Income Shares Child Support Guidelines and the Issue of a Second Household Adjustment*

 For states with child support guidelines based on the Income Shares methodology, the child cost table is based on intact family data.  A recent legal and economic critique of this assumption suggests that intact family based costs are completely inappropriate and should be discarded or adjusted for second household costs.  For states undertaking federally required 4-year reviews of guideline methodologies, this is a critical study.  It may also apply for rebuttal in individual cases.

Updated: June 21, 2012

 

Income Shares Child Support Guidelines and the

Issue of a Second Household Adjustment*

 

Draft Working Paper, Not for Circulation or Quote

Check Back to GuidelineEconomics.com for Circulating Version

 

By R. Mark Rogers

Introduction

 

As of 2012, well over two-thirds of all U.S. states and the District of Columbia have child support obligations determined by Income Shares child support guidelines.  Nearly all of the schedules of Basic Child Support Obligation (the child cost table) were developed by either Policy Studies, Inc. (PSI) or later by the Center for Policy Research, Inc. (CPR).[1]<!–[endif]–>  These child cost tables are based on intact family child cost data.[2]<!–[endif]–> That is, the spending patterns on children are based on income available from two-parent households in which only one set of housing costs are incurred.

 

Essentially, states relying on child cost tables using the Income Shares methodology have child cost tables based on the following:

 

·         The household is intact with the parents being married. 

·         The child support award is based on combined parental incomes.

·         The household does not have the additional adult “overhead” (second mortgage payment or second rent payment and second set of utilities) that is incurred by a separated family that would reduce income available to spend on children.

·         The cost schedule assumes that the household has income available for children based on both parents sharing adult overhead costs as found in one, combined household.

 

All states accepting federal monies for child support programs are required to have presumptive child support formulas.  Essentially, child support guidelines are a legal presumption that can be rebutted.  So, a key issue is how does a child cost table that is part of a legal presumption stack up against traditional law on applying legal presumptions?  If a cost table based on intact family data does not conform to traditional legal standards for a presumption, can child costs based on intact family data be adjusted to reasonably conform to legal principles for presumptions?  It is this paper’s premise that child costs based on intact family data violate standard legal principles regarding legal presumptions but that economic adjustments can be made for second households to more closely comply with these legal principles.[3]<!–[endif]–>

 

Documentation of the Use of Intact Family Data for Income Shares Child Cost Schedules

An example of documentation that intact family data underlie Income Shares child cost tables is found in a recent review of child support guidelines for the state of Pennsylvania.

 

Most state guidelines that are based on economic evidence rely on estimates of childrearing expenditures in intact families.[4]<!–[endif]–>

 

Both PSI and CPR have relied upon original research on child costs by Dr. David Betson of the University of Notre Dame to adapt for child cost tables for individual states.  Betson indicates in his own research that the child cost tables are based on spending on children by married couples.

 

This study was intended to focus upon the spending patterns on children in families where both parents were present, consequently the following sample restrictions were made:

• The unit contained a married couple between the ages of 18 and 60 years old; and

• The unit did not have any other adults (individuals 18 years old or older) present in the unit even if these adults were the children of the couple.[5]<!–[endif]–>

How Does the Use of Intact Family Data on Child Costs Violate Traditional Legal Principles Regarding Legal Presumptions?

General Standards for Rebutting the Presumptive Award

There are a number of legal standards for rebuttal that generally coincide with needed economic analysis for rebuttal.  Several of these standards overlap.  Standards for rebuttal of presumptive child support awards include:

1)    needs and ability to pay;

2)    presumed facts not existing in case facts;

3)    “unjust or inappropriate;” and

4)    “best interests of the child.”

Needs and Ability to Pay

The traditional standard for child support determination is a finding of the needs of the child and a determination of whether the obligor has the ability to pay an appropriate share of the child’s needs.  Prior to states enacting presumptive child support guideline formulas due to this requirement under the Federal Family Support Act of 1988, courts traditionally based award on the needs of the child and the parents’ ability to pay.  This standard remains in statute or in appellate opinion in most states.

For example, even after implementing a presumptive formula in 1989 and later revising the numeric presumptive formula in 2005 and 2006, the state of Georgia retained part of state code that requires child support to be based on needs and ability to pay.  This code section is OCGA § 19-6-1(c):

(c) In all other cases in which alimony is sought, alimony is authorized, but is not required, to be awarded to either party in accordance with the needs of the party and the ability of the other party to pay.  In determining whether or not to grant alimony, the court shall consider evidence of the conduct of each party toward the other.

Based on “plain English,” this code section appears to apply to alimony  and not to child support.  However, “alimony” in this code section has a long history of being a broad legal term that includes child support.  This code section has been interpreted to include child support as a form of broadly defined alimony in many appellate opinions.  The case that most concisely states this standard may be Scherberger v Scherberger, 260 Ga. 635, 398 S.E.2d 363 (1990):

In all cases child support must be assessed by some calculation of the needs of the child and the ability of the parent to pay. Clavin v. Clavin, 238 Ga. 421 (233 S.E.2d 151) (1977).  Any award, termination, or modification of child support without concern for those issues falls short of the mandate of the law.

Another example of needs and ability to pay is from Louisiana statute:

Child support is to be granted in proportion to the needs of the children and the ability of the parents to provide support: LSA-C.C. art. 141.

The Alabama Supreme Court also provided case law on the importance of needs and ability to pay in Dyas v. Dyas, 683 So. 2d 971, 973 (Ala. Civ. App. 1995):

The appellate court found the trial court should have applied a two-pronged test to determine the appropriate amount of support, since the parties’ combined income exceeds the child-support guidelines. First, the court must determine whether the award rationally relates to the child’s “reasonable and necessary” needs, in accordance with the child’s standard of living during the marriage.  Then, the court must examine whether the support award reasonably relates to the obligor’s ability to pay.

However, Income Shares child cost tables do not reflect actual ability to pay of the two parents since discretionary income in actual cases is reduced by the cost of a second mortgage or rent payment and a second set of household utilities.  Only in cases where the noncustodial parent has remarried a second income earner (or has other similar sharing of housing costs) should the use of standard Income Shares child cost tables not be rebutted or set aside.  Should the custodial parent remarry a second income earner but not the noncustodial parent, it would be inappropriate to base a child support award on intact family data and order a person in a single-parent household (the noncustodial parent) pay child support as if having discretionary income reflecting a non-existent situation of shared household expenses.

Presumed Facts Not Existing in Case Facts

The Incomes Shares child support cost tables are based on economic studies on child costs.  The underlying studies have certain underlying facts that are presumed to exist in actual cases.  What is important is that traditional case law on legal presumptions indicates that when the underlying facts for a presumption do not exist in application in a particular case, then that is a basis for setting the presumption aside—or rebutting it.  This is a due process issue.  See Leary , for example:

A statute based upon a legislative declaration of facts is subject to constitutional attack on the ground that the facts no longer exist; in ruling upon such a challenge a court must, of course, be free to re-examine the factual declaration.^{[6]<!–[endif]–>}

While the Leary case addressed a constitutional issue, the same reasoning would apply to rebuttal.  If presumed facts do not fit case facts, that becomes grounds for rebuttal—especially if this divergence fits other standards for rebuttal such “unjust or inappropriate” or “needs and ability to pay.”

For Income Shares child cost tables, a key presumed fact is that the parents are married and living in the same housing.  In contrast, for the vast majority of cases, the actual fact is that the two parents live in separate housing and do not have the same discretionary income as if living in the same housing.  The presumed facts generally do not exist in actual cases.

Unjust or Inappropriate

Federal regulations also require that rebuttal be based on two additional standards—“unjust or inappropriate” and “best interests of the child.”  These are found in federal regulations.

(g) A written finding or specific finding on the record of a judicial or administrative proceeding for the award of child support that the application of the guidelines established under paragraph (a) of this section would be unjust or inappropriate in a particular case shall be sufficient to rebut the presumption in that case, as determined under criteria established by the State. Such criteria must take into consideration the best interests of the child. Findings that rebut the guidelines shall state the amount of support that would have been required under the guidelines and include a justification of why the order varies from the guidelines.^{[7]<!–[endif]–>}

 

 

How do Income Shares child cost tables not reflect parents’ true ability to pay and result in an inappropriate presumption?  The use of intact family data results in child cost schedules that reflect situations in which for any given level of combined income (of the two parents), there is only one set of adult “overhead” or adult fixed costs such as housing and utilities.  Once the fixed costs of a mortgage or rent payment and utilities are paid and shared by the two parents, the remaining after-tax income can be spent on other “things”—including children.  In contrast, when the two parents are divorced or unwed, there are two sets of adult overhead for the same level of combined income.  There is less after-tax income after paying for housing and utilities.  There is less discretionary income available combined for other things—including children.  Less income is spent on children in a divorced situation simply because in part there is less combined income after paying for both sets of adult fixed costs.

By now, it should be clear that it is unjust and inappropriate to require a noncustodial parent to pay child support on spending patterns on children based on discretionary income from intact households.  Intact families on average have more discretionary income.   Child cost estimates based on intact family data overstate child costs for the actual financial circumstances of the two parents (each paying their own housing costs without the help of a spouse).  The noncustodial parent is ordered to pay child support as if the noncustodial parent has help with housing costs.  Meanwhile the custodial parent co-mingles the child support payment with general budget money and spends it on the child based on spending habits of single parents with no help with housing costs.

There is an additional reason that the use of married family data for child costs is unjust and inappropriate.  This gives the child the right to a higher standard of living than either parent has.  A simple example shows the economic inequity of using intact family data for child cost schedules.  Assume that the mother and father each earn $4,000 gross income per month.  The child is entitled under intact family guidelines to a standard of living based on $8,000 per month.  In contrast, each of the parents spends on themselves based on $4,000 gross income per month.  In reality, the noncustodial parent is required to pay child support based on an intact family standard, the custodial parent receives child support based on an intact family standard, but the custodial parent only spends the child support as if in a single-parent household.  Not all of the child support is spent on the child and the custodial parent receives a sizeable financial windfall from child support based on intact family data.

Best Interests of the Child

Is it in the best interests of the child to base child support on data from married families?  Some argue that the child’s standard of living should not be harmed by divorce or separation of parents.  This argument is that the child has a right to a higher standard of living than either parent (the parents spend on themselves according to single-parent income).

 

Nonetheless, it can be argued that it is in the child’s best interests that the presumptive cost table be based upon combined income after taking into account a second household’s expenses.  This would result in a more realistic child support award, reduce arguments over child support between the parents, and create a more conducive atmosphere for the child.

 

Regardless, the best interests of the child standard is a relatively new legal innovation (from federal regulations) and likely does not conform to the due process issue that presumed facts should exist in case facts or the presumption should be set aside if presumed facts no longer exist.  Additionally, arguing that an intact family standard is in the child’s best interest generally conflicts with the other standards of rebuttal—needs and ability to pay and the unjust and inappropriate standard.

 

Overall, the presumptive child cost amount should be rebutted in the vast majority of cases simply because it is based on intact family data with no consideration for the loss in discretionary income from a second set of housing costs.

 

Child Support Guidelines—Legal Presumption or Policy Choice?

Federal and state laws clearly indicate that child support guidelines are legal presumptions.  See 45 CFR 302.56.  They are applied as presumptive evidence in court.  Some argue that child support guidelines should be considered policy choices.  However, examples of public policy choices include how long unemployment benefits last if one becomes employed or how many Food Stamps one qualifies for if low income.   True policy decisions are not applied as presumptions in court.  A policy choice is not rebuttable but under Federal law and due process, presumptions must be fully rebuttable.  But legal presumptions are applied in court and impact personal property and income and sometimes even personal liberty.

The bottom line on primary legal issues regarding child support guidelines is that they are legal presumptions applied in court.  Child support guidelines should meet the standards applied for legal presumptions, including that a presumption should be rebutted if presumed facts no longer exist in application.  Specifically, a case fact of single-parent households living in separate housing should automatically rebut a presumption of child costs based on married parents living in the same house.

Not Setting Aside Income Shares Presumptive Child Costs on a Regular Basis Denies a Fair Opportunity for Rebuttal

If the presumptive child cost table should be rebutted due to costs being based on intact family data, then the presumptive costs should be rebutted in the vast majority of cases, otherwise the presumption denies a “fair opportunity” for rebuttal and is a due process violation.  See, for example, Manley v. Georgia , 279 U.S. 1, 49 S.Ct. 215 (1929).  A presumption that is irrebuttable or denies a fair opportunity for rebuttal violates the due process clause of the Fourteenth Amendment of the U.S. Constitution. 

 

A statute creating a presumption that is arbitrary or that operates to deny a fair opportunity to repel it violates the due process clause of the Fourteenth Amendment. Bailey v. Alabama, 219 U.S. 219, 233, et seq.

 

Habit of the court to not set aside the intact family child costs for non-intact family situations is an operational denial of fair opportunity for rebuttal.  Essentially, if there is not an adjustment for second household housing costs, then it appears that a state’s child support cost table could be challenged for due process violations.

 

A Solution to the Presumption of Intact Family Child Costs

One solution to this problem is to make adjustments to the intact family data to reflect the additional adult overhead from two single-parent households compared to one intact household.

 

Adjusting a standard Income Shares cost schedule for a second household’s expenses may be a comfortable approach, given that it keeps the traditional Income Shares cost schedule as its starting point.  Additionally, adjusting an intact family data cost schedule for the added cost of a second household is not a novel idea.  Kansas has built in such a calculation in its presumptive child cost schedule.  Kansas uses a variation of the Income Shares methodology.  As noted in the Kansas guidelines:

 

The [child cost] schedules also include a built-in reduction from average expenditures per child (the dissolution burden), because of the financial impact on the family of maintaining two households instead of one.[8]<!–[endif]–>

Virginia has conducted research into this approach.  But this approach was not adopted not so much due to the second household adjustment but due to the novel approach to estimating the alleged standard costs.[9]<!–[endif]–>

Adjusting Intact Family Cost Schedule for Reduction in Available Income Due to Second Household Expenses

To reflect the reduced available income due to maintaining a second household, a simple adjustment for a second household and related expenses is to subtract from combined income (used for “looking up” the child cost in the child cost schedule) the amount of income needed for paying for the second set of adult overhead of additional rent and utilities for housing. 

 

Steps in the second household adjustment are the following:

1)    Determine the traditional adjusted gross income for both parents;

2)    Determine each parent’s share of the traditional combined adjusted gross income;

3)    Determine appropriate cost of maintaining a second household (mortgage or rent and utilities but not the cost of parenting time—the appropriate cost should vary by income)[10]<!–[endif]–>;

4)    Subtract the cost of maintaining the second household from combined adjusted income; and

5)    Look up the Basic Child Support Obligation reflecting combined adjusted gross income less the cost of maintaining the second household.

 

With steps 1 through 5, one has the standard income figure (adjusted gross income) and the BCSO adjusted for the second household discount.  These steps can be repeated across income ranges and for alternative numbers of children in order to derive a child cost schedule that takes into account the costs of a second household, separate from parenting time costs.  Steps 4 and 5 are further explained in more detail below.

Data Source for One-Adult Housing Costs

An example of this process is for North Carolina’s child support cost table.  North Carolina’s child support guidelines implicitly assume typical housing costs limited to those for a married family.  How much extra housing costs are incurred from a second household (adult overhead only and not parenting time costs) must be inferred from separate data.   A reasonably reliable data source is found with the U.S. Internal Revenue Service.   The U.S. Internal Revenue Service establishes standards for allowable living expenses for tax payers with tax arrearages and need to determine how much income is available for paying back taxes on an installment basis.  These data are part of the IRS’s Collection Financial Standards.   These data include allowable living expenses for housing and utilities and vary by income and are established on a county-by-county basis.  Exhibit 1 shows some of the North Carolina county data in the IRS’s allowable monthly housing allowances.[11]<!–[endif]–>

 

Exhibit 1.

 

Source: U.S. Department of the Treasury, Internal Revenue Service, Collection Financial Standards, North Carolina – Housing and Utilities Allowable Living Expenses, effective April 2, 2012.

One-adult housing costs are from the “Family of 1” column.  These one-adult costs are put into a database along with median county income figures from the U.S. Census Bureau.  These data are used to statistically estimate one-adult housing costs at $50 increments in income.

 

Exhibit 2.

One adult housing costs are statistically regressed against median county income.  There is a wide range of median income in the 100 counties in North Carolina.  Exhibit 2 summarizes the statistical findings of the regression analysis of the IRS single person housing costs versus median income for North Carolina counties.  These coefficients are used to estimate second household costs at $50 increments for adjusting the North Carolina child cost table—the Basic Child Support Obligation, or BCSO, for the reduction in available income from second household costs.  However, average income of the two parents is used instead of combined gross income.  The average income based second household costs are applied to the combined income level as an adjustment.

However, these housing costs for the second household are paid out of after-tax income while the Schedule of Basic Child Support Obligations has income based on before-tax income.  To fully take into account the total housing costs for the second household, the income tax paid on the income paying the housing costs must be added as a cost.  Adding income taxes as a cost of housing fully takes into account the reduction in available gross income to the parents as a result of having to maintain two households instead of just one.  One could argue that the appropriate income tax rate to use would be the marginal income tax rate.  However, as a conservative approach, for this study the average income tax rate was used inclusive of federal, state, Social Security, and Medicare taxes.  Federal and North Carolina withholding formulas were used to “gross up” the second household costs, using 2012 withholding formulas.

Example of Adjusting the Schedule of BCSO for Second Household Discount

An example of the calculation of the Adjusted Schedule of Basic Child Support is as follows for a situation in which the custodial parent has monthly adjusted gross income of $4,000 and the non-custodial parent has monthly adjusted gross income of $6,000.

Combined adjusted gross income is $10,000.  The likely appropriate value for housing costs should be based upon $5,000—this is an average of the income available for the second house.   The cost for a second house based on $5,000 in monthly gross income is $1,534 but with income and FICA taxes added the cost is $1,936 per month.  The housing cost of $1,936 is subtracted from combined adjusted gross income of $10,000, resulting in available combined adjusted gross income of $8,064 per month.  This is the “lookup” value for the child cost figure in the standard Schedule of BSCO.  The cost associated with $8,064 for one child is $992 (with $8,064 rounded down to $8,050 for the lookup).[12]<!–[endif]–>  One now associates combined adjusted gross income of $10,000 with the $992 one-child cost figure instead of the standard cost figure of $1,094 per month.  This process can be repeated across income levels and numbers of children.

With no other adjustments, if the noncustodial parent has $6,000 in monthly gross income and the custodial parent has $4,000, the award based on income adjusted for second household expenses is $595 per month versus $656 with a standard presumptive calculation.

 

Exhibit 3.

Exhibit 3 is a chart that shows the estimated dollar value of second household costs and their percentage share of income for the second household.  The income of the second household is assumed to be the average of combined income.  Total costs for second households (including utilities and income taxes to have the needed after-tax income for such costs) typically are about 35 percent of gross income, though higher at lower income levels.

Exhibit 4.

 

 

 Exhibit 4 is a chart showing how much the second household adjustment reduces available gross income.  The reduction is typically about 20 percent of combined gross income, indicating that ability to pay actually is significantly different from what is assumed in intact family child cost tables.

 

Exhibit 5.

 

 

Exhibit 5 shows the dollar value of married family child costs for one child versus those adjusted for second household costs.  The percentage difference (reduction) typically ranges from 11 to 14 percent of married family child costs.   Child costs based on married family child cost data significantly overstate child costs based on actual ability to pay.

 

Case by Case Adjustment

While it likely is preferable to have a presumptive child cost table that builds in a second household adjustment based on statistical estimates, it is not difficult to make case-by-case adjustments to a child cost table based on intact family data.

The court could take case specific housing and utilities costs from the parties’ financial affidavits for monthly expenses and then for each case adjust combined income for the costs of a second household.  The court could average the parties’ mortgage/rent payments and utilities expenses. The state’s worksheet could be adjusted to take into account this calculation.

The only complicating factor would be the issue of grossing up actual expenses to take into account gross income needed to cover housing expenses after paying income and FICA taxes.  The state or even county could create standard tables for grossing up costs according to income level.   Payroll departments for companies and governments do that kind of calculation (in reverse—withholding instead of gross up) on an on-going basis.

Exhibit 6.

Exhibit 6 shows how a state’s standard Income Shares worksheet could be adapted to take into account second household expenses on a case-by-case basis.  In this exhibit, Line 4 is new.  It is the result of the court reviewing both parties’ financial affidavits for expenses for mortgage/rent and utilities and then averaging.  The court then applies a gross up factor already established in a standard table published by the state court or local court for the current tax year.

This approach theoretically should be able to be applied in any Income Shares state as a deviation that takes into account actual available income instead of assumed available income in standard child cost tables using data from married families.