State Fiscal Substitution Between the Federal Food Stamp Program and AFDC, Medicaid, and SSI

This paper addresses the fiscal behavior of states in response to the Federal Food Stamp program (FSP). The effectiveness of the Food Stamp Program in increasing the economic well-being of recipients is dependent, in part, on the fiscal behavior of states. Because most Food Stamp recipients are also eligible for other transfer progrmas, and Food Stamps is a nationally funded program, states have an incentive to substitute federal Food Stamp dollars for their own contributions to cash assistance. If states use Food Stamps primarily to reduce their own contributions to programs such as Aid to Families with Dependent Children (AFDC), Temporary Assistance to Needy Families (TANF), and Supplementary Security Income (SSI), which are jointly funded by the federal government and the states, then the main effect of Food Stamps is to provide fiscal relief to states. In this case, the Food Stamp program functions as a kind of categorical revenue sharing program. If states mainly add Food Stamps benefits to other cash and in-kind programs, then the program is expanding assistance to the needy from a national revenue base. <p> The incentive for states to use Food Stamps to displace their own effort is increased by the fact that Food Stamps taxes cash assistance at a rate of 30 cents per additional dollar of benefits. In this paper, the author exploits both the variation over time in the lump-sum component of Food Stamps and the cross-state variation in the Food Stamp price created by the interaction between the implicit tax and the Food Stamp disregard for excess shelter costs. I use this variation to estimate an econometric model of Food Stamp displacement. The results suggest that both the lump-sum and the price effects of Food Stamps are significant, and that the Federal government could induce an increase in state contributions by reducing the implicit tax on cash benefits. The author also finds that the cross-price elasticity between Food Stamps and Medicaid is significant, with Food Stamp induced reductions in AFDC spending also associated with increases in Medicaid spending for AFDC recipients. <p>The paper is organized as follows: Section 1 reviews the literature, Section 2 presents a general description of the Food Stamp program, Section 3 presents the model of fiscal substitution and describes the estimation strategy, Section 4 presents the results, and Section 5 concludes.