The Impact of TANF on State Budgets

he Personal Responsibility and Work Opportunity Reconciliation Act of 1996 consolidated three federal-state match-grant programs, Aid to Families with Dependent Children (AFDC), Emergency Assistance (EA), and the Job Opportunities and Basic Skills (JOBS) training program, into one block grant program. The new program, Temporary Assistance to Needy Families (TANF), gives states considerable spending flexibility, but also imposes new work requirements and time limits for welfare recipients. Estimating the fiscal impact on states of this switch to TANF is fraught with uncertainty, in no small part because it is dependent upon the economy and on state responses to the new grant structure. This uncertainty does not mean, however, that TANF’s fiscal impact is totally unpredictable. Since TANF is fairly precise about how much federal assistance will be made available between now and 2002, one can calculate how much fiscal burden would be placed on states under simplifying but revealing assumptions. Such calculations do not provide a prediction of states’ policy response to the new legislation, but they do reveal major fiscal incentives that will shape that response. For the first few years, most states will receive more federal funds for welfare than they received in 1996, which they can spend in one of three ways: reducing their own welfare spending, increasing total welfare spending, and/or saving funds for future welfare needs. Our analysis demonstrates that there are sufficient incentives for all three to occur, with states almost certainly varying in their response. We find that future caseload changes, either down or up, can force state spending to fall or rise by a greater percentage than the percentage caseload change. Further, this fiscal impact will be aggravated by large multiplier effects of the work requirements— with an increase in the caseload, under a variety of circumstances, requiring states to increase the number of recipients in an approved work activity by more than the caseload increase.