Final TANF Rule as published in the Federal Register 4/12/1999

17828 Federal Register / Vol. 64, No. 69 / Monday, April 12, 1999 / Rules and Regulations
are properly benefitting members of
eligible families.
(c) Types of Activities
Comment: Several commenters
recommended rewording § 273.2(d) of
the proposed rule to avoid confusion
regarding the applicability of
‘‘assistance’’ as defined under § 260.31
for basic MOE purposes. Commenters
noted that States have the flexibility to
count expenditures with respect to
eligible families whether or not the
expenditures meet the definition of
assistance.
Response: As we explained earlier in
this discussion, we believe that States
may help eligible family members
through an array of services that fall
within the broad categories of activities
listed in section 409(a)(7(B)(i)(I),
including services that would not fall
within the definition of assistance at
§ 260.31, such as nonrecurrent, shortterm
assistance. To clarify this point, we
have reworded § 263.2(d) of the final
rule and included similar language at
§ 260.31(c)(1).
(1) Cash Assistance
Comment: A few commenters
requested clarification of the amount of
State Earned Income Tax Credit (EITC)
that can count toward the basic MOE
requirement. One commenter noted that
a State’s EITC expenditures should
count toward the basic MOE
requirement even if none of the credit
was ‘‘actually sent’’ to an eligible family
member. For example, some States have
‘‘nonrefundable’’ EITC programs. Under
a ‘‘nonrefundable program,’’ the EITC
serves to reduce the family’s State
income tax bill. However, the State does
not pay the family any EITC remaining
if the credit amount is larger than a
family’s State income tax bill. Another
commenter asked whether we intended
the entire cash payment actually
received by the eligible family to count
toward basic MOE, even if a portion of
the payment consists of a State income
tax refund.
Response: We have addressed this
issue extensively in the preamble for the
new § 260.33. An EITC program can
help to relieve the State income tax
liability for working poor families by
decreasing the family’s State income tax
liability. The family’s tax liability is the
amount of taxes owed prior to any
adjustment for credits or payments.
EITC can also supplement a family’s
income—if the credit amount exceeds
the family’s State income tax liability
and the State pays the family the
remainder (i.e., it refunds the credit
amount remaining). Such a refund is
equivalent to cash assistance and may
count as a qualified expenditure
because it is reasonably calculated to
meet a purpose of the TANF program.
State income taxes represent revenue
to the State. Credits that offset a family’s
State income tax obligation provide tax
relief to the family while reducing the
State’s revenue. A reduction in taxes, or
revenue foregone, is not an expenditure.
Therefore, only the EITC amount that
exceeds a family’s State income tax
liability prior to application of the EITC
is an expenditure. It may count for basic
MOE purposes if the excess amount is
actually paid out (refunded) to the
eligible individual. Section 409(a)(7) of
the Act stipulates that only
‘‘expenditures’’ with respect to eligible
families that provide a benefit or service
that is reasonably calculated to meet a
purpose of the TANF program count
toward a State’s basic MOE. Thus, if a
State does not disburse or pay out any
excess EITC remaining, there is no
expenditure.
States must determine the amount of
any excess EITC paid to a family in a
fiscal year by reconciling the family’s
State income tax obligation for the year
against the total EITC amount for which
the family qualifies. Any excess EITC
amount actually paid to the family may
count toward the State’s basic MOE. In
this regard, any EITC that a worker
receives in advance through his or her
paycheck may only serve to offset the
family’s tax liability. Advance EITC
would have to be reconciled at the end
of the year, in the same manner as the
lump-sum EITC credit, to determine the
portion, if any, that exceeded the tax
liability.
For example, a wage earner qualifies
for a $200 earned income tax credit. His
or her family has a $75 State income tax
liability for the tax year. When
reconciling at the end of the year, the
first $75 of the credit is used to reduce
the eligible family’s State income tax
liability to zero. This part of the
calculation represents revenue foregone
to the State and does not constitute an
expenditure. If the State also elects to
refund (pay out) the remaining $125 in
EITC, then the $125 actually sent to the
eligible family is a qualified expenditure
and counts toward the State’s basic
MOE.
The same principles apply in the case
of a worker who is otherwise due a State
income tax refund. For example,
suppose the wage earner qualifies for an
earned income tax credit of $200.
Assume further that the family has a $75
State income tax liability. Yet, through
withholding, the wage earner paid a
total of $150 in State income taxes
throughout the year. After reconciliation
at the end of the income tax year, the
State owes the worker $150 from
withheld State income taxes and $125
in excess EITC. If the State pays out the
EITC owed and sends it to the family as
part of a refund check in the amount of
$275, only the EITC portion, or $125,
counts toward the State’s basic MOE.
Comment: One commenter asked to
what extent other tax credits such as a
dependent care credit, credit to
purchase a car seat or health insurance,
tax forgiveness credit, sales tax credit,
and property tax credit count toward a
State’s basic MOE requirement. The
commenter also asked to what extent, if
any, other tax relief provisions such as
personal or dependent exemptions or
the standard or other forms of
deductions count toward a State’s basic
MOE requirement.
Response: Tax provisions that only
serve to provide a family with relief
from State taxes, such as income taxes,
property taxes, or sales taxes, represent
a loss of revenue to the State, not
expenditures to provide a benefit or
service to eligible families. For example,
exemptions and deductions are
generally subtracted from total taxable
income, serving only to reduce the
amount of income subject to income tax.
Therefore, such exemptions and
deductions would not constitute an
expenditure for the purposes of section
409(a)(7) of the Act. Similarly, tax
credits that rebate, refund, or return to
a family a portion of the State’s tax
revenue (e.g., property, sales, or income
taxes paid by families to the State)
would not count toward the State’s
basic MOE requirement. Such credits
serve only to offset a particular tax (e.g.,
a State property tax credit that refunds
a portion of property taxes paid). A
reduction in tax burden is not an
expenditure. There has been no direct
outlay of State funds to provide a
service or benefit to eligible families.
However, credits that go beyond tax
relief and are paid to the eligible family
would count toward a State’s basic MOE
requirement if the expenditure is
reasonably calculated to meet a purpose
of the TANF program. For example, like
the earned income credit, a child care or
dependent care credit is subtracted from
the family’s income tax obligation. The
portion of the credit that exceeds the
income tax liability and is paid to the
family may count toward the State’s
basic MOE requirement. Should the
family qualify for more than one
refundable credit (e.g., an earned
income credit and a dependent care
credit), then the amount by which the
total combined value of the allowable
credits exceeds the family’s State
income tax liability may count for basic
MOE purposes.