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The Insurance Value of State Tax-and-Transfer Programs

Author

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  • Hilary W. Hoynes
  • Erzo F.P. Luttmer

Abstract

This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the determinants of changes in the value of state net benefits over a more than 30-year period. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value of transfers is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for mobility that would "undo" state redistributive spending.

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  • Hilary W. Hoynes & Erzo F.P. Luttmer, 2010. "The Insurance Value of State Tax-and-Transfer Programs," NBER Working Papers 16280, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16280
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    Cited by:

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    3. Kristy Fan & Tyler J. Fisher & Andrew A. Samwick, 2021. "The Insurance Value of Financial Aid," NBER Working Papers 28669, National Bureau of Economic Research, Inc.
    4. Ferey, Antoine & Haufler, Andreas & Perroni, Carlo, 2023. "Incentives, globalization, and redistribution," Journal of Public Economics, Elsevier, vol. 224(C).
    5. Zachary Parolin & Christiaan Luigjes, 2018. "Incentive to Retrench? Institutional Moral Hazard among Federal & State Social Assistance Programs after Welfare Reform," Working Papers 1802, Herman Deleeck Centre for Social Policy, University of Antwerp.
    6. Ilpo Suoniemi, 2012. "Income mobility, income risk and age – Finnish experiences in 1995–2008," Working Papers 276, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    7. Chloe N. East & Andrew I. Friedson, 2018. "An Apple a Day? Adult Food Stamp Eligibility and Health Care Utilization among Immigrants," Upjohn Working Papers 19-295, W.E. Upjohn Institute for Employment Research.
    8. Orsetta Causa & Mikkel Hermansen, 2018. "Income Redistribution Through Taxes and Transfers across OECD Countries," LIS Working papers 729, LIS Cross-National Data Center in Luxembourg.
    9. Sonja Settele & Reyn van Ewijk, 2017. "The effect of cigarette taxes during pregnancy on educational outcomes of the next generation," IAAEU Discussion Papers 201703, Institute of Labour Law and Industrial Relations in the European Union (IAAEU).
    10. Bartels, Charlotte & Neumann, Dirk, 2021. "Redistribution and Insurance in Welfare States around the World," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 123(4), pages 1116-1158.
    11. Orsetta Causa & Mikkel Hermansen, 2017. "Income redistribution through taxes and transfers across OECD countries," OECD Economics Department Working Papers 1453, OECD Publishing.
    12. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2011. "The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, vol. 95(11), pages 1466-1484.
    13. Peter Levell & Barra Roantree & Jonathan Shaw, 2021. "Mobility and the lifetime distributional impact of tax and transfer reforms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(4), pages 751-793, August.
    14. Hossein Askari & Abbas Mirakhor, 2014. "Risk sharing, public policy and the contribution of Islamic finance," PSL Quarterly Review, Economia civile, vol. 67(271), pages 345-379.
    15. Roger Gordon, 2024. "Fiscal Federalism and the Role of the Income Tax," NBER Chapters, in: Policy Responses to Tax Competition, National Bureau of Economic Research, Inc.
    16. Bruce D. Meyer & Derek Wu & Grace Finley & Patrick Langetieg & Carla Medalia & Mark Payne & Alan Plumley, 2020. "The Accuracy of Tax Imputations: Estimating Tax Liabilities and Credits Using Linked Survey and Administrative Data," NBER Chapters, in: Measuring Distribution and Mobility of Income and Wealth, pages 459-498, National Bureau of Economic Research, Inc.
    17. Silvia Avram & Mike Brewer & Paul Fisher & Laura Fumagalli, 2022. "Household Earnings and Income Volatility in the UK, 2009–2017," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(2), pages 345-369, June.
    18. Parolin, Zachary & Luigjes, Christiaan, 2019. "Incentive to Retrench? Investigating the Interactions of State and Federal Social Assistance Programs after Welfare Reform," OSF Preprints s5fwr, Center for Open Science.
    19. East, Chloe N., 2018. "Immigrants’ labor supply response to Food Stamp access," Labour Economics, Elsevier, vol. 51(C), pages 202-226.
    20. Ilpo Suoniemi, 2013. "Permanent income, redistribution and income risk: Empirical analysis on the role of age and social protection benefits (ESSPROS) using Finnish Panel data in 1995–2008," Working Papers 286, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    21. Ilpo Suoniemi, 2015. "Income mobility, dynamics and risk over the working life: income insurance from taxes and cash transfers in 2001–2008," Working Papers 300, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    22. Manasi Deshpande, 2016. "Does Welfare Inhibit Success? The Long-Term Effects of Removing Low-Income Youth from the Disability Rolls," American Economic Review, American Economic Association, vol. 106(11), pages 3300-3330, November.
    23. Hoynes, Hilary W. & Luttmer, Erzo F.P., 2012. "Reprint of: The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, vol. 96(11), pages 1110-1128.
    24. Olga Cantó & Carmelo García Pérez & Marina Romaguera de la Cruz, 2023. "The Role of Tax-Benefit Systems in Shaping Economic Insecurity in the European Union," Hacienda Pública Española / Review of Public Economics, IEF, vol. 247(4), pages 7-36, December.

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    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare

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