If Your State Uses the Income Shares Model

Background material on the Income Shares guideline can be found in:

Contrary to public perception, Income Shares child cost tables are not directly based on actual spending on children but on indirect estimates. Income Shares assumes that child costs reflect the spending necessary to restore a family’s standard of living back to what it was before having a child or additional child. Such indirect mesures were originally developed by economists in the mid- and late-1800s to answer the academic question: how much income is needed for different family types (differing numbers of adults and children) to have the same standard of living, such as a two-adult household compared to a two-adult-one-child household. They are known as income equivalence measures and were never intended or designed to measure the cost of rearing children.

Three Versions of Income Shares
There are actually three versions of Income Shares guidelines, and each is used by different states. So the first step in analysing a case is determining which formula is employed by that state. The first version was developed in the early to mid-1980s; the second in the early 1990s; and the third at the end of the 1990s and early 2000s.

The first was based on a collaborative effort between Thomas Espenshade and Robert Williams. Thomas Espenshade is a demographer specializing in immigration issues. He received a grant to do a one-time study on child costs. His study was published in a book entitled, Investing in Children: New Estimates of Parental Expenditures, the Urban Institute Press, 1984. Espenshade estimated child costs as a share of family net income. Williams used the net income percentages and developed cost tables with dollar amounts to be shared between the parents at various income levels.

What was Espenshade’s definition of child costs? He borrowed from a mid-1800s economist, Ernst Engel. Engel did original research on the above described income equivalence measures. His idea was to measure some basic measure of consumption and see how the percentages consumed in families varied by the level of income and by the number of household members. He found that the share of income allocated to food consumption declined as income rose. As family income rises, income is increasingly allocated to luxury goods and to savings. Engel’s research showed that families having children boost the percentage of income spent on food consumption. He believed that when families of different sizes spend the same percentage of income on food, those families are equally well off. Engel compared how much additional income would be needed to restore the family back to its earlier share of spending on food, thereby restoring the family's standard of living.

In 1984, demographer Thomas Espenshade used this Engel income equivalence methodology to estimate child costs in a U.S. national study. As used by Policy Studies, Inc. to develop Income Shares child support guideline cost tables, Espenshade’s and Income Share’s first definition for child costs essential is:

When comparing two families (one with children and one without children), the child cost is the difference in total expenditures between the two families when both consume equal proportions of their budget on food.

The Espenshade-Engel definition for child costs has been discredited by economists as it is heavily dependent on children “consuming” food and non-food items in the same proportion as adults. However, children use food more than adults in proportion to non-food, and this skews the amount of income needed to push the family’s share of non-food items back up to pre-child shares. Child costs are overestimated. It also uses only food, and seeks standard-of-living equivalence, not child costs.

Income Shares 1990s Definition for Child Costs
In the early 1990s, PSI asked David Betson of the University of Notre Dame to revise the Income Shares methodology. He also used an income equivalence approach, borrowing a technique from Erwin Rothbarth. The Rothbarth methodology compares changes in levels of household spending on purely adult goods to determine child costs. The idea is that looking at pure adult goods reduces the problem of shifts between adult and shared goods after having a child or an additional child. For measuring child costs, Betson specifically uses a particular bundle of adult goods to measure a household's level of well being-this bundle being adult clothing, alcohol, and tobacco. In other words, he replaced the food-only indirect measure with spending in three adult-only areas and switched from shares of consumption to levels of consumption. Because the cost tables are based on a Betson version of Rothbarth’s earlier research, they are sometimes referred to as Betson-Rothbarth tables.

So, what is the Betson-Rothbarth 1990s definition for child costs?

Income Shares Pre-1990s Version of Child Costs
For intact families – ones with an additional child and ones with no additional child – the difference in expenditures between the two families is the child cost when both families consume equal dollar levels of adult clothing, alcohol and tobacco. Child costs are defined by comparing changes in consumption of adult clothing, alcohol, and tobacco.

This definition is dependent on the assumption that having children does not change adult preferences for alcohol, tobacco, and adult clothing. However, common sense tells us that after having children, there is social pressure to reduce alcohol and tobacco consumption. This leads to overestimating child costs, similar to the problem with the Espenshade-Engel definition.

Income Shares Definition of Child Costs, Current Version
By the latter part of the 1990s, David Betson decided that the broad definition of adult goods – of adult clothing, alcohol, and tobacco – was not his favored version of the Rothbarth methodology. There has been no explanation of how such a best version was determined, however, Betson conducted a broad updating of the Income Shares methodology which was funded by the Judicial Council of California. With this study, Betson concluded that he prefered the Rothbarth methodology to be based on the adult goods being solely adult clothing and not including alcohol and tobacco. The study is entitled, Review of Statewide Uniform Child Support Guideline, 2001, Judicial Council of California. This version is based on intact family data as are all earlier versions of Income Shares.

Reasons Behind Income Shares’ Overstatement of Child Costs
Any version of Income Shares leads to an overstatement of child costs by:

Underlying Assumptions of Income Shares Child Support Guidelines

• The household is intact.
• The custodial parent cares for the children 100 percent of the time and the non-custodial parent has no parenting costs.
• There is additional income when a child is added to the family to bring the standard of living back to its previous level.
• Tax benefits attributable to the children are not cost offsets; are not negative costs.
• For Engel-Espenshade based Income Shares guidelines, the best method of estimating child costs is to compare household consumption percentages of food (just food) before and after having an additional child.
• For Betson-Rothbarth based Income Shares guidelines the method of estimating child costs is to compare household consumption levels of alcohol, tobacco, and adult clothing before and after having an additional child. For Rothbarth Income shares versions implemented after 2001, the comparison is with just adult clothing.

To Rebut an Income Shares Presumptive Award
One would show or argue:

• The family is no longer intact but the cost tables assume the family is intact. Both parents must incur adult overhead living expenses (mortgage or rent, utilities, car, etc.) that are no longer shared, thereby reducing funds available to spend on other goods-including goods for children.
• There is no “phantom income” as assumed by the income shares methodology beyond what the parents actually earn. The guideline cost table assumption should be rebutted because the parents do not earn what the cost table assumes.
• The child-related tax benefit is significant and is a cost offset that should be recognized in the child support determination. Income Shares includes the after-tax income from the tax benefits when deriving the cost tables but does not treat the benefits as a cost offset when allocating the costs between the parents.
• The non-custodial parent has (n) percent of the total parenting time, while the cost tables assume the non-custodial parent has no parenting time. Equal duty of support standards require that the custodial parent share the non-custodial parent’s child costs.
• Adult consumption patterns (of food in an Espenshade-Engel Income Shares state, or of alcohol, tobacco, and adult clothing in a Betson-Rothbarth Income Shares state, or just adult clothing for the most recent Rothbarth tables) bear no relationship to the instant case and that a better methodology is to examine actual expenditures on children.

One should provide an alternative to the presumptive award. Guideline Economics offers and uses the model to derive one that is based on appropriate economic assumptions and principles. Show that the difference between the presumptive award and the cost-based award (including tax benefits as cost offsets) would provide the custodial parent with a profit of $______ above the actual costs of raising the child(ren). Show the dramatic difference in after-tax, after-child support income for each of the parents for the presumptive award and for the award, and then assert that the presumptive award is unjust and economically inappropriate.