ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.
Seitz, Chief Judge, Adams and Garth, Circuit Judges.
At issue in this case is the proper treatment, under Sections 2301 and 2302 of the Omnibus Budget Reconciliation Act (OBRA), Pub. L. 97-35, 95 Stat. 843-45 (1981) (codified at 42 U.S.C. §§ 602(a)(7) and 602(a)(8) to be accorded to amounts mandatorily withheld for taxes from earned income received by beneficiaries of Subchapter IV, Part A of the Social Security Act, Aid to Families of Dependent Children (AFDC). Plaintiffs Constance James and the Philadelphia Welfare Rights Organization (PWRO), on behalf of all Pennsylvania AFDC households receiving earned income, argue that, under 42 U.S.C. § 602(a)(7) (1981), any amounts which are to be attributed to AFDC beneficiaries as "income" are subject to the condition that they be "available." They therefore argue that amounts mandatorily withheld from wages for purposes of federal, state and local taxes and for old age, survivors and disability insurance (FICA) must accordingly be deducted or disregarded from "income" for purposes of determining eligibility and benefits under AFDC, since such amounts are not "available."
Defendant O'Bannon, the Secretary of the Pennsylvania Department of Public Welfare (PDPW), and Defendant Heckler, the Secretary of the United States Department of Health and Human Services (HHS), argue that such mandatorily withheld amounts are no more than additional "work expenses" included within the standardized $75 disregard*fn1 enacted by Congress in Section 2302 of OBRA (codified at 42 U.S.C. § 602(a)(8)(A)(ii)), and are therefore not to be separately deducted from "earned income" as that term is used in 42 U.S.C. § 602(a)(8).
The district court, agreeing with the defendant Secretaries, granted summary judgment in their favor and against plaintiffs. James v. O'Bannon, 557 F. Supp. 631 (E.D. Pa. 1982). We affirm.
Because of the statutory scheme under which AFDC grants are made and the changes that have ensued over the years due to Supreme Court interpretation*fn2 and legislative amendments, it will help in the understanding of the discussion to follow if we briefly review the AFDC program.
When the AFDC program was instituted, it was to be a program administered by the states but with federal funding participation. One feature of the program as it evolved directed the states to take into consideration those expenses which were reasonably attributable to the earning of income by the beneficiary. Those expenses, which were related to employment, were to be deducted from the income earned by the AFDC applicant, in order to determine whether, and in what amount, the applicant would receive AFDC assistance. Once the applicant was deemed eligible, the amount of the assistance which the state would afford under the program would be determined by comparing the applicant's earned income, less authorized deductions from that income, with the state's standard of need. If the state's standard of need exceeded the applicant's earned income less authorized deductions, the difference would be made up by the state in an AFDC grant.*fn3
In 1969, the Secretary of HEW (now HHS), having the authority to promulgate regulations implementing the AFDC program, provided by regulation that, among the other expenses which were to be subtracted from the earned income of the AFDC applicant, were income tax withholdings, lunches, transportation to and from work, and the like. Since at least that date, therefore, withholdings for income taxes and taxes of similar character have been deducted from gross earnings as personal expenses.
In 1974, when the Supreme Court rendered its decision in Shea v. Vialpando, 416 U.S. 251, 40 L. Ed. 2d 120, 94 S. Ct. 1746, the issue was presented as to whether or not the state could establish a fixed amount or flat sum for all work expenses. Because the statute at that time required the state to "take into consideration . . . any expenses reasonably attributable to the earnings of . . . income," the Supreme Court held that no fixed amount, if it was not individualized so as to allow consideration of expenses in excess of the fixed amount, conformed to the statutory mandate. Thus, Shea taught that to the extent income tax withholdings were to be subtracted from earned income as other work expenses were, a flat sum amount established by the state, which did not allow for deduction of all expenses incurred by an applicant in excess of the fixed amount, could not stand. Significantly, Shea treated tax withholdings no differently than other work related expenses.
During this period of time the AFDC statute also provided the following procedure for determining the amount of AFDC grants to which a beneficiary was entitled: the gross earned income was first subjected to a deduction of a work incentive "disregard". The amount of that deduction was calculated by taking one-third of the gross earned income and adding to it $30. Hypothetically, therefore,*fn4 if the applicant earned $900, the first calculation to be made would be to subtract from that amount $330 (one-third of $900 plus $30), leaving a balance for further calculation of $570. It should be remembered, however, that the $330 subtracted did not represent an expenditure made by the AFDC applicant to any third party. Rather, it represented a sum that was retained for normal family needs and uses. The deduction was for computational purposes only.
The next deduction to be made under the statute as it then appeared, and pursuant to the Secretary's regulation, was a work expense deduction or "disregard." That deduction (under Shea) would be a total of the personal expenditures incurred by the applicant for lunches, transportation, child care expenses, mandatory payroll deductions, and the like.*fn5 Income tax withholdings were included in that total, so that, if income tax withholdings amounted to $25 and the other personal expenses, including child care, amounted to $125, a further deduction of $150 ($25 for withheld taxes, plus $60 for child care, plus $65 for transportation, lunches, and so forth) would be subtracted from the $570 previously noted. At that point in the calculation, $420 would remain to be measured against the state's standard of need. Assuming hypothetically that the state's standard of need was $500, the difference of $80 would be paid to the applicant as an AFDC grant.
Had there been no further revisions to the AFDC legislation, the hypothetical analysis which we have recited above would still be employed, and there would have been no occasion for the plaintiffs here, or the plaintiffs in Turner v. Prod, 707 F.2d 1109 (9th Cir. 1983), the Ninth Circuit decision which we will discuss, infra, to contest the state's administration of AFDC. For even though income tax withholdings were regarded by the Secretary and by Shea as work expenses for purposes of deduction or "disregards", they had in fact been subtracted from gross earned income during the period prior to the OBRA amendments. In 1981, however, Congress enacted OBRA and changed the statutory scheme of AFDC.
One change made was to permit a standard or uniform deduction for all work-related expenses. Congress effected this change by eliminating from the statute the language upon which Shea relied. It eliminated the requirement that a state "take into consideration . . . any expenses reasonably attributable to the earning of . . . income." Thus Shea no longer stood in the way of a standard deduction which would embrace all work-related expenses, even if those expenses exceeded the fixed amount established. Moreover, the statute itself made provision for a $75 work-expense deduction or "disregard" against earned income or a lesser amount as the Secretary might prescribe, where the applicant was only a part-time employee.*fn6
In addition, for the first time, the statute expressly allowed child care expenses and provided that those expenses -- significantly not included in work-related expenses -- could be deducted as a separate "disregard" up to a limit of $160. Lastly for our purposes, OBRA provided that the work incentive "disregard" was to be applied, not as the first deduction from gross earned income, as it had previously been applied, but rather only after all of the other separate "disregards" had been given effect. This of course had the effect of reducing the ultimate AFDC grant to the beneficiary, because applying the one-third plus $30 work incentive "disregard" to a sum which had been reduced by amounts for work expense and child care obviously would result in a smaller work incentive disregard than would have resulted had the "work incentive disregard" been computed on the basis of gross earned income.
Indeed, in retracing the steps of the hypothetical which we earlier set out, if we were to use the same hypothetical figures as above, but were to apply the OBRA amendments, the work incentive "disregard" would not total $330, but would be only $280 ($900 gross earned income minus $150 work expenses = $750; one-third of $750 plus $30 = $280). However, under OBRA, the applicant would have had the benefit of a standard deduction for work-related expenses (which specifically excluded child care expenses) and would also have had a separate child care deduction or "disregard."
Thus, by these legislative choices reflected in OBRA, the issue before us has narrowed down: did Congress when it amended the AFDC program without changing the content of the work-related expense "disregard" (which at least since 1969 and up until the present has always included mandatory tax withholdings) intend to create a separate tax withholding "disregard"? The Ninth Circuit in Turner v. Prod, supra, has analyzed the relevant legislation and Congress's objectives and has concluded that such was the congressional intent. Our analysis, which follows, concludes otherwise.
Plaintiff Mrs. Constance James and her three minor children reside in Philadelphia and have received assistance under the AFDC program.*fn7 Mrs. James, at the time of the district court's decision, was employed part time as a bus matron for handicapped children with the School District of Philadelphia. Mrs. James, who worked five hours per day, received a gross monthly income of $588.90. App. 11a (complaint, para. 32.).
The PDPW in February of 1982 claimed that, in light of the state standard of need, and of the disregards of "earned income" applicable to Mrs. James, she was entitled to an assistance grant of $45 per month. This amount was determined under regulations that were adopted by the PDPW effective November 7, 1981, and that are compiled in the PDPW's Public Assistance Eligibility Manual (PAEM), see App. 146a-47a (Section 183.44(d)). The following calculations were performed by PDPW in order to determine the amount of Mrs. James' AFDC grant:*fn8
Gross Monthly Income $588.90
Standard Work Expense Disregard*fn9
(for part time employee) - 55.00
Work Incentive Disregard*fn10
($30 plus one-third) -197.90
Monthly Grant*fn11 $45.00
Standard of Need for Family of Four $381.00
Mrs. James contends that she and her three minor children were entitled to a monthly assistance grant of $112, rather than $45. Her figure is based upon the following calculation:*fn12
Gross Monthly Income $588.90
Amounts Withheld for federal state,
and local taxes, and FICA*fn13 -100.53
Standard Work Expense Disregard -55.00
Sub-total of Disregards -155.53