BELL v. HETTLEMAN

FRANK A. KAUFMAN, Chief Judge.

On August 13, 1982, plaintiffs filed a complaint against the Secretary of the Maryland Department of Human Resources (DHR), (the state defendant), individually and in his official capacity, charging that the method used by that state agency to compute eligibility and the amount of benefits to be paid under the Aid to Families with Dependent Children (AFDC) program violates Federal statutes and regulations, because the state defendant considers mandatorily withheld taxes (state, local and federal income taxes and Social Security or Federal Insurance Contributions Act (F.I. C.A.) taxes) as income available to an AFDC family with an employed person. Plaintiffs are Carolyn Bell, a working AFDC recipient whose grant amount has been diminished as a result of defendant's inclusion of withheld taxes within the definition of income, and the Maryland Welfare Rights Organization, which includes at least three members who are adversely affected by application of the state defendant's challenged policy. The state defendant has estimated that there are over 3,000 open AFDC cases statewide in which one parent has earnings. Plaintiffs sought, and this Court has certified, pursuant to Fed.R. Civ.P. 23(b)(2), a class composed of

Plaintiffs ask for preliminary and permanent injunctive relief and a declaratory judgment that defendant's policy of counting federal, state, and local income and F.I.C.A. taxes mandatorily deducted from earnings, as income available to plaintiffs, is contrary to 42 U.S.C. § 602(a)(7) and an implementing regulation, 45 C.F.R. § 233.20(a)(3)(ii)(D), as amended 47 Fed.Reg. 5675 (Feb. 5, 1982). Plaintiffs also seek an Order from this Court requiring the state defendant prospectively to restore plaintiff and all members of the class to AFDC grant amounts calculated by subtracting allowable deductions from gross earnings minus mandatorily withheld taxes and requiring the state defendant to send relief notices to all members of the class whose AFDC applications have been denied or whose AFDC grants have been terminated or reduced within ninety days before the filing of this action.2 Jurisdiction in this case exists pursuant to 28 U.S.C. §§ 1331 and 1343(3).

After the inception of the within case, the Secretary of the Department of Health and Human Services (DHHS) (the federal defendant) was joined as an additional defendant. The federal defendant has filed a motion for summary judgment. The state defendant has moved to dismiss the within action pursuant to Fed.R.Civ.P. 12(b)(6) for failure of plaintiffs to state a claim upon which relief can be granted. That latter motion will be treated as one for summary judgment under Fed.R.Civ.P. 56 because numerous documents, other than pleadings, are included in the present record in this case. The relevant and material facts are not in dispute. The legal issues can be succinctly stated as follows:

(1) Are mandatorily withheld tax deductions (a) "income" as that word is used in 42 U.S.C. § 602(a)(7) and/or (b) "earned income" as those words are used in 42 U.S.C. § 602(a)(8)? If the answer to that question is "yes", (2) are such tax deductions included within the flat $75.00 disregard for work expenses established by the 1981 amendment to 42 U.S.C. § 602(a)(8)? The answer to both questions is "yes."

Four federal district courts have already dealt with those issues3 and have divided with two on each side. In the first, Ram v. Blum, 533 F.Supp. 933 (S.D.N.Y.1982), Judge Ward issued a preliminary injunction as requested by plaintiffs. In the second, Dickenson v. Petit, 536 F.Supp. 1100 (D.Me. 1982), Judge Cyr denied plaintiff's motion for preliminary injunction (no appeal has seemingly been taken from that portion of the order). In the third, James v. O'Bannon, 557 F.Supp. 631, Civil No. 82-1588 (E.D.Pa. filed June 18, 1982), Judge Pollak also denied plaintiff's motion for preliminary injunction and granted defendant's motion for summary judgment (presently on appeal to the Third Circuit). Finally, in Turner v. Woods, Civil No. 81-4457 (N.D. Cal. filed July 29, 1982), Judge Henderson entered a permanent injunction against the state defendants, prohibiting them from including mandatory payroll deductions within the definition of "income," and enjoined the federal defendant from terminating federal matching. (Presently on appeal to the Ninth Circuit.) This Court, for reasons set forth infra, comes to the same conclusions as those reached in Dickenson and James.

The controversy in those four cases and in the within case was generated by the passage in 1981 of the Omnibus Budget Reconciliation Act of 1981 (OBRA), Pub.L. No. 97-35, 95 Stat. 357 (1981). OBRA effected certain cost-savings changes in AFDC which were intended to limit the AFDC program to the "truly needy" by, among other things, eliminating some work incentive disregards from the program. Underlying those OBRA changes was the seeming assumption that working AFDC recipients whose earned income is supplemented by AFDC are less needy than persons who are not working. The specific statutory change at issue is the conversion from a so-called open-ended work expense disregard (a deduction of all expenses reasonably related to the earning of income from total earnings in calculating the AFDC grant amount) to a flat $75.00 maximum work expense disregard, regardless of the actual amount of a working AFDC recipient's work-related expenditures. In certain instances, that change caused an actual reduction in the amount of money available to an AFDC household; in others it resulted in total ineligibility for AFDC benefits. Under pre-OBRA law, as interpreted by the Supreme Court, the states were not permitted to place any "... limitation, apart from that of reasonableness, ... upon the recognition of expenses attributable to the earning of income." Shea v. Vialpando, 416 U.S. 251, 260, 94 S.Ct. 1746, 1753, 40 L.Ed.2d 120 (1974). In Shea, Justice Powell explained (at 253-54, 94 S.Ct. at 1750):

By way of contrast, AFDC claimants since the passage of OBRA, are no longer able to obtain AFDC benefits reflecting the full value of actual work-related expenses deducted from their earnings. Plaintiffs argue in this case that mandatorily withheld tax deductions are not income at all, and that any such withholding should be subtracted from gross pay before the flat $75.00 maximum work expense disregard is applied.4

At issue in this litigation is the question of whether Congress intended "income", as used in 42 U.S.C. § 602(a)(7), to mean gross, or on the other hand, after-tax income. That section of the Social Security Act, as originally passed in 1939, read as follows:

In 1962, that section was amended to state as follows:

In 1968, § 602(a)(7) was further amended to link it with a revised § 602(a)(8) which detailed disregards of earned income:

In 1981, §§ 602(a)(7) and 602(a)(8) were amended to provide as follows:

The 1939 enactment required the states to take into account, "in determining need" of the child, "any other income and resources." The phrase "any other income and resources" has remained the same to the present. Plaintiff urges that a 1940 Social Security Board policy statement5 and 45 CFR § 233.20(a)(3)(ii)(D)6 are controlling; that the intention of the Congress which passed that section of the act in 1939, upon the Board's recommendation, was that only income actually available to a recipient should be counted in the eligibility and benefit determination; and that mandatorily withheld tax deductions are not in any sense actually available or in hand income.7 The difficulty with plaintiff's approach is that it is inconsistent with legislative history and court decisions during approximately the last twenty years.

42 U.S.C. § 602(a)(7) was amended in 1962 to require the states to "take into consideration ... any expenses reasonably attributable to the earning of ... income." Justice Powell, for a unanimous Supreme Court in Shea, wrote that the term "income" in 42 U.S.C. § 602(a)(7), in reference to the law in force and effect after the 1962 amendment, meant "gross income":

416 U.S. at 254, 258-60, 94 S.Ct. at 1750, 1752-53 (emphasis added).

It is true that the Department of Health, Education and Welfare (HEW) Handbook of Public Assistance Administration, published in 1963, interpreted the newly enacted work-expense deduction and did not list withheld taxes as "expenses reasonably attributable to the earning of such income." Further, an HEW report, "State Methods for Determining Need in the Aid to Dependent Children Program," Public Assistance Report No. 43, published in March, 1961, states that during the period May-July, 1959, the states used the term "gross income" to refer to "take-home pay" after payroll deductions and the term net income to refer to amounts available after "other employment costs have been recognized." Id. at 25. However, by 1974, when Shea was decided by the Supreme Court, the states were lumping together mandatorily withheld taxes with other work expenses and thus including such taxes as expenses reasonably attributable to the earning of income.8 Justice Powell seems to have implicitly recognized that in Shea when he wrote:

416 U.S. at 254-55, 94 S.Ct. at 1750-51. (emphasis added) (footnote omitted).

In Shea, the Supreme Court also implicitly approved HEW's implementing regulation, in which "earned income" was defined as gross income, irrespective of income tax deductions:

416 U.S. at 261-62, 94 S.Ct. at 1754 (emphasis added).

The word "income" is used in 42 U.S.C. § 602(a)(7). The words "earned income" are used in 42 U.S.C. § 602(a)(8). § 602(a)(7) has since 1968 contained the direction that where § 602(a)(8) applies, i.e., to earned income, calculations are to be made not under (a)(7) but under (a)(8).10 Subsection (a)(8) states:

"Income" includes unearned as well as earned income. Thus, "earned income" is a subset within "income." It is difficult if not impossible to read the words "income" or "earned income" as not including income tax deductions. See 45 CFR § 233.20(a)(6)(iv) (1981), quoted by Justice Powell in Shea 416 U.S. at 261 n. 10, 94 S.Ct. at 1754 n. 10.11 Thus, returning to the first of the two questions posed supra at page 390, the answer is that mandatory tax deductions are included in and are not excluded from "income" (see subsection 7) and "earned income" (see subsection 8).

As to the second question posed supra at page 388, there is every indication that Congress intended that the flat $75.00 disregard or standard work-expense deduction should not be augmented by all or any part of mandatorily withheld taxes. It can be argued that the congressional motive in 1981 of avoiding administrative complexity and of curbing abuse, which seemingly, at least in part, motivated the enactment of the flat $75.00 disregard, is not served by including mandatorily withheld taxes within the umbrella of the $75.00 figure, since the amounts of such withholdings are easily verifiable.12 It can also be argued in relation to cost savings, that there are sufficient cost savings in other changes incorporated in OBRA.13 But the legislative history of OBRA shows that Congress did relate the $75.00 flat disregard to cost savings, and that Congress intended to discourage people from remaining on welfare as a supplement to working, by cutting back sharply on work incentive disregards. Thus, defendant Schweiker stated to the House Ways and Means Committee in support of the Administration's AFDC proposals:

See also the following response by the Secretary to subsequent questioning when he appeared before the Senate Finance Committee:15

The potential disincentives to work embodied in the Administration's income disregard cost-cutting proposals were emphasized by speaker after speaker during the congressional hearings. Further, several of the individuals representing national advocacy groups brought to the attention of the committees that $75.00 was an unrealistically low figure and that it included mandatorily withheld taxes.16

There are cases decided both before and after Shea which have interpreted 42 U.S.C. §§ 602(a)(7) and (8), in their pre-OBRA stance, to exclude from "earned income" all earnings not available in fact to the child in question.17 Shea applied pre-OBRA law so as to require the then existing open-ended disregard to include all work-related expenses as not available for the child in a post-work context. But Congress, in enacting OBRA, substituted a flat maximum $75.00 disregard for the prior existing open-ended disregard, and in no way indicated when so doing that mandatory tax withholdings should be excluded from earned income or calculated as augmentations to the $75.00 disregard. The inclusion of mandatory tax withholdings within "income" as that word is used in 42 U.S.C. § 602(a)(7) and within "earned income" as those words are used in 42 U.S.C. § 602(a)(8), and the further inclusion of those withholdings within the flat $75.00 disregard, may produce the results predicted by critics of the proposals enacted into law by Congress in 1981. However, whether those views are or are not meritorious and whether those results do or do not meet the needs of our society, this Court may not disregard the intent of Congress. Accordingly, plaintiff's quests for injunctive and declaratory relief will be denied.