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Figure 2

Percent of Children Eligible for Government Health Insurance vs. Living in Poverty

Eligible for Government Coverage

Child Poverty Rate

47.1%

20.3%

28.6%

20.5%

18.7%

16.7%

1987

1996

2002

Sources: Julie L. Hudson, Thomas M. Selden, and Jessica S. Banthin, "The Impact of SCHIP on Insurance

Coverage of Children," Inquiry.42, no. 3 (Fall 2005): 232; U.S. Census Bureau, "Historical Poverty Tables: Table

3. Poverty Status of People, by Age, Race, and Hispanic Origin: 1959 to 2005," September 06, 2006, http://www.

census.gov/hhes/www/poverty/histpov/hstpov3.html.

lies have almost no financial incentive to

that increases its earnings can end up with

achieve self-sufficiency, because increasing

less income overall.

their earnings often has zero effect on their

For example, a low-income single mother

actual income.

of two in New Mexico is eligible for a number

Expanding SCHIP would magnify those

of income-related subsidies from the federal

Expanding

powerful disincentives to increase family

and state governments. These include the

SCHIP would

earnings and would ensnare even more fami-

Earned Income Tax Credit, cash assistance,

Food Stamps, WIC,22 housing subsidies,

magnify powerful

lies in what economists call the "low-wage

child care subsidies, and Medicaid.23 Figure 3

trap"25 created by such programs.

disincentives to

shows what happens if that hypothetical

That low-wage trap would be deepened fur-

increase family

mother increases her earnings. The combina-

ther because Medicaid and SCHIP increase

tion of progressively higher taxes and the

health care prices for private purchasers. For

earnings and

progressive loss of government subsidies

example, Medicaid price controls increase the

would ensnare

means that even if she increases her earnings

cost of prescription drugs for private payers by

even more

an estimated 13 percent.26 Government pur-

from about $15,000 to $45,000, her net

income remains the same at about $40,000.24

chasing through Medicaid and SCHIP also can

families in what

Of the $30,000 she adds to her earnings, she

increase prices for private purchasers through

economists call

what is commonly believed to be "cost shift-

loses $4,000 to taxes and $26,000 to reduced

the "low-wage

ing," but may be more accurately described as

benefits. As a result of programs such as

crowding out private purchasers.27 Thus ex-

SCHIP, low-income families in New Mexico

trap" created by

and other states face marginal effective tax

panding SCHIP (and Medicaid) not only would

such programs.

rates that can exceed 100 percent. Such fami-

induce greater dependence on government, it

4