The Perverse Federal Incentives for Welfare Cuts
By Douglas J. Besharov and Karen Baehler
This article originally appeared in Governing, February 1993.
Nineteen ninety-one was a bad year for welfare recipients. Nine
states cut and 31 states froze benefits under the Aid to Families with Dependent
Children program. At the same time, 14 states cut and another 13 froze general
cash assistance payments--the program for poor people not eligible for AFDC. By
all accounts, when all of the numbers are in, 1992 will turn out to have been
These cuts hurt. But before heaping all the blame on the states,
we should recognize another culprit: the categorical nature of federal poverty
programs. In particular, the interplay of the federal AFDC and food stamp
programs invites states with large budget deficits to cut welfare.
Food stamp allocations are based on the recipient's income, so a
decline in welfare benefits automatically entitles a recipient to more food
stamp benefits. A $ 1 drop in welfare results in a food stamp increase of about
30 to 45 cents, according to the U.S. Department of Agriculture, which
administers the program. Hence, the food stamp program cushions the effects of
cuts in AFDC, making them less inhumane and politically more palatable.
More important is who pays the bills. AFDC is jointly funded by
state and federal dollars, with states picking up between 20 and 50 percent of
total costs; the average state share is about 46 percent. Food stamp benefits,
on the other hand, are 100 percent federally funded. The effect of a cut in AFDC
payments is a substitution of federal dollars for state dollars in aid to the
Some statistics from California illustrate the point. In 1991, the
state adopted cuts in its assistance programs that, between 1991 and 1996, will
reduce state spending on the poor by $ 10.8 billion. However, the state's budget
analysts calculate that this reduction will trigger a $ 4 billion rise in food
stamp payments, so the net loss to the poor drops to $ 6.8 billion.
The interaction between AFDC and food stamps is widely appreciated
in Washington. But until state budgets got so tight, it was seen solely as an
obstacle to increasing AFDC. Now it is clear that the interaction works in both
directions, encouraging decreases in AFDC as well as dampening increases in the
This interaction is no secret in the states. Many poorer states
and states with less apparent sympathy for the poor long have relied on food
stamps, rather than AFDC, as their primary program for the poor. In Alabama and
Mississippi, for instance, the maximum AFDC payment is about $ 120, while the
maximum food stamp benefit is $ 277. In comparison, the California figures are $
694 and $ 159, respectively. For New York City, they are $ 577 and $ 210.
Now, the more generous states are facing enormous budget deficits,
so they are taking the first steps down the same cost-cutting and cost-shifting
path. In 1991, District of Columbia officials openly acknowledged the role of
the food stamp cushion in their decision to cut AFDC benefits by 4.5 percent.
Although federal law prohibits states from cutting welfare in order to increase
food stamps, a court upheld the D.C. cuts because they were motivated mostly by
budget woes, not cost shifting.
But while the states gain, the poor lose: For every 43 cents
states save, AFDC benefits decline by about 65 cents. Removing this increasingly
attractive incentive for cutting benefits will require a radical change in
federal funding of antipoverty programs.
The AFDC/food stamp interaction is only one of many created by the
profusion of categorical federal programs which, in turn, create incentives for
states to distort their priorities. Ten committees of Congress and a dozen
federal administrative departments have established and preside over more than
75 separate public assistance-like programs, each with its own funding formula
and mandates. Hundreds more programs have been established to meet the
non-financial needs of disadvantaged individuals and families.
Up to now, it has not been possible to reduce the jumble of
federal funding streams--each year brings more, not fewer, categorical
programs--because of the powerful special interests involved and because most
advocacy groups believe that having more programs leads to more total spending
on the disadvantaged. But the current rash of state welfare cuts is telling
evidence that the current system creates perverse incentives that can actually
hurt the poor. In a period of shrinking budgets and growing needs, it's time to
rationalize federal antipoverty aid to the states.
Back to top