In the 2023 Discussion Paper Mitigating Benefits Cliffs for Low-Income Families: District of Columbia Career Mobility Action Plan as a Case Study, we study a workforce development pilot program in Washington, DC, that is unique in its strategy to mitigate the reductions in public assistance that workers experience when their employment income increases. We provide a broad overview of the structure of the Washington, DC, social safety net system and describe the benefits cliffs that a hypothetical single parent household would experience when employment income rises. Next, we analyze how the new pilot program, called the Career Mobility Action Plan (Career MAP), mitigates these benefits cliffs. We then estimate both how benefits cliffs currently affect potential program participants and how Career MAP’s mitigation strategy may reduce the benefits cliffs they face.
This Partners Update highlights two findings from the paper. First, in Washington, DC, the existing benefits cliffs pose a potentially significant barrier to career advancement. Second, the Career MAP benefits cliff mitigation strategy reduces the financial disincentives low-income workers face when making decisions about career advancement.
The Current Benefits Cliff Landscape in Washington, DC
Low- and moderate-income workers who receive public assistance can experience significant losses of benefits as their employment income rises. This experience can leave workers financially worse off overall (a benefits cliff) or no better off (a benefits plateau) even though their employment income is higher. Benefits loss can create disincentives for low-income workers to accept higher-paying jobs, which ultimately limits career advancement. Sudden benefits loss can also destabilize a families’ finances, causing financial and psychological stress (Romich 2006; Romich, Simmelink, and Holt 2007). Because benefits loss can disincentivize career advancement and destabilize a family’s finances, it may reduce the effectiveness of workforce development programs that focus on lifting low-income workers out of poverty and toward economic security.
A useful way to conceptualize benefits cliffs is with a measure called the effective marginal tax rate (EMTR), defined as the percentage of new employment income that is lost due to reductions in public assistance and increases in taxes. When multiple public assistance programs are lost at the same time, or the dollar value of a terminated subsidy is large (for example, losing valuable housing or childcare subsidies), the EMTR can be high. Some workers may experience an EMTR that exceeds 100 percent following a raise, which means that for every $1.00 of additional income earned, they lose more than $1.00 because of increases in taxes and decreases in public assistance.
In Washington, DC, we find high EMTRs that may disincentivize working families from advancing in their careers and improving their standard of living. Using an example family of one adult and one child (aged three) who receives all benefits programs for which they are eligible, we find that this household is no better off earning $65,000 than earning $11,000 because of high EMTRs following a series of benefits cliffs.1 The large $54,000 increase in employment income is fully offset by losses in public assistance and tax credits, together with increases in taxes.
The Career MAP Pilot Program
Workforce development programs generally seek to train workers with skills that allow them to advance to higher-paying, in-demand occupations and to promote economic self-sufficiency. High EMTRs create financial disincentives that may hinder the effectiveness of these workforce programs. Workforce programs that include benefits cliff mitigation strategies offer an opportunity to reduce these disincentives and, longer-term, to identify the impact of these strategies on program performance.
The Career Mobility Action Plan (Career MAP) is a new workforce program with such a benefits cliff mitigation strategy. Career MAP is administered by the DC Department of Human Services with The Lab @ DC providing design and evaluation support. For up to five years, the pilot, which launched in December 2022, is providing resources directly to families who have experienced homelessness and want to pursue career advancement. Career MAP includes a strategy to mitigate benefits cliffs for its participants by providing resources to cover the loss of cash, food, health care, childcare, and housing benefits that can occur as participants gain skills for career advancement and increase their employment income.
Career MAP includes a unique strategy to mitigate multiple benefits cliffs. First, the program structures rental assistance such that participants pay 30 percent of their income in rent, minus any lost food assistance (Supplemental Nutrition and Assistance Program, or SNAP) or DC cash assistance benefits as a family’s earnings increase. This rent reduction strategy compensates families for the loss of SNAP and cash assistance benefits; moreover, the increased financial resources (in the form of reduced rent) does not count as income against the assistance received from other programs.
Second, the program creates a cash fund of up to $10,000 annually per family that reimburses participants for losses of medical and childcare benefits as a family’s income increases, as well as for any SNAP or cash assistance benefit losses that cannot be covered through rent discounts.2
In the Discussion Paper we summarize the impact of the benefits cliff mitigation strategy by comparing EMTRs for potential participants with and without the mitigation strategy. Using the administrative data on the population of DC families who were eligible to apply to Career MAP,3 we calculated the EMTR for all potential participants using a simulated $5,000 increase in annual employment income. We reproduce results from the paper here in figures 1 and 2.
Figure 1 shows the case without the benefits cliff mitigation strategy. Median EMTRs remain above 56 percent for workers with incomes between zero and 299 percent of the Federal Poverty Level (FPL).4 For context, the 56 percent median EMTR is 19 percentage points higher than the top 2023 federal marginal income tax rate of 37 percent, which applies to Heads of Household with more than $578,100 of annual income. At several income levels below 299 percent of FPL, median EMTRs exceed 100 percent, indicating a benefits cliff. Median EMTRs spike to 173 percent for worker incomes between 325 percent and 349 percent, corresponding to a benefits cliff caused by the phase out of the Child Care and Development Fund (CCDF) childcare subsidy.
Figure 2 shows the median EMTRs with the mitigation strategy in place. The figure shows lower median EMTRs for workers with incomes at all levels of the FPL. Besides these consistently lower median EMTRs, the mitigation strategy eliminates benefits cliffs, in which the EMTRs exceed 100 percent.
Implications for Practice
The Career MAP program mitigates high EMTRs by providing direct cash assistance of up to $10,000 and increasing rental assistance to families, which together replace the public assistance lost due to employment income gains. Our Discussion Paper case study shows how these mitigation strategies lower EMTRs compared to a baseline scenario without the mitigation strategies. With the mitigation strategies in place, median EMTRs do not exceed 100 percent at any income level. This result shows that benefits cliffs, in which EMTRs exceed 100 percent, are eliminated by the Career MAP program’s mitigation strategies.
Our analysis can inform the design of workforce development programs that seek to mitigate the disincentives caused by the potential loss of safety net program assistance. The methods used in our Discussion Paper can also inform other researchers and practitioners when designing programs to mitigate the benefits cliff. The EMTR measure, together with the administrative data analysis, provide a rigorous way to estimate the effectiveness of benefits cliff mitigation strategies on reducing financial disincentives to career advancement.
While the analysis shows simulated reductions in EMTRs, it does not examine how Career MAP will impact worker outcomes such as credential attainment or earnings gains, nor estimate the longer-term costs and benefits of the program. These two topics for future research—impact on workers and long-term value—are important considerations for other jurisdictions that are considering similar programs. The Lab @ DC’s program evaluation will leverage the random assignment of applicants to explore these topics and help inform future work.
By Elias Ilin, former assistant policy advisor, Federal Reserve Bank of Atlanta; Alex Ruder, Community and Economic Development director and principal adviser, Federal Reserve Bank of Atlanta; and Alvaro Sanchez, Community and Economic Development senior research analyst, Federal Reserve Bank of Atlanta. The authors thank the following individuals from the DC Department of Human Services: Laura Zeilinger, Dena Hasan, Geoff King, Curtis Smith, Calvin Robinson, Stacey Johnson, Adam Gerstenfeld, Anna Fogel, Anthea Seymour, Rachel Pierre, Brian Campbell, and Kevin Valentine. The authors thank the following individuals from The Lab @ DC: Sam Quinney, Renzo Massari, Anamita Gall, Karissa Minnich, and Katie O’Connell. The authors also thank Peter Dolkart and Jarrod Elwell of the Federal Reserve Bank of Richmond. The views expressed here are the author's and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility. The Federal Reserve Bank of Atlanta does not provide grants or funding to the general public or to partner organizations. We do not endorse or make any representations as to the suitability of partner organizations, their products, or their programs, and we do not advise on distribution of funds by partners.
References
Romich, Jennifer L. "Difficult calculations: Low-income workers and marginal tax rates." Social Service Review 80, no. 1 (2006): 27-66. https://doi.org/10.1086/499086
Romich, Jennifer L., Jennifer Simmelink, and Stephen D. Holt. "When working harder does not pay: Low-income working families, tax liabilities, and benefit reductions." Families in Society 88, no. 3 (2007): 418-426. https://doi.org/10.1606/1044-3894.3651
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1 This hypothetical family is not meant to be representative. Few families likely receive all benefits for which they are eligible. For instance, the DC housing assistance benefits included in this analysis are only available to families that previously experienced homelessness, and the waitlist is currently closed for other low-income families seeking similar housing benefits through the District of Columbia Housing Authority. The intent of the analysis is to illustrate simply how combined benefits loss can impact a worker at different income levels. The EMTR analysis in the Discussion Paper moves beyond the hypothetical analysis and estimates benefits cliffs within the actual population of potential participants.
2 The rent payments can only be reduced to zero dollars. Once that point is reached, Career MAP uses the $10,000 fund for additional mitigation. The $10,000 cap can be extended if additional funds are available.
3 In the summer of 2022, 1,438 families applied for selection via lottery to the Career MAP program and were randomly assigned for participation in the 600 program slots.
4 The EMTRs for this hypothetical family will change over time as their children age since some of the benefits they receive are linked to the young age of their child. This analysis does not account for these dynamic effects.