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Examining the Relationship between the EITC and Food Stamp Program Participation Among Households with Children

Robert Lerman () and Kelly S. Mikelson

No 190, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: The federal Earned Income Tax Credit (EITC) and the Food Stamp Program (FSP) are the largest means-tested transfer programs for low-income working parents in the United States. Together, these two programs cost nearly $50 billion per year and comprise the bulk of the social safety net for working poor families. This paper examines how these two programs interact, particularly the potential impact of the EITC on participation in the FSP during the latter half of the 1990s. This paper is the first to focus on examining the relationship between the EITC and FSP participation. Although EITC payments do not reduce the potential size of a household's food stamp allotment under FSP rules, EITC adds to a household's resources and thus could affect its willingness to participate in the FSP. The paper tests this hypothesis with monthly data from the Survey of Income and Program Participation (SIPP) for 1996 through 1999. We use two logit models to examine the relationship between EITC and FSP participation. Our dependent variable is FSP participation which equals one if a household head participates in the FSP during a given month and zero otherwise. Our primary independent variable of interest in model 1 is actual federal EITC claimed by the household head. In our second model, we replace actual EITC benefits claimed with a computed variable measuring the EITC benefits a household should be eligible for given their household size and earned income. The reduced form of model 1 excludes variables that may be endogenous (e.g., employment status, spousal employment status, TANF participation, and actual TANF benefits received). Specifically, we are concerned about the endogeneity of a household head's employment status, for example, which may simultaneously affect the likelihood of participating in the FSP and be affected by EITC. The full form of model 1 includes these potentially endogenous variables. Model 2 is useful since actual EITC benefits may not be completely exogenous. We tested this by regressing actual EITC benefits on the computed EITC benefits (plus our other control variables) and then including the residuals from this regression in an ordinary least squares regression of food stamp participation on actual EITC benefits and our controls. While our results did not conclusively demonstrate that there was an endogeneity problem with using actual EITC benefits, they did suggest it was possible. Model 2 is also important since there is a large amount of missing data in the SIPP on actual EITC claimed. Since the vast majority of EITC recipients receive the benefit in a lump sum payment between January and April, we might expect that the decision to participate in the FSP would be affected by the seasonal nature of EITC benefits. To determine if the timing of the receipt of EITC benefits impacts food stamp receipt, we also investigate whether federal EITC receipt has a seasonal effect. We do this by running an alternate version of the full form models 1 and 2 using trimester variables (i.e., January-April, May-August, and September-December) interacted with the EITC variable. The results of the reduced and full forms of logit model 1 indicate that federal EITC claimed is positively and significantly related to FSP participation. For the full form model, the coefficient for the low ($1-$999) amount of actual EITC claimed is significantly different from the coefficients on the medium ($1,000-$1,999) and high ($2,000+) amounts at the ten percent level. For the reduced form model, we find that the coefficient for the low ($1-$999) amount of actual EITC claimed is significantly different from the high coefficient, however, the low and medium and high and medium coefficients are not significantly different from one another. We find no significant difference between the coefficients of the actual EITC variable interacted with the calendar trimester. That is, we find no evidence of a seasonal effect of actual EITC on FSP participation. Thus, the coefficients on the federal EITC variables suggest that households that claim EITC are more likely to participate in food stamps, though there does not appear to be a strong relationship between the amount of EITC claimed and FSP participation. Because there is much missing data for EITC claimed in the SIPP, we are skeptical of these results. Our model 2 estimates based on computed EITC benefits show a negative and statistically significant effect of EITC on FSP participation. However, the magnitude of the EITC effect declines as the amount of computed federal EITC benefits increases. The results of the full form model indicate that the effect of computed federal EITC is negative and significant for medium ($1,000-$1,999) and low ($1-$999) amounts of EITC and negative but not significant for high amounts of EITC ($2,000+). Model 2 also provides no evidence of a seasonal effect of computed EITC on FSP participation. Model 2 provides some evidence that the added money households receive from EITC allows them to avoid taking up food stamps. That said, the fact that high levels of computed EITC benefits does not exert a statistically significant effect weakens the hypothesis that money received from EITC may result in households not participating in the FSP. There is no straightforward explanation as to why only low and medium EITC levels reduce FSP participation. We conclude that it is possible that the EITC resulted in some decline in FSP participation rates, however, further study and improved data measuring EITC participation are necessary to sort out the degree to which EITC participation affects participation in the FSP.

Keywords: EITC; income supports; working poor; Food Stamp Program (search for similar items in EconPapers)
JEL-codes: I38 (search for similar items in EconPapers)
Date: 2004-08-11
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