Opinion
For Opinion on Hearing see, 200 Cal.Rptr. 893, 677 P.2d 1183.
Opinions on pages 999-1030 omitted.
[182 Cal.Rptr. 726]George Deukmejian, Atty. Gen., Thomas E. Warriner, Asst. Atty. Gen., Anne S. Pressman and G. R. Overton, Deputy Attys. Gen., for defendants and appellants.
Western Center On Law & Poverty, Inc., Alan Rader and Marilyn Katz, Los Angeles, and Community Legal Services, Eileen Matteucci and Stanley E. Doty, San Jose, for petitioners and respondents.
BEACH, Associate Justice.
Class action by welfare recipients receiving assistance under a state plan for aid and services to needy families with children (AFDC program) against the Department of Social Services for the State of California and its Director, Marion J. Woods. At issue is the propriety of the state's practice to consider income tax refunds received by AFDC recipients as a form of regular income and to reduce the financial aid by the amount of the refund. The trial court granted a preliminary injunction compelling defendants to treat income tax refunds as "resources", not "income", and requiring defendants to make retroactive payments to those AFDC recipients who were denied aid or whose aid was reduced because the income tax refund was treated as income. The State appeals. We reverse.
DISCUSSION:
The Social Security Act makes federal funds available to those states which choose to participate in providing aid and services to needy families with children. (42 U.S.C. § 601 et seq.) Once a state elects to join the program, its plan must comply with the mandatory requirements of the Social Security Act, as interpreted and implemented by regulations promulgated by the Department of Health and Human Services (HHS), formerly known as the Department of Health, Education and Welfare (HUD). (County of Alameda v. Carleson [1971] 5 Cal.3d 730, 739, 97 Cal.Rptr. 385, 488 P.2d 953; California Welfare Rights Organization v. Carleson [1971] 4 Cal.3d 445, 448-449, 93 Cal.Rptr. 758, 402 P.2d 670.)
To encourage recipients of public assistance to become self-supporting and productive members of the community, it is the policy of this state, to the extent it is consistent with federal law, to allow them to earn some money without a proportionate deduction in their aid grants. (Welf. & Inst.Code, § 11008.) In addition, California allows an AFDC recipient to retain certain real property not to exceed $5000 (Welf. & Inst.Code, § 11255) and personal property [182 Cal.Rptr. 727] not to exceed $600 (Welf. & Inst.Code, § 11257).
The federal statute pertinent here is 42 U.S.C. section 602, subdivision (a)(7), which provides: "(a) A State plan for aid and services to needy families with children must ... (7) ... provide that the State agency shall, in determining need, take into consideration any other income and resources of any child or relative claiming aid to families with dependent children...." For many years, HHS has characterized an asset as income if received "on a regular basis." Thus, 45 C.F.R. section 233.90, subdivision (a)(1) states: "In establishing financial eligibility and the amount of the assistance payment, only such net income as is actually available for current use on a regular basis will be considered...." The State argues that the tax refund of an AFDC recipient constitutes "regular" income and therefore may be used to decrease the monthly grant by the amount of the refund. We agree.
There is no definition of the term "regular basis", in the federal statutes and regulations. While no California case law exists on the precise issue now before us, the issue has been presented to a number of courts in our sister states and in the federal courts, and a split of authority has developed.
While in County of Alameda v. Carleson (1971) 5 Cal.3d 730, 749, 97 Cal.Rptr. 385, 488 P.2d 953 there is language raising the question whether tax refunds should be treated as deferred income, the court focused its discussion on the propriety of the California scheme which distinguished between non-recurring lump sum payments and payments recurring over a period of two or more months.
In Kaisa v. Chang, 396 F.Supp. 375, 377, fn. 13 (D.Hawaii 1975) the United States District Court said that an income tax refund was not available on a "regular" basis because of the uncertainty of receiving any tax refund "and the fact that even if received, it can be expected, at most, once annually...." Thus, the Kaisa court concluded, tax refunds were not "income" for the purpose of determining eligibility and need under the AFDC program. Kaisa relied on County of Alameda, referred to in footnote 1 below. Kaisa was followed in Anderson v. Morris (1976) 87 Wash.2d 706, 558 P.2d 155.
Contrary conclusions were reached by the Oregon Court of Appeal in Walker v. Juras (1974) 16 Or.App. 295, 518 P.2d 663 and by the Minnesota Supreme Court in Steere v. State, Dept. of Public Welfare (1976) 308 Minn. 390, 243 N.W.2d 112. Both Walker and Steere held that tax refunds were a reasonably predictable annual source of income and therefore fell within the "regularity" requirement of the federal statute.
Plaintiffs, however, argue that because the refunds are paid only annually, they are not income received on a "regular" basis and therefore the state may not use those refunds to reduce the amount of aid received.
Under California law, certain lump sum payments received by an AFDC recipient are protected. Thus, Welfare and Institutions Code section 11157 provides: "Notwithstanding Section 11008, all lump sum income received by an applicant or recipient, including an applicant for or recipient of aid to families with dependent children, shall be regarded as income in the month received except nonrecurring lump sum social insurance payments, which social insurance payments shall include but are not limited to social security income, railroad retirement benefits, veteran's benefits, workman's compensation, and disability insurance." (Emphasis added.) The term "insurance" implies the payment of money upon the happening of some event over which the individual has no control. (See Walker v. Juras, supra, 518 P.2d 663, 664.) Such payments generally are not the result of the recipient's efforts. On the other hand, lump sum payments in the form of income tax refunds are simply earned income which was deferred in anticipation of tax liability. (Richards v. Lavine [1974] 78 Misc.2d 801, 357 N.Y.S.2d 982, 986.) Thus, [182 Cal.Rptr. 728] tax refunds are attributable to the efforts of the recipient. Also, depending on the type of employment, amount of salary, marital status and the number of dependents claimed, a wage earner to some degree controls the amount paid in cash in the scheduled pay period and the amount paid at the end of the tax period. Tax refunds are therefore distinguishable from lump sum "social insurance payments."
See p. 726, of 182 Cal.Rptr., p. ---- of --- P.2d ante.
Insofar as mandatory tax deductions are taken out regularly from regularly received income, return thereof to the wage earner in a lump sum payment once a year must likewise be deemed income received on a "regular" basis. As the court noted in Steere v. State, Dept. of Public Welfare, supra, 243 N.W.2d 112, 117, most AFDC recipients may be described as wage earners with low incomes and relatively stable economic circumstances, so for them tax refunds are a sufficiently uniform source of income to be deemed available on a "regular" basis.
In determining plaintiffs' eligibility for AFDC benefits, the state considered only net income during the periods of employment. (California Manual of Eligibility Assistance Standards (EAS) § 44-113.241.) Thus all taxes withheld were not taken into account, which of course reduced plaintiffs' net income. A holding that a refund of these amounts withheld should have no effect on the amount of aid being received would create an anomalous result. The withholding tax would, in effect, be deducted twice: first upon determination of eligibility for aid during the periods of employment, and again upon exclusion of the tax refund. (Walker v. Juras, supra, 518 P.2d 663, 665, fn. 2.) If the state had determined eligibility based on gross income, instead of net income as was done here, it might well be that many of the recipients would have been ineligible for assistance because their income would have been above the qualifying level. We see no reason why the state, not having considered the amounts of taxes withheld at the time eligibility was determined, may not treat the recipient's tax refund as income and reduce the AFDC grant in direct proportion thereto.
Also, if tax refunds could not be used to reduce a recipient's AFDC grant, those refunds in effect become a protected savings account for AFDC recipients. Less money would then be available within the AFDC program, thus seriously threatening the laudable goals of the program. It also would place an even heavier burden on the taxpaying public at large, whose monies are used to fund public assistance programs.
Support for the correctness of California's treatment of income tax refund is not limited to the choice of following the cited authorities which discuss the issue in terms of regular or nonregular income. Another simple and perhaps more fundamentally sound reason which supports the result we reach here is that California's treatment of the funds in issue is fair and balancing. It is not prohibited by the federal law. Within the limits of the federal statute which established the program and provides for the distribution of the federal funds, California is free to establish and define the criteria for administration of the AFDC program and the entitlement to the AFDC funds within the state. The federal law does not prohibit the state from arranging the criteria for entitlement in such a way that the amount of income tax withheld, which when deducted from income helps to create entitlement to AFDC assistance, may be returned to the net-income side of the ledger when repaid to the recipient. There is no federal or state constitutional or statutory right to demand that this particular portion of income cannot be considered when received merely because its receipt has been deferred. It is unlike other described forms of deferred income which specifically have been permitted to be permanently disregarded--for example, the return of that portion of income used to pay social security tax when social security payments are received.
The trial court's order granting the preliminary injunction is reversed, and the case is remanded for further proceedings consistent with this opinion.
ROTH, P. J., and COMPTON, J., concur.