Some of the governor’s budget proposals to help low-income families are ineffective, ripe for abuse or better left to the private sector
By ANGELA RACHIDI | March 16, 2021
Gov. Tony Evers’ proposed 2021-’23 budget adds a variety of spending and programs aimed at assisting low-income households. Some of the spending proposals represent useful and targeted assistance to low-income working families in Wisconsin, while others will crowd out private investments, invite abuse or simply be ineffective.
The summary below highlights the spending proposals.
$74.3 million in 2022, $74 million in 2023
One of the largest spending proposals targeting low-income families is a plan to increase the Wisconsin earned income tax credit (EITC) for families with one and two children. It proposes to increase the Wisconsin EITC from 4% of the federal EITC to 16% for families with one child and from 11% of the federal EITC to 25% for families with two or more children.
The Wisconsin EITC supplements employment and offers direct cash assistance to working families on top of the federal EITC, which research shows reduces poverty. However, the governor’s budget maintains a tiered approach where families with more children receive a higher percentage of the federal EITC. This is not necessary since the federal EITC already offers a larger benefit for families based on the number of children.
Instead of maintaining the tiered system, Wisconsin should offer a flat percentage of the federal EITC (such as 20%), no matter the family size. This will align with other states and ensure that the budget treats families equally under the Wisconsin EITC.
Nonrefundable child and dependent care tax credit
$9.8 million in 2022, $9.8 million in 2023
The governor’s budget proposes a new nonrefundable child and dependent care tax credit that will be 50% of the federal credit. The plan appropriately treats childcare as a work expense by partially offsetting related expenses through a tax credit.
However, by making this a nonrefundable tax credit (that is, it will not go to families that do not pay income taxes), it will benefit only higher-income households with income tax liability. Coupled with other provisions in the budget, it appears that the childcare-related spending will disproportionately assist middle- and higher-income families. The child and dependent care credit should only advance if it is part of a more comprehensive reform.
Transitional Jobs Program, Temporary Assistance for Needy Families funding
$2.6 million TANF funding in 2022, $5.2 million in 2023
The governor proposes to follow through on then-Gov. Scott Walker’s plan to expand the Transitional Jobs Program statewide. The program uses Temporary Assistance for Needy Families funds to subsidize private-sector employment for eligible participants, with the hope that it will lead to long-term unsubsidized employment. It is an alternative to the Department of Children and Families W-2 programs and serves custodial and non-custodial parents.
The evidence suggests that transitional jobs programs can effectively employ people when jobs are scarce (because the jobs are government-funded), such as during a recession. But the evidence is fairly weak that transitional jobs programs lead to long-term positive employment effects.1 In fact, a study of the Wisconsin program showed that while many participants subsequently found unsubsidized employment, it is not clear whether they would have found these jobs on their own without the program.2
The programs tend to employ people who would get a job themselves anyway, except when jobs are very hard to find, which is why the programs are effective during a recession. However, researchers have found other positive outcomes from the programs, such as reduced prison recidivism.3 The governor should include funding for a rigorous study on the effectiveness of the Transitional Jobs Program to inform future efforts.
Work Opportunity Tax Credit
$27.8 million in 2022, $24 million in 2023
The budget proposes a nonrefundable state supplement to the federal Work Opportunity Tax Credit (WOTC), which gives employers a tax credit for hiring certain types of employees, such as TANF recipients or those with barriers to employment.
The WOTC dates back to welfare reform, but the evidence of its effectiveness is mixed. Employer participation has always been low, and some believe that employers would hire these individuals even without the subsidy.
A study of the program in Wisconsin found small short-term positive effects on employment for those hired through the WOTC, but the effects faded over time and participants were no more likely to be employed than others not involved with the program.4 The governor’s plan would add state funding to supplement a largely ineffective federal program.
Child Care Strong program
$53 million in 2022 and $17 million TANF, same in 2023
The budget argues that childcare providers cannot remain in business due to razor-thin operating margins. It states: “Due to lower teacher to child ratios and other compliance and quality factors, revenue from these programs does not cover operational costs.” This acknowledges that costs are high due to regulations (that is, teacher/staff ratios and compliance costs), yet the budget does nothing to reduce regulations as a way to control costs.
Instead, it proposes a major expansion of state funding to compensate for government regulations. It offers provider grants (base payments to providers with a bonus for infant and toddler care) and a per-child stipend to providers, both of which providers can use to subsidize the cost of doing business. The grants will support providers no matter the income level of the children they serve, as will the per-child stipend. However, the budget calls for more spending to cover low-income children.
This represents a substantial expansion of the government’s role into the childcare market in Wisconsin. It creates bad incentives for childcare providers to increase costs, and it favors providers that can serve a large number of children. It also will create a vicious cycle of low-quality providers entering the market to make money, at the same time the government tries to improve quality through regulations.
To offset the new spending, the budget removes funding that promotes quality (that is, payments linked to YoungStar ratings). The budget attempts to control some of the potential negative consequences, such as specifying that personnel must account for 50% of costs to be eligible for the provider grants. However, these attempts likely will backfire as providers learn to manipulate the system.
The budget includes new spending to address homelessness. It appropriately recognizes the importance of preventing homelessness by dedicating funds to help divert families from homeless shelters and help defray existing housing costs. But the largest share of new spending goes to house the homeless and offer support services.
If this funding is time-limited and focused on helping people transition to permanent housing, it will be worthwhile. However, the budget also provides priority to homeless children and their families for the Housing Choice Voucher Program (that is, Section 8), which will draw families into homeless shelters if they expect to receive a housing voucher. An increased demand for housing the homeless likely will follow.
The budget also includes funding to provide grants to landlords to address housing deficiencies. This is an unnecessary government intrusion in the private housing market. Spending those dollars on prevention programs, including mental health services, would be better, along with an effort deregulate housing (and zoning) to maximize affordability.
$10 million in assistance for low-income families, $10 million TANF
Limited internet connectivity is a problem among low-income populations, especially those in rural areas. The budget seeks to subsidize private investment in developing high-speed internet, which will crowd out private-sector funding and ultimately will benefit service providers. Additionally, the budget seeks to assist low-income households by purchasing internet service for them. This runs the risk of providers raising prices at the expense of the government.
REWARD, Legal Services for Eviction
REWARD $500,000 TANF, $2 million eviction services
The governor proposes some items designed to help low-income families directly or indirectly. These proposals expand government into areas that the private sector might be better equipped to handle, and the programs are ripe for abuse.
The budget expands the REWARD program, which offers stipends to childcare providers based on educational credentials and longevity (on top of other childcare spending). It also includes funding for legal services for vulnerable people — to cover eviction, unemployment compensation and domestic violence, for example. These are worthwhile endeavors but are better served by philanthropic and private-sector efforts.
Angela Rachidi is a Badger Institute visiting fellow, a scholar at the American Enterprise Institute and founder of Rachidi Research and Consulting, LLC.
(1) See Cummins and Bloom, February 2020, “Can Subsidized Employment Programs Help Disadvantaged Job Seekers? A Synthesis of Findings from Evaluations of 13 Programs,” https://www.mdrc.org/publication/can-subsidized-employment-programs-help-disadvantaged-job-seekers.
(2) See Davis and Rupinski, September 2013, “Evaluation of the Transitional Jobs Demonstration Project,” https://dcf.wisconsin.gov/files/w2/studies/tjdp-final-evaluation.pdf.
(3) See Barden, Juras, Redcross, Farrell and Bloom, May 2018, “New Perspectives on Creating Jobs Final Impacts of the Next Generation of Subsidized Employment Programs,” https://www.mdrc.org/publication/new-perspectives-creating-jobs.
(4) See Hamersma, 2008, “The Effects of an Employer Subsidy on Employment Outcomes: A Study of the Work Opportunity and Welfare-to-Work Tax Credit,” https://onlinelibrary.wiley.com/doi/pdf/10.1002/pam.20354.