Poverty, Programs, and Prices: How Adjusting for Costs of Living Would Affect Federal Benefit Eligibility by Leah B. Curran, Harold Wolman, Edward W. (Ned) Hill and Kimberly Furdell1 “Researchers and Findings policymakers Public policies rarely account for regional differences in living costs across the should closely country. Applying cost-of-living adjustments to measurements of economic well- examine how being and eligibility standards for social programs in 98 central cities reveals that: regional • Federal poverty guidelines, often used to determine eligibility for social programs, change significantly when indexed for cost of living (COL) differences. Out of 38 large differences in cities in higher-cost areas in the Northeast and West, 36 experience increases in the federal poverty guidelines. Conversely, more than half of the large cities located in lower-cost the cost of areas in the South and Midwest (38 of 60) see shifts in the opposite direction. living impact • The percentage, number, and distribution of families that are considered poor under federal poverty guidelines would change dramatically in many central cities the adequacy if regional differences in the cost of living were recognized. In high-cost areas on the East and West coasts, the poor population would increase substantially both in real and of programs to proportional terms. Cities like New York, NY and Los Angeles, CA rank among those boost incomes with the greatest increases in both the number and proportion of poor families under COL- adjusted standards. However, cities in lower-cost areas of the South and West, such as El and reduce Paso, TX and Shreveport, LA, have among the largest declines in the number and share of poor families once living costs are taken into account. poverty.” • Adjusting federal poverty guidelines for regional differences in the cost of living has a considerable impact on the number of families eligible for public programs. Overall, the share of families eligible for Early Head Start and Head Start as well as the National School Lunch Program would increase 29 percent in large cities across the country. San Francisco, CA, San Jose, CA, and Bridgeport, CT experience the largest increases in eligibility for these programs, while San Antonio, TX, Corpus Christi, TX, and El Paso, TX see the largest declines in the eligible population under COL-adjusted guidelines. Measures such as the federal poverty guidelines provide more accurate perceptions of the relative economic wellbeing of populations across the country when they consider regional cost-of-living differences. To craft effective public policies and programs for low-income families throughout the United States, researchers and policymakers should give further attention to the impact that regional COL differences have on program eligibility standards. In particular, policymakers can employ COL-adjusted measures to determine where state and local policies are most needed to supplement federal assistance targeted to low-income families and individuals. METROPOLITAN POLICY PROGRAM THE BROOKINGS INSTITUTION MARCH 2008 1 Introduction low when compared to other the few programs that take living major cities, making it doubtful cost differences into account use that the magnitude of poverty in imprecise or outdated methods Regional cost of living affects Cleveland is in fact higher than in for estimating interarea cost of the quality of life that individuals many other large metropolitan ar- living (COL) differentials. and families experience in differ- eas. Still, the perception of being Similarly, economic and com- ent places. The national median home to the highest proportion munity development programs household income for a family of urban poor in the country may such as the HOPE VI program of four ($46,242 in 2005), for affect confidence in the region and the Community Develop- instance, purchases a much higher among potential investors, unduly ment Block Grant program also standard of living in Wichita, KS depressing growth. fail to account for regional living 2 than in New York City, NY. Yet, Ignoring cost of living differ- cost differences when computing policymakers rarely consider the ences also has important impacts community need levels. In addi- impact of cost of living differences on the allocation of federal tion, the current tax code, which on quality of life or factor these resources for low-income work- is where an increasing amount differences into decisions about ing families because the buying of social policy expenditures oc- the allocation of federal resources power of government benefits, cur, also neglects to account for for working families. like the Earned Income Tax regional COL differences. As a Failing to accurately account for Credit, varies widely across result, these federal investments cost of living differences influ- places. According to the Con- may be systematically providing ences both our perceptions of the gressional Research Service more of a relative benefit to low- relative economic wellbeing of (CRS), there were approximately cost areas of the country, and less places as well as the distribution 85 federal means-tested programs of a benefit to high-cost areas. of public policies. In terms of our providing cash and noncash This paper first presents the perceptions, both researchers and benefits in 2002 to more than 22 history of the debate surrounding policymakers use income-based million individuals every year cost of living adjustments and measures—particularly median in the United States.4 Eligibil- discusses the current methods household income, per capita ity criteria for these programs used to account for regional COL income, and the proportion of the are typically based upon one of differences. After reviewing population with incomes below five measures: (1) the federal the methodology, the paper then the poverty level—to gauge the poverty guidelines or the Cen- analyzes the impact of applying relative economic wellbeing of sus Bureau’s poverty thresholds a cost of living adjustment to the an area’s residents. However, (or a combination of the two), federal poverty guidelines in 98 unadjusted income-based mea- (2) state or area median income, central cities across the country. sures inevitably yield misleading (3) the “Lower Living Standard It also evaluates how COL adjust- results by understating economic Income Level” determined by the ments to the poverty guidelines wellbeing in low-cost areas of the Bureau of Labor Statistics, (4) would affect the number of country and overstating wellbeing 3 an absolute monetary standard or families considered poor in these in high-cost areas. (5) an income level considered communities. Focusing on two Such mistaken perceptions to indicate “need” (CRS, 2003).5 programs that use the federal of wellbeing may have serious Most programs do not take living poverty guidelines (or multiples adverse consequences for cities costs into consideration when thereof) to determine eligibility, and their residents. For instance, determining program eligibil- the paper then explores the extent the Census Bureau reported that in ity. Exceptions include certain to which COL adjustments would 2003 a larger proportion of people programs with qualification affect eligibility for means-tested were living below the national standards based upon state or area programs. By analyzing the im- poverty threshold in Cleveland, median income, the two programs plications of accounting for COL Ohio than in any other major city that are based on the Lower differences in these cases, this in the nation, making Cleveland Living Standard Income Level6 paper highlights the potential role the poorest city in America (Proc- and, in some cases, those that are of COL adjustments in contribut- tor et al., 2003). However, Cleve- based on multiples of the federal ing to research that presents more land’s living costs are relatively poverty standards.7 Furthermore, METROPOLITAN POLICY PROGRAM THE BROOKINGS INSTITUTION MARCH 2008 2 accurate perceptions of economic behavior by subsidizing people in and residential opportunities, and wellbeing across regions and in higher-cost areas, allowing them less human capital to employ to crafting policies better targeted to to stay when they would have take advantage of those oppor- low-income families. The paper otherwise moved to a lower-cost tunities. Subsequently, poor and concludes with a discussion of community. This would result low-income households have a implications for policymakers in overcrowding in high-amenity relatively lower degree of inter- and researchers. areas and under-populated lower- metropolitan residential mobility amenity areas.8 and choice than the rest of the However, in several cases this Background population (Gimpel, 1999). As a argument does not bear out in result, poor people often bear the practice, underscoring the im- costs of amenities through higher The Debate portance of accounting for COL housing prices, regardless of differences, especially where whether or how much they actu- Policymakers and existing low-income individuals are ally value them. public policy often do not ac- concerned. First, while regional Therefore, while low-income count for COL differences variations in housing prices people may be enjoying some because amenities that improve likely capture amenity or disa- of the amenities associated with quality of life are thought to be menity differences among areas high-cost metropolitan areas, capitalized into land and hous- (Kaplow, 1995), housing is only they have a limited opportunity to ing costs. Attributes of an area one component of disparities in make choices between residential such as the weather, the regional the regional cost of living. Varia- locations compared to the rest labor market, the culture, the tions in the cost of food, cloth- of the population. In this light, crime rate, the amount of pol- ing, health care, utilities, etc. can when households are immobile, lution, and the natural environ- reflect real differences in supply adjusting for COL differences is ment, for instance, are thought costs and comprise important economically efficient because to be reflected in the differences differences in the quality of life.