I. Background

Work has long been the centerpiece of disability policy in the United States. While we maintain income support programs for people forced to leave work on account of disability prior to retirement age, [1] and for low-income persons with disabilities regardless of work status, [2] economic self-sufficiency through work remains the objective of policy as well as the goal of Americans with disabilities themselves.

In view of this focus, it comes as no surprise that our chief test of disability, as established in the Social Security Act, [3] has revolved around ability to work. Nevertheless, despite an intricate web of laws and programs designed to enshrine work, to encourage or coerce people into finding and keeping it, and to assist and reward employers for providing it, this country has an underclass, variously described, whose ascent from poverty, at least as defined by access to assets, has not been achieved.

While unemployment rates have tended to correlate with general economic conditions, the employment picture for Americans with disabilities has remained grim. Although debate exists as to the actual level of unemployment among members of this population, [4] no one disputes that it is many times the level for the population of people without disabilities and that it has largely resisted, in good times and bad, a variety of efforts and approaches designed to bring it down. [5]

Confronted by the persistence of the underclass, interest has grown over the past decade in new strategies for augmenting work in the effort to bring about greater economic self-sufficiency. While still believing in employment, for practical and perhaps for moral reasons, as the chief source of economic betterment and access to assets, we have come to recognize that employment by itself may not be enough.

By the early 1990s it was clear that we needed to rethink the role of employment within the framework of our overall economy. The single-career, lifetime employment assumptions that characterized the post-World War II generation were no longer viable. Traditionally secure, middleclass industrial jobs were disappearing as the manufacturing sector contracted. Pay for entry level or unskilled jobs was lagging behind the rate of inflation. Pay disparities between executive or high-skilled technical and professional personnel (the people Peter Drucker has called knowledge workers) and others were growing larger. And (as has become more evident in the past few years) economic pressures were combining to curtail the growth and in many cases to cause the roll-back of major employee fringe benefits, ranging from guaranteed "defined benefit" pensions to employer-paid health insurance premiums.

Numerous programs have attempted to respond to the changes in the labor market. Far too numerous to list here, these range from the Trade Adjustment Act [6] (which sought to direct resources to workers facing job loss because of competition from imports) to the lifetime learning tax credit [7] (which encouraged return to school or continuing education to meet changing labor market demand). At the same time that we have been rethinking the nature of work, we have become increasingly disenchanted with some of the traditional strategies for cushioning the effects of its absence. The decline of political support for all forms of welfare, culminating in the passage of welfare reform legislation in 1996, [8] illustrates that we have in no way lost our belief in the centrality of work, even as we have striven to renew our understanding of its role and to find new ways for bringing it about.

Many factors, some controversial and some widely accepted, have been advanced to explain the changes in the nature and role of work over the past thirty years; and many theories try to explain the effects of these changes on people's attitudes and beliefs. Even as the opportunities and expectations of work have changed, so too has technology reshaped the very nature of work and the tasks that most people who work need to perform.

It is against this backdrop that the modern asset accumulation movement came into existence, [9] reaching critical mass in 1998 with enactment of the landmark legislation creating the legal framework for individual development accounts (IDAs). [10] This asset accumulation movement, which dovetailed with welfare reform and with new innovations in job training and placement, [11] appears to rest on three related assumptions. The first is that the great majority of wealth in this country at any point in time derives not from cash flow from wages but from intergenerational transfer of wealth and from accumulation of capital through ownership of financial or tangible assets. The second assumption is that for many people, entry level employment is unlikely to facilitate or have a high probability of leading to permanent escape from poverty or to acquisition of assets. The third, and by far the most controversial assumption underlying our recognition of the need for new economic strategies, is that even if well-paying jobs, with full benefits, reliable tenure and upward mobility prospects could be found for everyone willing and able to work, a high wage structure would not necessarily be a good thing for the economy as a whole. Increasingly, when faced with calls for higher wages or increased fringe benefits, business and government respond with concerns that acquiescence to such requests would adversely affect the competitiveness of American products and services in the global market.

The demands of global economic competition have led to a dramatic restructuring of the U.S. labor market as government and industry embrace, however reluctantly, the notion of a low-wage service economy, increasingly stratified and segmented, including at its apex a relatively small cadre of highly-skilled, well-paid managers and technical or other skilled personnel.

Although it is to be hoped that economic growth and productivity gains will reverse these trends, our society appears presently on course to becoming a low-wage service economy. With a tax system increasingly oriented toward concentration of wealth (for new investment or other purposes) among the wealthiest sectors of society, the potential of productivity gains to reduce growing disparities must be regarded as limited.

Asset development and accumulation programs appear to hold out significant potential for many Americans. How many, and whether Americans with disabilities will be included among them, are among the key questions that must be addressed.

II. Role of the Tax System in Employment

No less than in other spheres of life, the tax system's role in employment, asset accumulation and the concentration or distribution of wealth is fundamental. In connection with employment of disadvantaged and other hard-to-employ groups (including certain people with disabilities), the role of the tax system is particularly evident in a number of provisions that subsidize employer outreach to a variety of hard-to-employ demographic groups. These provisions include: the work opportunity tax credit, (WOTC) [12] (which subsidizes first-year wages up to a maximum of $2,400 per worker for hiring members of eight targeted groups including Supplemental Security Income (SSI) recipients and state VR agency referrals); the welfare to work credit (WTW) [13] (which subsidizes first- and second-year wages up to a total of $8,500 per worker for the hiring of recipients of long-term family assistance); and subsidies for creating jobs in underdeveloped, impoverished or otherwise designated target economic development or new market zones. [14]

In addition, a number of provisions subsidize work by channeling benefits directly to workers. Most significant among these is the earned income tax credit (EIC), [15] available to low-income workers, especially to those with children, as a refundable credit. This means that once the amount of the credit is computed based on income and family size, the taxpayer will receive a refund for that amount, even if it is more than the amount of tax the person owes.

In the area of job creation and employment subsidization, four tax law provisions specifically address workers with disabilities. These are: the WOTC; the disabled access credit (DAC) [16] (which allows qualifying small businesses an annual credit of up to $5,000 to help offset the costs of Americans with Disabilities Act [ADA] compliance); the architectural and transportation barriers removal deduction (ATBRD) [17] (which allows businesses of any size to accelerate the deductibility of up to $15,000 per year in capital costs incurred for the removal of architectural and transportation barriers to the "elderly and handicapped"); and the impairment-related work expense deduction (IRWE) [18] (which broadens the range of employment-related expenses that can be deducted by workers themselves).

The impact of these tax benefits on job creation or preservation has been questioned by a 2002 U.S. General Accounting Office (GAO) study, [19] which concluded these incentives could not be shown to be effective in increasing employment for persons with disabilities. Moreover, they appear to incentivize initial hiring more than long-term employment or investment in training of workers. As such, there is room for doubt whether, even if successful in encouraging initial hires, they would have great effect in contributing to job tenure or stability.

Another pivotal area can be found in the interplay between tax law and fringe benefit programs, particularly employer-sponsored health insurance. Through the tax-deductibility to employers and excludability to employees of such insurance, those who work for wages obtain a tax-favored benefit that would not be available to the same workers if they paid for their own health coverage out-of-pocket. [20] Similarly, cafeteria plans or flexible spending arrangements (FSAs) [21] represent another common fringe benefit of employment that allows employees to pay their shares of health-insurance premiums or other nonreimbursible medical costs with pretax dollars.

These and other provisions encourage employment and subsidize significant costs such as health care, but a number of other tax law policies tend either to discourage employment or to contribute to the low-wage society. The Internal Revenue Code rewards investments in equipment and other capital expenditures far more handsomely than it rewards hiring new employees, or retaining and investing in existing ones. It is not our purpose here to address the wisdom of or to explain these tax system preferences. What is important to recognize though is that the existence and likely continuation of current trends will heighten the need for asset accumulation, financial education and related strategies designed to enable low-wage workers to maximize the leverage value of their earnings and resources.

Given the prevailing belief among government leaders that tax policy is a key variable in economic growth, there is little doubt that it will continue to grow in importance as the main engine for economic policy and planning. If the asset accumulation movement is to succeed, particularly in application to individuals with disabilities, it behooves us to understand the interactions between the Internal Revenue Code, asset accumulation programs, and issues of disability (such as the add-on costs of asset-acquisition or the strict means-testing in many programs on which people with disabilities depend).

III. Asset Accumulation and the Tax System

Any discussion of the role of the tax system in asset-creation or accumulation must begin with a working definition of assets. Broadly speaking, assets are anything of value that people have at their disposal for use in advancing their interests and achieving their goals. In the most expansive use of the term, good looks are an asset, because attractive people have more successful careers or perhaps even more rewarding personal relationships than others. But it is with the more prosaic financial and tangible assets--savings and investments, homes, expectations of inheritance, credit and the like--that we are concerned here. Our analysis of the tax law's role will attempt to distinguish its impact upon the initial creation of such assets from its role in their preservation and increase overtime.

Another class of assets more difficult to quantify but potentially as important are those of community. These we will call gateway assets (though they have gone under many names in economics and sociology). These consist of the value of access to family and social contacts, education, transportation and communications, health care and expert advice (including tax and financial advice). Some of these gateway assets, such as access to expertise, can be bought and sold, so are perhaps most relevant as tools for increasing assets. Others, like education, are traditionally associated with upward mobility leading to asset accumulation in later life. Nevertheless, the possession of or ready access to such assets probably correlates highly with economic status. Certainly people's level of education has been shown to correlate statistically with earning potential over the course of a lifetime.

The innumerable and sometimes contradictory ways the tax system serves or repudiates the goals of asset accumulation are well beyond the scope of this paper. Suffice it to say, since the creation of so-called generation-skipping trusts during the 1930s for avoiding the imposition of inheritance taxes on large estates, [22] the role of the income tax in supporting and preserving asset accumulation has been widely understood. With the reduction of all federal inheritance taxes now in effect through at least the year 2010, [23] this role has been re-emphasized.

But it is not in the facilitation of intergenerational wealth transfer that the tax law makes its greatest contribution to asset accumulation. Rather, it is in the lives of ordinary people that the tax law plays by far its greatest role. It does this through two familiar provisions: the home mortgage interest deduction [24] and the tax deferrability (and in some cases exemption) of retirement savings. [25] In recent years the tax law has also attempted to contribute to the acquisition of gateway assets, most notably through provisions subsidizing some costs of education. [26]

Much debate surrounds the question of whether tax subsidization is the best way for achieving any of these asset-related goals, or assuming its appropriateness, how effective it has been. This really involves two questions though, because effects in the general population or in various target subpopulations can be quite different from results in the subpopulation of people with disabilities. But before addressing ways in which relevant tax law provisions do or do not anticipate the issues confronted by people with disabilities, we must first clarify some of the distinctions suggested above.

We noted earlier that asset-accumulation provisions can be evaluated, among other ways, by their relative role in facilitating initial aggregation of resources. Since we have used retirement savings as a principal policy vehicle for creating assets to support many Americans in their post-working retirement, [27] let us examine the tax system's retirement provisions in this light.

Tax deferral of retirement savings makes it advantageous to save for retirement, since investments will compound faster if not taxed until withdrawal and since tax rates on the money are expected to be lower after retirement than during the working years. But tax deferral does not help anyone begin saving for retirement. To do that, they must have some discretionary income to set aside. Thus, tax deferral of retirement savings fosters asset accumulation for those who are able to begin saving, on their own or with employer contributions, but probably does little to facilitate savings in the first place.

By contrast, the home mortgage interest deduction presents a more complex picture. It seems indisputable that this deduction has contributed to the ability of many people to become first-time homeowners; and in a period when people's homes have become their largest personal asset and source of wealth, the importance of the home mortgage deduction as both an asset initiation and asset accumulation strategy must be given considerable weight.

But does access to the gateway asset represented by employment or to the initial asset represented by a first home have the same impact in the lives of people with disabilities as it does for other people, and if not, do the pertinent tax provisions reflect the implications of these differences? For many people with disabilities, the receipt of income from employment may in fact result in net economic loss because of the impact of earnings on needs-based income maintenance and health insurance benefits. With such people in mind, let us turn our attention to the unique issues faced by people with disabilities in trying to enter the ownership society.

IV. Asset Accumulation and People with Disabilities

Many provisions of tax and other laws that are intended to facilitate capital formation or asset accumulation, and that succeed in doing so for some people, operate in ways that substantially prevent that result for people with disabilities. In fact, many of these provisions are not only ineffective but counterproductive from the standpoint of that goal.

The first issue to be considered in this regard is what we may call the costs of entry. As diverse as people with disabilities are, it is generally the case that activity for activity, function for function, the dollar costs of full participation in society are typically higher than the comparable unit costs for persons without disabilities. For the person with a mobility impairment who needs an accessible vehicle in order to get around, the cost of vehicle ownership and operation (even extra gas attributable to the vehicle's increased weight) is greater than for other people. For the person who is blind, the cost of the hardware and software needed for Braille or synthetic speech computer output adds to the basic costs of going online. In the area of services too, the unit costs of working, learning, living and fully participating with a disability may frequently be higher in dollar terms. The sign-language interpreter, the reader, the attendant services provider, the computer trainer with specialized knowledge of the interface between complex networked systems and access technology–each of these represent costs that must be paid for by someone. Of course, most of these costs also have great investment value, and often yield or save far more than they cost, but regrettably, neither the tax system nor any accounting or evaluation procedure used by government tracks or recognizes these benefits. Moreover, the tax law often fails to acknowledge the add-on costs incurred by people with disabilities in relation to activities that are in principle tax-favored.

To illustrate this, let us return to the subject of housing. An example of the interaction between the add-on costs of living with a disability and the tax system is presented by accessible housing. While low home ownership rates among people with disabilities are partly explainable by such routine factors as low incomes, small resources and limited access to credit, an additional element is the relative scarcity of accessible housing, a scarcity that results, according to many anecdotal reports, in reduced choice and heightened cost for homebuyers.

Where a home must be modified for accessibility, the cost usually can be deductible as a medical expense. [28] Likewise, if a larger home is needed in order to accommodate a live-in nurse, the proportional cost of the extra space will qualify for deduction. But where the choice of a home, including its cost, is influenced or dictated by other, more subtle but equally demonstrable and crucial accessibility concerns, the tax law has nothing to offer, except a larger deduction for the increased mortgage interest resulting from paying a higher price.

For people prevented from driving by visual or physical disabilities, the need to be near mass transit routes, or within the catchment area of paratransit services, may restrict choice and, as important, raise prices. In this car-dependent nation, this restriction may be quite severe, even though the inability to find suitable housing may compromise an individual's ability to live independently in the community. It is highly likely that loss of the ability to drive, consequent upon advancing age or disability, has been the precipitating cause for nursing home entry on the part of a significant number of people. While the tax law may dismiss variables such as the need to live near stores or a bus line as mere matters of individual preference, they are in fact far more.

The limitations in the tax law's ability to respond to the add-on costs of entry to home ownership are further demonstrated by the fact that even the medical expense deduction will be unavailable if one's purpose is to make a house accessible for, or to find one that is accessible to, visitors, family or friends with disabilities.

Another way the tax system disadvantages the homebuyer with a disability is in its failure to utilize any of its considerable leverage in ways that would encourage the market to place a higher value on accessibility. Our law, including the tax law and other sources, governs the buying, selling and ownership of private residential real estate in many, often shockingly intrusive ways. Yet, beyond building-code requirements and other legal requirements for publicly-funded properties, it exercises little leverage on behalf of an accessible housing supply. Measures to encourage accessibility could be taken in ways that do not impose undue burdens on the economy and that are less intrusive than those already used in the service of other policy goals.

For example, the tax law confers no advantage on those developers and communities that opt for accessibility compared to those who do not. Rules governing the amortization of points paid on home purchases could be structured to allow for faster amortization in the case of homes meeting already well-established accessibility standards, but they do not. A number of tax advantages are granted to cooperative and condominium housing associations, but irrespective of the property's accessibility. [29] The costs of painting a house within a certain period of time before sale to make it more attractive to prospective buyers can be added to the basis of the property for the seller's capital gains purposes. But it is not clear that the costs of accessibility accommodations intended for the same purpose would be.

Numerous other examples could be cited, but an exhaustive technical assessment is not our purpose. Rather, it is enough to say that although broadening home ownership is a central goal of national housing policy, many of the chief instrumentalities for bringing this about, including notably the tax law, have yet to bear on behalf of home ownership for people with disabilities, and on behalf of the enormous potential for asset accumulation that broadened home ownership could yield.

V. Individual Development Accounts

Among the modalities used to facilitate asset accumulation, the individual development account (IDA) is perhaps the most innovative. IDAs currently operate under the auspices of two primary laws, the Assets for Independence Act of 1998 (AFIA) [30] and the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. [31]

IDAs vary considerably depending upon the population being served and the mix of public and not-for-profit funds of financial institutions involved. Reduced to their essentials, IDAs involve the creation of conditions under which people who meet various low-income and related eligibility tests can save money from earnings and receive additional matching funds from third-party sources–provided the funds are saved and aggregated for specific goals and for required periods of time, and provided the fundholders participate in financial literacy education or other programs designed to encourage economic self-sufficiency. The AFIA specifies that demonstration asset-building programs funded under its authority shall include "economic literacy, budgeting, credit, and counseling" education. [32]

While there is some variation between IDAs authorized under AFIA and under the welfare reform law, and while additional IDA-type programs utilizing similar principles and methods are emerging in other public policy sectors–including the various "cash and counseling" and stakeholder self-direction funding models being demonstrated under Social Security Administration waiver authority and through the Medicaid program in a number of states [33] –by all accounts the major IDA programs retain a high degree of legal and programmatic consistency in the goals they pursue and the methods they employ.

The tax system and IDAs intersect at several points. Key questions are: Are the earnings that the accountholder places in the IDA includible in gross income, and if so, do they become tax deductible or tax deferrable by reason of deposit into the IDA? If they do, what is their tax status upon withdrawal or maturity, and what (if any) are the penalties for premature withdrawal or of use for non-approved purposes following timely withdrawal? Similarly, what is the tax status of the matching funds, at time of receipt and in the year of withdrawal?

A parallel set of questions arises for IDA sponsor businesses that administer the programs and for program funders, particularly private sector funders, who provide matching funds. What are the tax consequences for individuals and organizations that provide matching funds for IDAs? This issue is of great importance, since if IDAs are to come into wider use, the nonprofit sector by administering the funds, and the private sector by contributing them, will have to play major roles.

The law clearly answers some questions about the interaction between IDAs and tax law, however, we must depend on analogy and inference for the answers to others. Perhaps because legislators do not tend to speak of people affected by tax policies and people utilizing IDAs in the same breath, and because the IDA has not been around long enough for a body of interpretive precedent to build up around it, many issues cannot be resolved with the certainty we would like. Opportunity may exist, and should be utilized, to seek advisory rulings or other clarifications directly from the IRS on a number of key issues that remain unresolved. [34]

A. Status of Income

Earned income. All income from whatever source that an individual receives is includible in gross income, unless the law expressly says it is not. [35] This means earnings from employment, whether or not put into an IDA, are in theory taxable. An individual may end up not owing any income tax in a particular year, because her taxable income ends up below the threshold for tax to be due after factoring in all deductions and credits. It is a different question whether a given revenue item is included in the calculation of gross income.

In addition to income taxes, wages are subject to Social Security (SS) and Medicare withholding taxes. For many low-income workers, these payroll taxes exceed income tax liability, and a person can be below the income tax-owing income threshold but still be paying SS and Medicare tax on gross wages.

For our purposes the key tax question then is whether depositing the permissible portion of one's earnings from employment into an IDA renders that amount tax deductible or deferrable. But the law presumes that unless there is clear authority to the contrary, all revenues are included in gross income. No authority has been found to suggest the availability of any tax preference or advantage under current law that would allow earnings to become tax-exempt or deferred because put into an IDA. Because all deferrals that do exist, such as those for retirement savings, are explicitly authorized in the law, and none has ever been created in the absence of clearly authorizing statutory language, no basis for inferring the existence of such a tax-favored status can be plausibly advanced.

Of course, if an IDA accountholder were somehow to have enough discretionary income to fund both the IDA and a small retirement account such as a 401(k), a 403(b), or even an Individual Retirement Account (IRA), the sums deposited in the retirement account would become tax deferred. But an IDA cannot be a retirement account, because the qualifying purposes of an IDA do not include saving for retirement. So income and Social Security-Medicare tax would be due on the earnings deposited in the IDA.

Matching funds. IDAs must always include some portion of the earnings of their accountholders. Without earnings they cannot exist. But earnings are not the only source of IDA proceeds. Matching funds, contributed by not-for-profit organizations or by state and local government, also go into them, and it is these matching funds that provide much of the leverage and the high rate of return on worker contribution that IDAs can offer.

The Internal Revenue Service (IRS) has ruled that matching funds contributed to IDA interest are not includible in the gross income of the recipients. [36] They are not taxable because, according to the IRS Revenue Ruling, they are deemed to be gifts. Gifts are not considered income under the law.

Generally speaking, funds received by individuals from government are not taxable when based on need. The gift rationale comes into play when nongovernmental, private sector entities are the source of the funds. Government is not generally considered to give gifts, but because IDA payments go to low-income individuals and have very specific purposes, there is little to no likelihood that matching funds directly from governmental sources would be subject to tax.

Interest. If the organization administering an IDA is doing a good job, and if a financial institution is serving as custodian of the funds, some interest should accrue on the funds. The amount is likely to be very small and easily overlooked, but it is the sort of item that is invariably communicated to the IRS through the 1099 tax forms that banks and other financial institutions file. One element of any related financial education, and one responsibility that sponsoring agencies should therefore take seriously, is that of encouraging program participants to file tax returns and explaining why. In light of benefits issues discussed below, this may not be so easy or so obvious to the recipients.

Curiously, in the statute detailing the operation of Temporary Assistance for Needy Families (TANF) IDAs, the strong suggestion exists that the interest may in fact be taxable. In this connection, the statute indicates that sums attributable to IDAs shall not be taken into account for purposes of determining eligibility for any federal assistance programs. [37] But the subsection goes on to make a specific exception for the IRS, thus suggesting that for purposes of the tax law, IDAs are properly taken into account.

Read in isolation, this language is sufficiently broad as to suggest that matching funds, at least welfare reform IDA matching funds, could also be taxable. They are not though because of an IRS revenue ruling, published after the TANF statute was written, saying that these matching funds are not taxable. [38] The revenue ruling, on the other hand, does not address the tax status of interest on the funds.

In those instances where accountholder-contributed funds and matching funds are maintained in separate accounts, allocating interest to each would be simple. In such a case, taxing the interest on the earned-income portion but not on the matching-funds portion would be straightforward. But in those cases where the funds from the two sources are combined in one account, determining how much of the single periodic interest payment is allocable to each of the earned income and matching funds portions may be difficult. Therefore, from the standpoint of simplicity and efficiency, it probably makes more sense to treat all the interest as taxable or all as nontaxable. And since the interest on the earned-income component is taxable, then the interest on the matching-funds share should be regarded as taxable too.

Interested organizations are urged to pool their resources in seeking an authoritative IRS ruling on this point. Tiny as the sums are, they could make a difference by putting someone a dollar or two over some critical benefits threshold level.

B. Donor Tax Considerations

In order for IDAs to reach all those who are appropriate for them, not-for-profit, community-based organizations must be found to operate them. Financial education resources must also be developed to assure that accountholders make effective use of their new resources. Both of these in turn depend on the availability of funds to fulfill matching funds requirements and for resource development and dissemination.

By offering a charitable deduction to donors for private contributions made to sponsoring organizations, the tax system can offer incentives to the creation of funds for IDA programs. In its impact on potential donors and funders, therefore, the tax law's role may be as or even more significant than its effect upon recipients.

Governmental units and 501(c)(3) tax-exempt organizations are eligible to administer IDAs and to distribute matching funds. Individuals or businesses contributing funds to the 501(c)(3) organizations that operate IDAs are generally entitled to claim a charitable tax deduction for the value of those contributions. The problem is how to convince donors, who face many worthy demands for their charitable funds, that support for IDA programs is more worthwhile than support for any number of other causes.

It is not within the scope of this paper to suggest how the nonprofit sector should market IDA programs to their donors. Short of vibrant marketing or compelling social arguments, which we believe can justly be made for such programs, there are changes that could be recommended in the tax law to enrich the relative value of contributions made to IDA programs.

C. People with Disabilities and Taxes Under IDAs

At this point a key question to ask is whether the existing IDA framework is fully responsive to the needs and situations confronting persons with disabilities. Our focus for this inquiry begins with the tax dimensions of the IDA. As we will see, it is the impact of IDAs and of the tax law on benefit programs that for most people will prove far more significant.

Earnings. As indicated above, the core of IDAs must come from accountholder earnings. While this requirement is understandable and even praiseworthy, its application to individuals with disabilities may in some cases be counterproductive.

Many people with disabilities may need more extensive job training than others. This may involve basic rehabilitation training after the onset of a disability, specific skills training in the use of assistive technology (AT), or extra time to complete standard training due to the complexities of accommodation and access considerations. In some cases, stipends or other financial support in lieu of wages may be provided for some of this training. Similarly, volunteer work and unpaid internships represent a frequent entry pathway into employment for some people with disabilities, as do work experience programs, but these frequently carry no pay. It might be useful in such cases to broaden the definition of earnings sufficiently to allow people in any of these situations to participate in IDA programs.

Qualified purposes. Cases will also exist where employment cannot be obtained or maintained without AT. If a rehabilitation agency or an employer is willing to provide this technology, the process may go smoothly, but if no third-party source is available, then the entry costs to employment, as discussed above, may be considerably higher. More time may be required for the needed funds to be aggregated as well.

Use of IDAs to aggregate funds for such purposes should be permitted as a means of obtaining the necessary technology and training. Yet, among the permissible purposes for which IDA funds can be spent, the costs of starting a new business (including the costs of needed technology) are a qualifying use. But the identical technology needed for employment is apparently not a qualifying IDA savings goal. [39]

At first glance, this distinction seems explained by the very purposes of the IDA. If the goal is asset accumulation, then the distinction between technology for business start-up and technology for employment is clear. A business is an asset in any terms, whereas a job, while sometimes including tenure rights or due process rights before it can be taken away, and while sometimes including contractual pension rights or other legally enforceable benefits, has never been considered an asset in any conventional sense.

Examined more deeply however, this distinction makes little sense, particularly in light of other parallel federal initiatives. For instance, the AT loan funds operated under the auspices of the Assistive Technology Act, [40] empower persons with disabilities to purchase for themselves the equipment and equipment-related training and services they need for employment or self-employment.

Target populations. One of the reasons why the IDA rules do not reflect key awarenesses may be that they were not designed with people with disabilities in mind. Although the GAO has found that 44% of TANF recipients are people with disabilities or are people with caretaker responsibilities for dependents with disabilities, [41] and while people with disabilities tend to be economically disadvantaged, the archetypes and target populations that Congress had in view when developing the IDA model do not appear to include people with disabilities. It may also be that the functions served by IDAs for economically-disadvantaged people without disabilities were, in the opinion of Congress, already being performed for people with disabilities by the work incentive provisions in the Social Security Act. With that possibility in mind, let us turn next to an examination of some of these provisions, particularly as they interact with or stand in opposition to the tax code in the effort to facilitate initial asset accumulation.

VI. SOCIAL SECURITY WORK INCENTIVES AND ASSET ACCUMULATION

A. The Historical Dualism

As focused as American social policy has long been on employment as the solution to most problems, it has not been oblivious to the existence of people who cannot work. Obviously, children and senior citizens are not expected to pay their own way in the world, but even for people of working age, between 16 and 64, there are provisions to cushion those, who because of disability cannot work, against the worst ravages of destitution. Whether these provisions are penurious or extravagant we will leave to the political process to decide. A much more pressing problem is that the provisions are all, to varying degrees, predicated on an all-or-nothing dichotomization, based on the assumption that people either can or cannot work. The notion of disability as a limitation on the kind or amount of work people can do–or the recognition that exclusion or discrimination are themselves disabling insofar as the opportunities they restrict are concerned–are largely absent from the income-support, health-insurance, and basic-sustenance arrangements we have made. Such are the notions of disability that still permeate and largely define our law that the word "disability" occurs in the Internal Revenue Code more often in the same sentence as the word "death" (as in "disability or death") than it does apart from it.

Our nation should be embarrassed at reinforcing these associations, but more than embarrassment is the harm they do to contemporary efforts to bring people with disabilities into the mainstream of American life.

B. Means-Testing

Because of this association of disability with inability to work, it follows that these programs must be means-tested or needs-based. In the case of people with disabilities, whose eligibility arises from a combination of economic and health or functional status, this means that both the inability to work and lack of income or resources must be demonstrated, and in many cases (as with continuing disability reviews under Social Security Disability Insurance [SSDI] and Supplemental Security Income [SSI]) periodically re-demonstrated.

Beginning in the early 1980s with enactment of such provisions as the trial work period (TWP) under SSDI and SSI, [42] Congress and successive administrations of both parties have realized that in the modern world disability and inability to work are not synonymous. Because some people with disabilities can work, and because many want to, it seemed prudent to experiment with measures that would ease the transition from dependency to self-sufficiency. The methods involved various techniques for maintaining benefits while employed status was being tested, demonstrated and solidified, and for gradually reducing benefits overtime (in essence so as to convert a cliff into a hill). The effort has utilized various techniques for gradually reducing and eliminating benefits so that the revenues from employment will not be completely or immediately offset by a corresponding benefit cut.

Over the years, both cash and in-kind benefit programs, including those providing health insurance and housing, have become steadily more complex. This also is true for the measures designed to mitigate or offset what are now widely understood to be the corrosive work disincentives inherent in the disparity between the security these programs offer and the uncertainty, instability, and deteriorating benefits associated with the entry-level labor market. While we admire the idealism, courage and optimism of an individual with complex medical involvements who would trade the security of health insurance under Medicare for a job with no health coverage and no security, we cannot be surprised if only few would voluntarily make this choice.

As the quality of the entry-level labor market has eroded in terms of wage levels, job security, upward mobility and fringe benefits, the need for powerful incentives has grown ever greater. Some people have argued that necessity is the most powerful incentive, and that if benefits were simply cut, people would have no choice but to seek (and find) employment. Others have argued for a more balanced, arguably more humane, approach–preserving key social supports over time, providing assistance to facilitate the transition to employment, and accepting that a person's success or failure to find or retain employment is dependent on more than individual motivation or skills.

Perhaps because our measures embody an amalgamation of both these viewpoints, they have resulted in a web of provisions that are so complicated and so erratic in their application and effect, as to be incapable of giving clear guidance for people's planning in transition situations.

C. Impact of Tax Provisions on Work Incentives

Status of cash benefits. As noted earlier, public benefits given on account of need are not generally taxable, so SSI cash payments are not included in gross income. But what about the impact of tax refunds or withholdings on eligibility for benefits? Tax refunds are not included in income for purposes of the Social Security Act benefit calculations or most other means-tested programs. [43] Some concern has been expressed in this regard over whether refunds arising from the two refundable personal credits–the EIC and the child tax credit CTC [44]–might be treated differently from ordinary tax refunds. Fortunately, this concern has proved groundless. The EIC refund, even if it results in a net payment by the government to the taxpayer, is not included in any relevant statute's definition of income and therefore is not countable as income for SSI purposes.

But when it comes to the question whether such refunds are included in the calculation of resources, the picture is a bit more complex. Tax refunds are countable in SSI resources, but only after the recipient is given a number of months to spend, spend-down or otherwise use or dispose of the funds. In the case of the EIC, since March, 2004 the SSI recipient has had nine months during which the EIC refund or EIC advance payment will remain excluded from countable resources. [45] Far from being an incentive to asset-accumulation, this application of SSI's $2,000 resource limit serves only to discourage and ultimately punish saving. IDAs can be funded and are excludable from SSI countability up to $10,000, but it is unlikely that someone permissibly could put the EIC refund into an IDA.

Status of in-kind benefits. In-kind public benefits, such as medical insurance or treatment provided under Medicaid or Medicare, food stamps, housing subsidies, child-care, vocational rehabilitation services or dedicated funds required to be used for these purposes, are generally exempt from taxation. Goods and services provided by nongovernmental entities ordinarily should be treated as gifts. Only in a case where a tax-exempt organization was used as a conduit for providing support to a designated person would an issue likely arise. Even there the problem would relate more to the tax-deductibility to the donor of the contribution than to the taxability to the recipient.

Services, since they do not become resources and have no prospective financial value once received, are not an issue in resource calculation either. Goods that are furnished to an individual can become countable resources because they have a cash value. SSI recipients have several options for shielding various tangible resources from countability. The law provides a number of automatic exclusions such as a dwelling unit, automobile, and tools and equipment used in business or employment, to name the most common. [46] These exemptions generally apply to items that were owned prior to the commencement of benefits. If they have been acquired after benefit eligibility was established, the question of where the money to buy them came from must be addressed.

As many family lawyers and those who set up special needs trusts know, it is always better to give a benefits recipient goods than the cash to buy them. [47] But even cash can be exempted from SSI income or resource countability under a plan for the achievement of self-support (PASS), [48] when it is being accrued for use in meeting costs associated with the attainment of SSA-approved self-sufficiency goals.

Consumer-directed services. There is a new type of cash coming into the human services system. Under a number of experimental programs currently underway, Medicaid recipients are allowed to select and manage some of their own services, and to keep some of the money if they can effect savings. These include various cash-and-counseling, life-account and similar initiatives, many under the auspices of the President's New Freedom Initiative (NFI). [49] Meanwhile, initiatives under the tax code, such as the health savings accounts (HSAs) established by the Medicare Modernization Act of 2003, [50] allow people to defer tax on certain sums if they agree to have high-deductible policies, and allow them to keep some part of their deductibles if they can avoid spending them for a period of time.

Nor is this approach unique to human services. In the education setting, the Coverdell education IRAs [51] utilize the same principle. Sums that families set aside are tax deferred, and become exempt when spent if used for "qualifying" purposes.

With cash-and-counseling or similar models, a number of disincentive and tax-interaction questions arise. Because these models are early in their development, it does not appear that their cross-program impacts have been fully thought out yet. For example, the interplay between IDAs and PASSs has yet to be addressed, as evidenced by the fact that home ownership, one of the qualifying IDA savings goals, is ordinarily not a permissible savings goal under a PASS because not directly related to attainment of employment.

If consumer-directed services programs are to work, it will be by virtue of increasing recipient autonomy and because they save money. Giving benefits recipients a financial incentive to save money, by letting them keep some of it, is one of the principal strategies for achieving program savings. But if there is a conflict between these incentives and the income, or more particularly the resource limitations contained in other means-tested programs upon which recipients rely, the viability of consumer-direction may be severely restricted. Methods will have to be found by which these new resources clearly and unambiguously are shielded from countability in eligibility and benefit-level determinations under all relevant programs. Unless the consumer-retained funds can be accumulated freely and will not be used to supplant or replace other program resources, failure is all but certain.

D. Health Insurance

Of all disincentives in the current system, loss of health insurance is the most significant. Many people may be willing to risk the loss of cash benefits for the sake of paid employment, but if the employment provides no health insurance, the equation tilts too far in the direction of unacceptable risk.

Numerous efforts, ranging from the Sec. 1619(b) program for Medicaid, [52] to extended eligibility for SSDI recipients under Medicare, to the provisions of the Ticket to Work Act (relating to both Medicaid and Medicare) have attempted to prolong health insurance coverage even after cash benefits are curtailed. But the complexity and uncertainty of these have contributed to their ineffectiveness and limited use. Until simple, secure solutions to the health insurance retention problem can be found, the work-disincentives problem cannot be solved.

This same issue pertains to asset accumulation. Without the security of health insurance, no assets are safe from catastrophic costs, and in light of new bankruptcy legislation [53] this dilemma will only be worsened. It is one thing to promote asset accumulation for people who do not have insurance anyway. It is quite another to propose asset accumulation and health-insurance coverage as alternatives, which is what needs-based programs currently do.

VII. The Challenge

The erosion of the labor market and the barriers facing career development for many people with disabilities are such that primary reliance on employment as the sole strategy for asset-accumulation is no longer viable. That being so, it becomes incumbent on policymakers to explore other strategies, both as adjuncts and candidly as alternatives to entry-level employment, for bringing about long-term economic self-sufficiency. The problem is that such a broadening of our approach requires not merely technical skill and innovation, not only creative policy analysis, but also a fundamental change in public attitudes and human-services professional values. Nowhere in the literature of disability, with its articulation of the meaning of the American dream, and nowhere in the surrounding policy discussions in government and academia, are there strong or consistent indications of the kind of rethinking that will be required.

To bring about long-term economic self-sufficiency for many people with disabilities, it is necessary and difficult to accept the notion that the acquisition of initial assets can no longer be linked to employment or regarded as a reward for pursuit of paid employment. As such, the question for policymakers is this: How can the link be remade in the public mind so that attempts to facilitate asset accumulation through means other than employment are not seen as rewarding laziness, as welfare or as somehow antithetical to our deeply-rooted distinctions between the deserving and the undeserving poor. One need only look at the restrictions introduced into the SSI and SSDI programs barring substance abusers from claiming benefits, [54] no matter their poverty and no matter the connection between their behaviors and their health, to understand how alive and well notions of the deserving poor remain.

Put more broadly, the key unanswered question is how to reconcile rigidly means-tested programs with asset-accumulation goals. Either the means-testing must go or the asset-accumulation goals must be sacrificed. Attempts to split the difference do not appear to have succeeded.

The political impossibility, budgetary difficulty and likely scandalous nature of three simple and straightforward asset-accumulation proposals for low-income people with disabilities may serve to illustrate the problem. On an experimental basis: (a) remove current limitations on the size of IDAs and clarify that they and their proceeds are entirely exempt from all income and resource limitations under any federal, state and local means-tested programs; (b) eliminate the current restrictions on the range of qualifying expenditures, so that any serious self-sufficiency objective, even the purchase of annuities, is permissible; (c) create a nationally chartered, not-for-profit corporation specifically chartered to administer IDA programs and to raise private sector matching funds by enhancing the tax-efficiency of charitable deductions granted to individuals and businesses for contributions made for this purpose.

For success, use of asset-development strategies must be coupled with renewed efforts to support people with disabilities in employment and to encourage employers to utilize the skills of this population. Neither goal can be achieved without the other. The tax system already plays a role. From the excludability from countable income of taxes under SSI and SSDI, to the need for more sophisticated employer tax incentives; from the tax deductibility of matching funds contribution, to the need for full deferrability, if not deductibility, of IDA proceeds–the tax system has played and must play a growing role in the coordination and innovation that alone can solve the disincentives problem and help our nation to fully harness the untapped productivity of Americans with disabilities.

Endnotes

1. For instance, Social Security Disability Insurance (SSDI). Social Security Administration. (2005). Benefits for people with disabilities. Retrieved July 18, 2005 from: http://www.ssa.gov/disability/.

2. For instance, Supplemental Security Income (SSI). See Social Security Administration. (2005).

3. Moreover, disability is required to be "permanent" as defined by law in order to establish SSDI eligibility.

4. National Council on Disability. (2004). Improving federal disability data. Retrieved July 18, 2005 from: http://www.ncd.gov/newsroom/publications/2004/pdf/improvedata.pdf.

5. Caner, A. & Wolff, E.N. (2004). Asset poverty in the United States: Its persistence in an expansionary economy (Public Policy Brief No. 76). Levy Economics Institute of Bard College. Retrieved July 18, 2005 from: http://www.levy.org/pubs/ppb/ppb76.pdf.

6. Trade Act of 1974, Pub. L. No. 93-618, 88 Stat. 1978 Pub. L. No. 93-118 (1975) (as amended by the Trade Adjustment Assistance Reform Act of 2002, Pub. L. No. 107-210, 116 Stat. 933 (2002)).

7. 26 U.S.C.A. § 25A (West 2005). Sections discussed under Title 26 (i.e., the Internal Revenue Code) will hereinafter be cited as a section of the IRC.

8. Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Welfare Reform Act), Pub. L. No. 104-193, 110 Stat. 2105 (1996).

9. Sherraden, M. (1991). Assets and the poor: A new American welfare policy. New York: ME Sharpe.

10. Assets for Independence Act of 1998, Pub. L. No. 105-285, 112 Stat. 2759 (1998).

11. For instance, the Workforce Investment Act of 1998, Pub. L. No. 105-220, 112 Stat. 936 (1998).

12. IRC § 51.

13. IRC § 51A.

14. IRC § 1396.

15. IRC § 32.

16. IRC § 44.

17. IRC § 190.

18. IRC § 67(d).

19. U.S. Government Accountability Office. (2002). Business tax incentives: Incentives to employ workers with disabilities receive limited use and have an uncertain impact (GAO-03-39). Retrieved July 18, 2005 from: http://www.unclefed.com/GAOReports/d0339.pdf.

20. IRC § 213.

21. IRC § 125.

22. IRC § 2651.

23. The administration is eager to make this provision permanent after its full phase-in, in 2010.

24. IRC § 163.

25. IRC §§ 401—408.

26. IRC §§ 25A, 529—530.

27. If administration Social Security proposals are adopted, this reliance will be increased.

28. Internal Revenue Service. (2004). Medical and dental expenses (Pub. 502). Retrieved July 18, 2005 from: http://www.irs.gov/pub/irs-pdf/p502.pdf.

29. IRC § 216.

30. Pub. L. No. 105-285.

31. Pub. L. No. 104-193.

32. Pub. L. No. 105-285, § 407(c)(1)(A).

33. Supplemental Security Income (SSI) Youth Transition Process Demonstration (YTPD), 68 Fed. Reg. 57,950 (Oct. 7, 2003).

34. Private Letter Rulings and other advisory opinions and guidance can be requested from the IRS.

35. IRC § 61.

36. Rev. Rul. 99-44, 1999-44 I.R.B. 549.

37. 42 U.S.C.A. § 604(h) (West 2005).

38. Rev. Rul. 99-44, 1999-44 I.R.B. 549.

39. Pub. L. No. 105-285 § 405 (8).

40. Assistive Technology Act, Pub. L. No. 105-394, 112 Stat. 3627 (as amended by the Assistive Technology Act of 2004, Pub. L. No. 108-364, 118 Stat.1707 [2004]).

41. National Council on Disability. (2003). TANF and disability: Importance of supports for families with disabilities in welfare reform. Retrieved July 18, 2005 from: http://www.ncd.gov/newsroom/publications/2003/pdf/familysupports.pdf.

42. 20 C.F.R. § 404.1592 (2004).

43. Id. § 416.1103(d); Social Security Administration, Program Operations Manual System (POMS) SI 00815.270.

44. IRC §§ 32, 51A.

45. 20 C.F.R. § 416.1235.

46. 220 C.F.R. §§ 416.1210, 416.1212, and 416.1218.

47. Sheldon, J. & Straube, D. (1999). Supplemental security income and the family attorney. Retrieved July 18, 2005 from: http://www.nls.org/ssifmaty.htm.

48. 20 C.F.R. Parts 1181—82, 1226—27.

49. The ASPIRE Act of 2005, introduced into the 109th Congress in the spring of 2005, would provide a basic savings amount of $500 for each child, according to advance reports. America Saving for Personal Investment, Retirement, and Education Act of 2005, S. 868, 109th Cong. (2005) Retrieved July 18, 2005 from: http://www.theorator.com/bills109/s868.html.

50. IRC § 223.

51. IRC § 530.

52. This allows retention of Medicaid benefits for higher than usual income levels, based on average health insurance costs in the state. Income ceilings currently range from about $20,000 to over $40,000.

53. The new Federal Bankruptcy Code, enacted in early 2005, would restrict debt liquidation for individuals, even when the debts were solely attributable to medical expenses.

54. Hunt, S.R., & Baumohl, J. (2003). Drink, drugs and disability: An introduction to the controversy. Contemporary Drug Problems 30(9), 9, 51-53. Similar restrictions are found in the ADA, barring active substance abusers from claiming the protections of the act. 42 U.S.C. § 12114(a).