The effective tax rate on earnings is somewhat complicated because two of the deductions used to compute net income are themselves functions of income. The earned income deduction of 20 percent reduces the effective tax rate on benefits. The excess shelter cost deduction (see page 157) is calculated as the amount of shelter costs over 50 percent of net income after other deductions are taken, so an increase in income can reduce this deduction. As a result, an increase in income can result in a benefit reduction that is greater than the base (Ohls and Beebout, 1993).
Net Income Determination
Earned Income Deduction
An important change within the SNAP population is that an increasing proportion of the SNAP caseload is employed (Eslami et al., 2011). This shift toward a greater number of employed participants can have an impact on the purchasing power of the SNAP allotment because of expenses related to employment, such as transportation to work and child care expenses, which reduce the disposable resources available to purchase food. To account for the cost of being employed, the SNAP formula allows certain deductions in the calculation of a household’s net income on which the benefit level is based. Twenty percent of earned income is deducted, and recipients can deduct their spending on dependent care (prior to 2008 the dependent care deduction was capped at $175 per month per dependent) (CBPP, 2010).
There has, however been less recognition that being employed reduces the time available to prepare meals (Davis and You, 2010; Rose, 2007). As discussed in previous chapters, the cost of the TFP does not take into account time costs for food procurement and meal preparation, and therefore does not explicitly account for the trade-off between the costs of more expensive, intermediate-prepared foods and the labor costs of preparation. For example, a household may prefer to purchase prepared foods (e.g., precut carrots or shredded lettuce) instead of spending the time to prepare meals from raw ingredients. Given this trade-off, the earned income deduction at its current level may reduce the overall purchasing power of the SNAP allotment, especially for those facing time constraints such as households headed by a working single mother. Employment among single mothers accelerated with the reforms of the 1990s toward a more work-based safety net, notably the expansions of the earned income tax credit that increased the reward for working and the 1996 Welfare Reform Act,6
6Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Public Law 104-193 (August 22, 1996).