nearly 30 percent below the average level of the 1970s
Until the minimum wage was increased in 1996, its real value had fallen to the same level as in 1955, a level seen only once (in 1989) since then.
During the 1960s and 1970s, the earnings of a full-time minimum wage worker were typically enough to lift a family of three out of poverty. By 1995, a full-time minimum wage job left a family of three some $3,350 below the poverty line.
Even at Massachusetts’ new, higher minimum wage of $5.25 an hour, a full-time worker would fall nearly $2,000 below the 1997 poverty line for a family of three. Over time, that gap will grow progressively larger.
Short of raising the Commonwealth’s minimum wage to a level that would raise a full-time worker with a family of four out of poverty — which would require nearly $8 an hour in 1997 — the state could simply index its current minimum wage to the rate of inflation. In that way, inflation would stop eroding the value of the minimum wage, as automatic increases take effect each year. Absent indexing, the value of Massachusetts’ minimum wage can be expected to fall by anywhere from 12 percent to 18 percent over the next five years, depending on the actual inflation rate.26
The absence of automatic inflation-triggered increases in the minimum wage can be contrasted to the most effective anti-poverty program in the federal policy arsenal, social security. Automatic and regular increases in social security benefits have proven dramatically successful in reducing the poverty rate among the elderly; policy makers would be loath to consider eliminating those automatic benefit adjustments. If the same principle were applied to increases in the minimum wage — that inflation should not reduce the minimum standard of living for those of modest means — low-wage workers would not continue to fall further behind in the struggle to rise from poverty.
Establish a Property Tax Circuit Breaker
Housing costs are a major share of the cost of living for poor families, particularly here in Massachusetts. One appropriate way to reduce the cost of housing is to provide property tax relief to those with high housing costs relative to their income. For low-income homeowners, a property tax circuit breaker would rebate any property tax in excess of some set maximum, say 10 percent of a family’s income. A well-crafted circuit breaker, to limit the cost to the state, would limit eligibility to those with moderate incomes, perhaps around $30,000 annually. For such a family, then, the state would subsidize any property tax in excess of $3,000, or 10 percent of the family’s income. There is often a maximum credit established in law, and the state may choose to reimburse homeowners for only a share of the excess, perhaps 75 percent or so. All of these provisions serve to limit the financial exposure to the state and ensure that limited state resources are targeted to those with unacceptably high housing costs.
Renters — who pay property taxes indirectly through their rent — would also benefit from a well-designed property tax circuit breaker. State legislation that deemed a certain share of rent to be property tax — 25 percent is typical in states that provide similar tax relief — would allow renters to make the same calculation as homeowners. If the share of rent deemed to be indirect property tax payments exceeded 10 percent of income, the state would rebate the excess property tax payment in the form of a tax refund. Thus at modest cost and in a targeted fashion, the state could thus reduce the impact taxes have on poor families.
Protect the Revenue Base and Improve Tax Equity
The state should reject proposals for large, permanent tax cuts that are aimed primarily at high-income households or at businesses. Recent proposals have included a $1.2 billion income tax cut with over 40 percent of the benefits accruing to the richest 10 percent of taxpayers; a $260 billion cut in taxes paid on dividend and interest income, with over one-third of the benefits going to the richest one percent of taxpayers; a $160 million cut in tolls on highways, bridges, and tunnels in Massachusetts; a $41 million tax cut for the insurance industry that would make insurance companies — alone among all companies in the state — free from paying any income tax whatsoever; and a $40 million tax cut to subsidize manufacturers’ investment in capital equipment that automates production and thus eliminates jobs.
If enacted, these or other tax cuts would come on top of large tax cuts that have already benefited businesses and wealthy families. During the 1990s, the state has cut the capital gains tax paid on income from capital assets, slashed the estate tax, and given large tax cuts to banks, defense manufacturers, other manufacturers, and mutual fund companies. Tax cuts that have been aimed more at low- or middle-income families have been far more modest like the new state EIC or one-time tax cuts.
Given these already-enacted tax cuts — some of which are still being phased in — any new, large, and permanent tax cuts could seriously affect the state’s ability to provide important services to low-income families. This would be particularly true when the current "hot" economy cools down or falls into a recession as it eventually and inevitably will. Elected officials and voters would be better off to protect the state’s fiscal solvency by using temporary budget surpluses to build a better "rainy day fund," restore services that were cut due to earlier budget constraints, target tax cuts on low- and moderate-income families, buy down existing debts to reduce future costs, invest in programs that will reduce long-term costs for the state, and pay cash for certain capital projects rather than borrowing. In short, tax cuts now that would all but guarantee the need for tax increases and further spending cuts during the next recession would be unwise and short-sighted.
Improve Child Care Access
Few concerns arise more quickly for low-income working parents than the cost of child care. Particularly for mothers leaving welfare to enter the work force — but for all low-income and most middle-income parents — the cost of child care is a serious impediment to making ends meet.
There are a number of important actions state government can take to ensure that parents who are willing and able to work are not kept out of the workforce due to the high cost of child care. An important step would be to fully fund the child care subsidy for low-income parents. There are estimated to be between 6,000 and 10,000 low-income parents eligible for child care subsidies currently on waiting lists due to inadequate funding. Surely, before any new tax cuts are enacted, funding for this subsidy should be increased to ensure that all eligible parents can pay for child care.
Beyond that first step, the state should increase the earnings limit for this subsidy. Under current law, parents are eligible for the subsidy only up to 50 percent of the state median income. By raising that to 85 percent of the median income, more needy parents would be covered, thus helping them to remain in the work force and simultaneously provide quality care for their children.
Finally, the funding for low-income child care subsidies should be tied to reductions in the welfare caseload. Parents who move from welfare to the work force typically have low incomes during the early years they are working; thus efforts reduce the welfare caseload will likely increase the need for low-income child care subsidies. Any surplus in the welfare-related child care accounts should be transferred to the low-income child care subsidies, rather than simply returned to the state’s general fund.
Reform the Poverty Definition
As has been shown above, the current official definition of poverty in America is something of a historic anomaly. Members of the congressional delegation should support efforts to revise the official poverty standard, keeping in mind the following considerations:
The official poverty line should take into account the cost of living in each state. It is evident that $12,000 buys far more in Mississippi than in Massachusetts.
The poverty line should reflect the cost of living in today’s economy, not that of the 1950s or 1960s with only inflation adjustments. In particular, the poverty line should take account of federal and state tax burdens, child care and transportation expenses, and other factors that reflect the modern economy.
Consideration should be given to establishing a relative measure of poverty tied to state median incomes. Specifically, establishing the official poverty levels at fifty percent of median income, with adjustments for family size, would recognize the different costs of living in each state.
Increase the State Earned Income Credit
One method of supporting families that work and yet have low incomes is to provide a targeted state tax break for them. The new state earned income credit (EIC) recently enacted is an enormous step forward for reducing the impact of low wages for those who work. Using a "refundable" credit that provides any tax credit in excess of an individual’s state income tax liability works essentially as a wage supplement to help boost the family’s income. This idea is particularly simple to implement as an add-on to the existing and popular federal EIC.
The federal EIC is a targeted tax credit for low income workers; nearly the entire credit — some 97 percent — goes to parents who both work and are raising their children. For parents with two or more children, the credit provides a 40 percent "match" for each dollar earned up to the first $8,890 of income, meaning that the maximum credit is $3,556. The credit phases out at incomes between $11,610 and $28,495. For parents with one child, the credit provides a 34 percent match for each dollar earned up to $6,330, with a maximum credit of $2,152. The credit for parents with one child phases out at incomes between $11,610 and $25,078.
The federal credit, begun during the Ford administration, has enjoyed bipartisan support over a number of years, with increases implemented during the Reagan, Bush, and Clinton administrations. This broad support results from the credit’s emphasis on supporting working parents; the credit is seen appropriately as both pro-work and pro-family.
Massachusetts recently joined seven other states that have added state EICs on top of the federal credit.27 This added support for working parents helps reduce the difficulties faced by low-wage workers, and can be seen as off-setting other state and local taxes — particularly the property tax and sales tax — that have a disproportionate impact on low- and moderate-income families.
While great credit is due those policy makers who pushed through the new credit, the 10 percent piggy back remains one of the lower credits in the nation. A Massachusetts state EIC pegged at 15 percent to 20 percent of the federal credit would provide working families with at least two children up to $360 in additional state tax relief, above that already provided. The cost of this proposal would be $15 million to $30 million annually. While such costs are not trivial, they certainly pale in comparison to some of the tax cuts suggested by Governor Weld in his fiscal year 1998 budget such as a cut in the tax on dividend and interest income, with an annual cost of over $300 million, or the elimination of the sales tax on telecommunications services, with its cost of $200 million annually.
Establish a Job Training Tax Credit
Massachusetts policy makers should consider establishing a tax credit for employers who provide training to low-skilled workers. Such an incentive could expand the amount of training available to these workers, thus improving their prospects to work their way out of poverty.
In too many cases, job training activities are aimed primarily or even exclusively at higher-skill employees. In many cases, tax incentives for employers simply subsidize managers for training they would have provided to their workers anyway, training which is necessary to maintain a competitive edge in the marketplace. When it comes to low-skilled workers, though, employers may feel that it is not cost-effective to train them, since they typically stay with an employer for comparatively short periods of time. This can perpetuate a vicious cycle of low skills leading to low wages, with low wages leading to high turnover, and the perpetuation of sub-poverty wages. In this case, there may well be sufficient public benefits from providing training — benefits that the employer may not see if the worker moves to new employment — to justify government subsidies.
It is important that any such job training tax credit be structured in a narrow and targeted way. It should apply only to workers with low wages, possibly defined as the rate at which a full-time worker would keep a family of three above 150 percent of the poverty line; in 1997, that would be about $9.35 an hour. It should also be available only to businesses that are expanding their work force; businesses that are shrinking their Massachusetts payroll should not be subsidized with limited state funds. And finally, to reduce the incentive for employers to receive subsidies for job-specific training they would have undertaken without the credit, eligibility should be restricted to employers providing training in reasonably general skills. Together, these three policy proposals would begin the job of ensuring that in Massachusetts at least, work still pays.
Protect Low-Income Families During Energy Deregulation
As a result of federal law, technical demands, and a changing economy, the energy industry will be largely deregulated during the coming years. The deregulation of the industry promises to bring about improved efficiency and significant economic savings. In too many previous cases of deregulation, however, the savings have accrued mostly to investors and large-scale users while individual families, and particularly low-income families, have been left out or face even higher costs. Every effort must be made to ensure that low-income households receive real and substantial savings from the inevitable deregulation of the energy industry.
Rather than being subject to approval by public commissions, future energy rates are more likely to be set by market forces. One implication of that is that large, industrial consumers are well-placed to negotiate the lowest possible rate, while individual families could be forced to pay higher rates. In negotiations with the Attorney General’s office, energy providers have promised that deregulation would lead to a 10 percent cut in rates for residential consumers. Such a reduction should be considered the minimal savings acceptable, and every effort should be made to increase that to 15 percent. Additionally, any promised savings must be locked in, with specific limits imposed as to future rate increases on residential consumers; it would be a Pyrrhic victory at best if rates were cut 10 percent to 15 percent for a year or two, but then edged up quickly in subsequent years.
Additionally, low-income households should receive a discount of 60 percent off normal residential rates to protect them from the risk of high and volatile prices that a competitive market may bring. Eligibility for this discount would be tied to eligibility for the low-income fuel assistance program as well as receipt of any means-tested program offered by the state or federal government including housing, cash, food, or medical care.
An important component of energy deregulation negotiations is how to account for utility production facilities — primarily nuclear power plants — that are not economically viable. Energy executives, who once insisted that their companies could be successful only if they were allowed to build nuclear power plants, now insist that they must be shed of these facilities, leaving rate payers to pick up billions of dollars in "stranded costs." Such a strategy, one energy executive acknowledged, would allow the industry to spend up to $10 billion to buy up other assets and companies. The cost of these massive white elephants, often shoved down the throats of communities that objected to their construction, must be shared by investors and rate payers alike if the benefits of deregulation are to be equitably distributed.
Finally, non-profit community based organizations should be encouraged to act on behalf of low-income people to help them organize into buying groups to ensure competitive rates. And as recommended by the Department of Public Utilities, utility companies should deliver their low-income conservation programs through the weatherization assistance program agencies already in place.
Improve Access to Quality Health Care
Ensuring access to health care is an important component of improving the lives of families near or below the poverty line. Since 1987, Massachusetts has fallen from first in the nation in terms of the share of the population covered by health insurance down to 21st. Moreover, recently released data show that even during the current economic recovery the number of people without access to adequate health care is increasing: during 1996, while 60,000 new jobs were created in Massachusetts, the number of uninsured in the state grew by 95,000. There are a number of reforms that are warranted here in Massachusetts.
Medicaid eligibility should be expanded to include all children through age 18 whose family income is up to 200 percent of the federal poverty line. (Under current law, children are eligible for Medicaid if their family income is below 133 percent of the poverty line.) This would cover an additional 35,000 children, with financing provided by new federal money and the state’s cigarette tax revenue.
Similarly, Medicaid eligibility should also be expanded for pregnant women from the current 185 percent of the poverty level to 200 percent of poverty.
The benefit package for children served by the Children’s Medical Security Plan — currently providing reduced-cost preventive and primary health care to children up to four times the poverty line — should be expanded to include dental care, hearing and eye exams, outpatient surgery, mental health, and prescription drugs.
Finally, a significant share of any revenue that Massachusetts may receive as a part of a national settlement with tobacco companies — perhaps half of all new revenue — should be spent to expand health care access among low-income working families.
Expand Education and Training Programs
There is broad acknowledgment that education and training is a crucial aspect of efforts to ensure that low-income families have a chance to escape poverty. With new demographic data showing substantial increases in school-age population and with looming time limits that will push more people off existing welfare rolls, Massachusetts should continue to expand the resources available to education and training programs. In particular, workforce retraining programs must find ways to teach sophisticated technical skills that many workers have to date not acquired must receive new emphasis from state policy makers.
Another area that cries out for attention is the school structures themselves that students attend. A recent report by the General Accounting Office — the research arm of Congress — surveyed physical status of schools in each of the 50 states. The results were disturbing; schools in Massachusetts are in a greater degree of decay than in all but two other states. It should be simply unacceptable that Massachusetts, with the third highest per capita income in the nation, would also have the third worst school buildings. And given the limits of Proposition 2½, it will most certainly fall to state policy makers to find ways to finance school building improvements.
Reform Welfare Reform
The federal and state changes enacted in welfare policies in recent years are likely to have a damaging impact on large numbers of Massachusetts families that find themselves unable to meet the strict requirements established. While it is evident that the old welfare system had many flaws and it is unlikely that dramatic improvements in the welfare system can be made in the coming years, there are several changes in welfare laws that would be prudent as well as beneficial for vulnerable families.
One set of changes was proposed in the 1998 state budget but ultimately not enacted. State policy makers should revisit these questions in the coming months. The first of these changes would be to consider participation in education and training programs as meeting the work requirements of the new welfare laws. As shown in this report, many poor and low-income adults have at best modest education and skills. It is simply unreasonable to expect that these parents will find jobs to raise their families out of poverty unless they are able to improve their education and skills.
The second issues raised during the recent budget debates was to exempt women who had been subject to abuse or domestic violence from welfare work requirements. Women who have been abused by their husbands or partners often face very limited options during the transition period out of the abusive relationship. Over the years, millions of women have found welfare to be the economic lifeline that allowed them to protect themselves and their children by leaving an abusive relationship. Forcing these women off welfare rolls before they are adequately prepared could simultaneously pressure them back into an abusive relationship, where they may feel at least that they have some economic security despite the physical insecurity. Ensuring that victims of domestic violence have the full protection of the state is the least we should expect.
Finally, the state should enact a pilot job readiness preparation program for transitional assistance recipients who are required to perform community service work. Such a program would provide some 4,000 community service workers with the kind of skills and work habits that employers are looking for, and better ensure that program participants are able to find and keep jobs when their time-limited welfare benefits expire after two years.
26. If inflation averages 2.5 percent annually during the next five years, the real value of the minimum wage would drop to $4.64, measured in 1997 dollars. If inflation averages four percent during the next five years, the real value would drop to $4.32 in 1997 dollars, or 18 percent the current $5.25.
27. The seven states are Iowa, Maryland, Minnesota, New York, Rhode Island, Wisconsin, and Vermont.