The Insurance Value of State Tax-and-Transfer Programs
This paper estimates the total value that individuals derive from their state's tax-and-transfer program, and shows how this value varies by income. The paper decomposes this total value into two components: redistributive value, which is due to predictable changes in income (and family circumstances), and insurance value, which occurs when taxes and transfers compensate for unexpected income shocks. Our approach is a forward-looking one, where we examine income and transfers net of taxes over a 10-year period. We model state taxes (personal income taxes, the EITC, and sales taxes) and state means-tested transfers (AFDC/TANF and Medicaid/SCHIP). The calculations are made using the Panel Study of Income Dynamics and allow for analysis of the determinants of changes in the value of state net benefits over a more than 30-year period. We find that the redistributive value of state tax-and-transfer programs sharply declines with income, but that the insurance value of transfers is increasing in income. The resulting total value still declines with income, but not nearly as sharply as the redistributive value. Hence, the insurance value mitigates the incentives for mobility that would "undo" state redistributive spending.
We thank Julie Cullen, Roger Gordon, Kevin Milligan, Rob Williams, two anonymous referees, participants at the NBER conference on Fiscal Federalism, participants at the NBER labor studies program meeting, and seminar participants at Berkeley, Columbia, and UCLA for helpful comments. We thank Ankur Patel for outstanding research assistance. This project would not have been possible without tremendous generosity of many who shared data and program calculators with us, including Rosanne Altshuler, Patty Anderson, Jon Bakija, Dan Becker, Marianne Bitler, Raj Chetty, Linda Giannarelli, Jon Gruber, Peter Huckfeldt, Doug Miller, Jon Rork, Kim Rueben, Kosali Simon, and Gary Wagner. Erzo Luttmer gratefully acknowledges funding from the Taubman Center for State and Local Government. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Hoynes, Hilary W. & Luttmer, Erzo F.P., 2011. "The insurance value of state tax-and-transfer programs," Journal of Public Economics, Elsevier, vol. 95(11), pages 1466-1484. citation courtesy of
The Insurance Value of State Tax-and-Transfer Programs, Hilary W. Hoynes, Erzo F.P. Luttmer. in Fiscal Federalism, Cullen and Gordon. 2012