Poverty in Our Time. The Challenges and Opportunities of Fighting Poverty in Virginia. Executive Summary. By Michael Cassidy and Sara Okos

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1 May 2009 Poverty in Our Time The Challenges and Opportunities of Fighting Poverty in Virginia By Michael Cassidy and Sara Okos Executive Summary Even in times of economic expansion, the number of Virginians living in poverty has remained at roughly the same levels for the last 20 years. Thus, addressing this issue in the current recession may seem daunting. However, in times such as these as many more Virginians are facing the prospect of poverty the commonwealth should examine the opportunities available to make significant changes. In fact, such changes are even more crucial than ever. Primary to this discussion are Virginia s safety net programs. The commonwealth has struggled to make progress in fighting poverty, in part, due to the significant holes in Temporary Assistance to Needy Families (TANF), food stamps, unemployment insurance, minimum wage, and health care policies. As a result, these programs are not responsive to the real needs of families facing the current economic recession. Even though unemployment has increased by more than 122 percent since the start of the recession, food stamp enrollment is up only 18 percent, and TANF enrollment up by less than 10 percent. Virginia s TANF program is not meeting the needs of children in poverty. In 2007, the number of children enrolled in TANF totaled 50,462. But there were over 96,000 children living in deep poverty (half the federal poverty line) and over 233,000 children living below the federal poverty line in the state. Only four states extend unemployment insurance to fewer unemployed workers than Virginia. Poverty rates for families without long-term unemployment insurance coverage are more than double those for families with that coverage. Virginia workers who lose their jobs have basically only a one in four chance of even being covered by the state s unemployment insurance system. Despite the rising number of uninsured Virginians, the state s Medicaid insurance program for low-income individuals continues to have among the strictest eligibility requirements of any state in the country. Virginia s low minimum wage standards mean nearly one in five working Virginians earned wages low enough to place them below the federal poverty thresholds. To address these problems and deal constructively with the challenge of poverty in Virginia, this report recommends several key steps: Maximize the use of federal funding available through The American Recovery and Reinvestment Act (Recovery Act). Federal funds could expand Virginia s TANF program through new initiatives and could improve the unemployment insurance system. Conduct needed outreach to ensure more eligible Virginians in need receive benefits through TANF, food stamps, refundable tax credits and other safety net programs. Improve coverage for food stamps by eliminating our unnecessary asset test and raising the gross income test. Make the state s Earned Income Credit refundable to help more low- and moderate-income families struggling to pay for the necessities of life and to encourage work. Raise Virginia s minimum wage to help more workers earn a living wage. Expand public health insurance coverage so that working parents living in poverty can have access to Medicaid. The Commonwealth Institute 1

2 An Overview of Poverty in the Commonwealth Currently more than 742,000 Virginians live in poverty. This translates to just under 10 percent of Virginia s total population in Poverty is defined as living below the federal poverty level, which for 2007 was approximately $21,000 for a family of four. The federal poverty level is determined annually by the U.S. Department of Health and Human Services and has been criticized as an inadequate measure of what it takes to sustain a family. It is important to note that a number of alternative measures have been proposed that assume a more comprehensive approach to determining the poverty threshold. These alternatives often include estimates of the taxes families pay, the tax credits they receive, other cash transfers, and things such as child care, medical, and transportation costs. These alternatives often result in a slightly higher calculation of the poverty rate. While Virginia ranks well compared to other states in terms of its current poverty rate, the commonwealth has made very little progress in reducing its poverty rate in the past decade. Even during the economic expansion during the mid- 2000s, the poverty rate remained steady (see Figure 1). In addition, because there is a significant lag in the release of poverty data by the Census Bureau, the most current poverty data does not capture the full effects of the recession that began in December As the recession deepens, substantially more Virginians will face poverty. For example, if national unemployment hits 9 percent, it is predicted that up to 218,000 more Virginians will be in poverty. Of those, up to 73,000 will be children. 1 The recently enacted federal Recovery Act is intended to soften the blow of 2 The Commonwealth Institute

3 these increases through a variety of improvements to safety net programs, but significant increases in poverty remain likely, especially if Virginia does not take advantage of the federally funded initiatives within the Recovery Act. Although overall poverty rates may be relatively low compared to other states, particular populations within Virginia experience markedly higher rates of poverty. As shown in Figure 2, the poverty rate is highest among African Americans, followed by Hispanics/ Latinos, American Indians, Whites, and lowest among Asians. When looking at Virginia s total population in poverty, more than half of this population is White. About one in three Virginians in poverty is African American and just under one in 10 is Hispanic or Latino. There is a strong link between education and poverty as education rises, poverty becomes increasingly less prevalent. Among Virginians with less than a high school degree or equivalent, one in five lived in poverty in As shown in Figure 3, graduating from high school more than cuts this rate in half, and a bachelor s degree reduces that rate by more than 75 percent. Unlike the overall poverty rate, Virginia s poverty rate among children under 18 has increased over the time period of economic growth leading up to the current downturn. In 2007, for example, more than 233,000 Virginia children lived below the federal poverty level. Among Virginia s children living in poverty, more than half live in deep poverty, which is defined as half of the federal poverty level or for 2007, less than $11,000 for a family of four. Of Virginia s children living in poverty, two-thirds come from a female-headed household. As shown in Figure 4, less than one-fourth of Virginia children in poverty live within a household where two parents are present, and less than 10 percent of children in poverty live in a male-headed household. In addition, studies show that families who receive assistance that keeps them from falling into poverty are more likely to beat the odds and not remain in poverty. For example, research indicates that children who are pushed into poverty during a recession are 13 times 2 more likely to remain in poverty as adults than individuals who do not experience poverty as children. Challenges and Opportunities to Fight Poverty in Virginia The challenges for Virginia are numerous. 1. Virginia s TANF program is not fully reaching its target population and is not as responsive to the recession as it needs to be. As unemployment continues to rise during the recession, public safety net programs such as food stamps and TANF become increasingly more important. As shown in Figure 5, however, the number of people receiving these crucial benefits is not growing in proportion to rising need. Since the start of the current recession, statewide unemployment levels have increased by more than 122 percent. During this same period, the number of households receiving food stamps has grown by just about 18 percent, and the number of people receiving TANF benefits has increased by fewer than 10 percent. As Figure 6 illustrates, there is a substantial gap between the number of Virginia children living in deep poverty and the number of Virginia children receiving TANF. Although this Virginia has made very little progress over the past 20 years in reducing poverty. The Commonwealth Institute 3

4 gap narrowed a bit in the mid-2000s, it is starting to grow once again and at a time when support is needed most. 2. Virginia s food stamp program needs to cover more people in need. Food stamps are a significant share of income for low-wage workers and families struggling in poverty. Connecting eligible people to this program is a critical work support, at a very low cost to the state (only the administrative expenses). Virginia s current asset test for eligibility and strict gross income test make it harder for families to access this help. 3. Virginia s unemployment insurance system is not reaching enough Virginians who have lost their jobs. In 2008, just 26 percent of unemployed Virginians received unemployment insurance benefits (see Figure 7). This is the lowest recipiency rate of any state in the South Atlantic region, and 30 percent below the national average. Only four other states extended benefits to fewer unemployed workers than Virginia. Unemployment insurance plays a significant role in reducing poverty for unemployed individuals who receive benefits. The Congressional Budget Office has found that the monthly poverty rate for families of longterm unemployment insurance recipients was 23 percent but would have been 50 percent if the families had not been receiving unemployment insurance Virginia has a regressive tax structure, which is one of the most significant challenges facing efforts to reduce poverty. The state taxes a higher portion of lowincome taxpayers income than that of higher-income Virginians. This makes it harder for low- and moderate-income families to work their way out of poverty and secure a more prosperous future. Figure 8 illustrates the percentage of Virginians income comprised of state and local taxes arrayed by income level. Virginians with income less than $18,000 per year pay two times as much of their income in sales and excise taxes than Virginians with income between $55,000 and $92,000. These lowincome Virginians pay nearly nine times 4 The Commonwealth Institute

5 as much of their income in these taxes as Virginia s wealthiest 1 percent. The main culprit in this structure is Virginia s relatively flat income tax structure the highest income tax rate (5.75 percent) kicks in at only $17,000 in income. In addition, a reliance on regressive sales and excise taxes disproportionately impacts low- and moderate-income Virginians since these taxes are not based on ability to pay. Substantial holes exist in Virginia s safety net programs, making it harder to tackle poverty. 5. In 2007, one in every five Virginia workers earned a wage that was low enough to place them below the federal poverty threshold (see Figure 9). These 900,000 individuals represent a segment of the population that is working, yet is still not able to earn enough to make ends meet. During the period of economic expansion that followed the 2001 recession, high wage earners saw their wages grow substantially, while most workers earning at the median wage or below experienced a decline in their real wages during the period. 6. Virginia s investment in the health care safety net also serves as a challenge to combating poverty. Virginia is one of the most restrictive states in providing Medicaid coverage. Income eligibility limits for parents in Virginia are below 30 percent of the federal poverty level, less than half the national average. That means parents earning more than $6,000 annually likely will not qualify for coverage under Medicaid. Virginia ranks 47th in per capita Medicaid spending nationwide, ahead of only Colorado, Nevada and Utah. The state spends just $609 per capita only slightly more than half the national average of $1,015 and less than all of its neighboring states. The Commonwealth Institute 5

6 Virginia needs to maximize federal funding under the Recovery Act. Critical opportunities exist for Virginia to tackle the challenges of poverty including: 1. Take advantage of the federal Recovery Act that provides more than $9 billion in assistance to Virginia and its residents. Through a variety of tax cuts for working and low-income Virginians, as well as $4.5 billion in direct funding to public programs, the Recovery Act provides opportunities to address the needs of families facing poverty. Some of these provisions require Virginia to take action in order to access the federal funding. Namely, Undertake new initiatives or expansions to TANF to access up to $79 million in federal funds. Virginia is currently on track to only receive $4 million of this new funding. Given that TANF benefit amounts have not increased in Virginia since the late 1990s and Virginia s TANF program is only reaching a small percentage of people in poverty, expansions in this program are necessary to meet current need. Federal funding to pay for them provides a strong incentive to undertake these initiatives. Virginia needs to enact two of four possible reforms to its unemployment insurance in order to access $125 million in available federal funding. These incentives mean that the federal government would be fully funding the costs of needed program expansions with resources sufficient to last at least several years. Given the low coverage of the state s unemployment insurance system and the growing number of Virginians facing unemployment, these changes and the 6 The Commonwealth Institute

7 federal funds to pay for them are needed. Conduct outreach to make sure more Virginians take advantage of existing and new programs. The Recovery Act included an array of tax credit programs such as the creation of the Make Work Pay credit, expansion of the federal Earned Income Tax Credit and expansion of the refundable child care tax credit. In addition, existing food stamp and TANF programs exist to serve families in need during tough economic times. But people need to know these programs exist and how to access them in order for them to be effective. Launching efforts to maximize recipiency can ensure that help is delivered to those in need. 2. Improve the Virginia food stamp program. Virginia should be aggressively looking for recently unemployed families and low-wage workers in an effort to connect them to food stamp relief. Efforts can include reviewing the children s health insurance program to see if any families appear eligible but are not participating, and doing aggressive outreach through the unemployment insurance program to connect newly eligible jobless Virginians. Virginia could also expand eligibility by eliminating the asset test (already done for TANF recipients) and raise the gross income test to 165 percent of the federal poverty limit to cover more Virginians in need. These are all ways to help newly low-income families with federallyprovided assistance. 3. Expand the state s Earned Income Credit. An effective antidote to its regressive tax system is making Virginia s earned income credit refundable. Currently taxpayers are eligible for a state credit equal to 20 percent of the credit they claimed on their federal return. But the state credit is currently non-refundable. Meaning that to the extent a taxpayer is eligible for a credit that is greater than their tax liability, they leave that remainder on the table and do not receive a refund. By allowing individuals who qualify for a credit that exceeds their state income tax liability to receive the excess credit in the form of a refund check, the state helps to offset the sales, excise, and property taxes paid disproportionately by lowincome workers. Taxpayers across the state would benefit from this expanded program. Federal EITC recipients span the state and serve as a useful proxy for understanding who would be eligible for a refundable state Earned Income Credit. 4. Increase the minimum wage. Virginia lags in this critical area. Twenty-seven states have a higher minimum wage than the commonwealth. An increase in the minimum wage would mean more low-wage Virginia workers could get out of poverty. 5. Improve health insurance coverage for working parents in poverty. Virginia could expand eligibility for the Medicaid program for working parents to be at 100 percent of the federal poverty limit. This would mean that if parents are working, but in poverty they would be able to access health insurance. Conclusion The current recession has revealed many challenges for Virginia in dealing with rising unemployment and need as families across the state struggle to deal with rising economic distress and insecurity. These challenges will lead to increases in poverty. Virginia has struggled to adequately address the challenges of poverty even in good times. The percentage of the population living under the federal poverty limit has remained distressingly stuck at effectively the same levels for twenty years in the Commonwealth. Virginia can and should join with the many other states across the country that have identified reducing poverty as a significant challenge to be met. By leveraging federal resources, improving key safety net programs, and improving investments in other core public structures like education, health care, wages, and retirement savings, Virginia can begin to make progress on this key front in the battle to bring prosperity to all Virginians. About The Commonwealth Institute The Commonwealth Institute for Fiscal Analysis provides credible, independent and accessible information and analyses of state fiscal issues with particular attention to the impacts on low- and moderate-income persons. Our products inform state fiscal and budget policy debates and contribute to sound decisions that improve the well-being of individuals, communities and Virginia as a whole. For more information, go to This research was partially funded by the Annie E. Casey Foundation. We thank them for their support but acknowledge that the findings and conclusions presented in this report are those of the authors alone and do not necessarily reflect the opinions of the Foundation. Endnotes 1 See Predicting Poverty in the Commonwealth. The Commonwealth Institute for Fiscal Analysis and Voices for Virginia s Children. February Available at tpovertylink.pdf Or 2 Michael Linden. The Cost of Doing Nothing: The Economic Impact of Recession-Induced Poverty. First Focus, December Congressional Budget Office, Family Income of Unemployment Insurance Recipients. March Available at: The Commonwealth Institute 7