The highest marginal tax rates in America are not faced by millionaires or billionaires, but by someone leaving welfare for work. The moment a welfare recipient takes a job and begins to earn income they face what policymakers refer to as a “benefit cliff.” The combination of lost benefits, payroll taxes, and new job-related expenses can leave them worse off financially in the short term. The result is that, even though work is a key to long-term self-sufficiency, the current structure of welfare programs often discourages work and leaves families trapped in dependency.  

A 2012 Congressional Budget Office report looking at the example of Pennsylvania found that marginal tax rates, after accounting for the loss of benefits, could reach extremely high levels, discouraging labor-force entry and work hours. The CBO found that unemployed single taxpayers with one child would face an effective marginal tax rate of 47 percent for taking a minimum wage job in 2012, and if their earnings disqualified them from Medicaid, they could have faced an astonishing marginal tax rate of 95 percent. Likewise, an Urban Institute study by Elaine Maag and others, found that a single parent with two children moving from no earnings to poverty-level earnings faced a marginal tax rate that was as high as 25.5 percent in Hawaii. A 2014 Illinois Policy Institute study found that a single mother with two children who increased her hourly earnings from the minimum wage of $8.25 to $12 would increase her net take‐​home wage by less than $400 per year—about 19 cents per hour. Even worse, if she further increased her earnings to $18 an hour, her annual net income would decrease by more than $24,800 due to benefit reductions and tax increases. Although inflation and policy changes over the last decade have changed some of these studies’ details, the general conclusions remain the same today.  

Welfare cliffs rank among the top two or three policy challenges if we want to transform the welfare system into a stepping stone to self-sufficiency and independence. A viable and affordable solution has long perplexed welfare scholars and policymakers.  

Now, Missouri has passed landmark welfare reform that might provide a national model for dealing with welfare cliffs. Just signed into law, the legislation sponsored by Senator Mary Elizabeth Coleman, establishes “transitional benefits” for those receiving benefits from the Supplemental Nutrition Assistance Program (SNAP, previously known as food stamps) and Temporary Assistance for Needy Families (TANF). It also makes permanent an existing transitional benefit for the childcare subsidy program.  Rather than immediately losing benefits when an individual’s income reaches the eligibility threshold, benefits would be “stepped down” in proportion to increases in income, eventually phasing out at 300 percent of the federal poverty level (FPL). (In 2023, the FPL for a family of four is $30,000; at 300 percent FPL, the phase-out would offer transitional assistance to families with incomes as high as $90,000 per year.). Work requirements and other welfare restrictions would remain in place for the duration of the benefits, but the transitional benefit would not count against lifetime caps. Previously, Sen. Coleman noted, a single mother with two kids in the city of St. Louis who earned $27,001 instead of $27,000 lost nearly $9,300 in childcare benefits alone.

Missouri’s reform passed with broad bipartisan support. 

Given the sprawling complexity of the U.S. welfare system, Missouri’s reform will not completely solve the problem of welfare cliffs. Two big welfare programs, Medicaid and housing assistance, are not included in this new law. And the program will cost more money in the short-term—an estimated $270 million/year initially—although it is likely to save money over the long haul as it encourages recipients to leave welfare for work. Other reforms may be necessary to enable low-skilled individuals with limited attachment to the labor force to develop stronger and more enduring ties in order to benefit fully from the program.

It remains to be seen how the program will play out over time. But Missouri’s approach may prove to be a model for dealing with a problem that has confounded welfare scholars for decades. 

Kudos to Sen. Coleman for thinking outside the box and also to Missouri’s leaders from both parties for turning this into a bipartisan victory for smart and compassionate welfare reform.