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Fiscal Effects of Block Grants for the Needy: An Interpretation of the Evidence

  • Howard Chernick

In 1996 the United States revamped its welfare system by eliminating the entitlement to cash benefits under Aid to Families with Dependent Children (AFDC), and replacing it by Temporary Assistance to Needy Families (TANF). Federal financing was converted from open-ended matching grants to fixed block grants. This paper reviews the evidence on the likely impact of block grants for the needy on average benefit levels, total redistributional outlays, and on differentials across states. The econometric evidence on state responses to federal incentives for spending on the needy varies enormously. An evaluation of this evidence, together with an examination of state responses to the federalization of aid to the elderly, blind, and disabled through the Supplementary Security Income program, suggests that in the long run the federal changes will substantially decrease the amount of direct cash redistribution in the United States. A reasonable guess is that average benefits to the needy will be 15 to 30 percent smaller than under current law, while total spending on cash grants could decline by as much as 35 percent. While interstate competition will act to reduce benefit differentials across states, this tendency will be offset by differential matching rate effects. An extreme ‘race to the bottom,’ with a total withering of the transfer state, is unlikely to occur. Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1008694405571
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 5 (1998)
Issue (Month): 2 (May)
Pages: 205-233

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Handle: RePEc:kap:itaxpf:v:5:y:1998:i:2:p:205-233
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  1. David C. Ribar & Mark O. Wilhelm, 1999. "The Demand for Welfare Generosity," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 96-108, February.
  2. Michael Wiseman, 1996. "State strategies for welfare reform: The Wisconsin story," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 15(4), pages 515-546.
  3. Edward M. Gramlich & Henry J. Aaron & Michael C. Lovell, 1982. "An Econometric Examination of the New Federalism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(2), pages 327-370.
  4. Shroder, Mark, 1995. "Games the States Don't Play: Welfare Benefits and the Theory of Fiscal Federalism," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 183-91, February.
  5. Blank, Rebecca M., 1988. "The effect of welfare and wage levels on the location decisions of female-headed households," Journal of Urban Economics, Elsevier, vol. 24(2), pages 186-211, September.
  6. Moffitt, Robert, 1990. "Has State Redistribution Policy Grown More Conservative?," National Tax Journal, National Tax Association, vol. 43(2), pages 123-42, June.
  7. Howard Chernick, 1982. "Block grants for the needy: The case of AFDC," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 1(2), pages 209-222.
  8. Orr, Larry L, 1976. "Income Transfers as a Public Good: An Application to AFDC," American Economic Review, American Economic Association, vol. 66(3), pages 359-71, June.
  9. Howard Chernick, 1992. "A Model of the Distributional Incidence of State and Local Taxes," Public Finance Review, , vol. 20(4), pages 572-585, October.
  10. Plotnick, Robert D, 1986. "An Interest Group Model of Direct Income Redistribution," The Review of Economics and Statistics, MIT Press, vol. 68(4), pages 594-602, November.
  11. Phillip B. Levine & David J. Zimmerman, 1995. "An Empirical Analysis of the Welfare Magnet Debate Using the NLSY," NBER Working Papers 5264, National Bureau of Economic Research, Inc.
  12. Robert K. Triest, 1997. "Regional differences in family poverty," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-17.
  13. Edward M. Gramlich & Deborah S. Laren, 1984. "Migration and Income Redistribution Responsibilities," Journal of Human Resources, University of Wisconsin Press, vol. 19(4), pages 489-511.
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