Bell v. Hettleman

• Decision Date: 31 January 1983
• Docket Number: Civ. No. K-82-2369.
• Citation: 558 F. Supp. 386
• Parties: Carolyn BELL and Maryland Welfare Rights Organization (Individually and on behalf of all others similarly situated) v. Kalman R. HETTLEMAN, Secretary, Maryland Department of Human Resources (Individually and in his official capacity) and Richard S. Schweiker, Secretary of the United States Department of Health and Human Services (In his official capacity).
• Court: U.S. District Court — District of Maryland

558 F. Supp. 386

Carolyn BELL and Maryland Welfare Rights Organization (Individually and on behalf of all others similarly situated) v. Kalman R. HETTLEMAN, Secretary, Maryland Department of Human Resources (Individually and in his official capacity) and Richard S. Schweiker, Secretary of the United States Department of Health and Human Services (In his official capacity).

Civ. No. K-82-2369.

United States District Court, D. Maryland.

January 31, 1983.

Peter M.D. Martin, Myrna A. Butkovitz and Dennis W. Carroll, Baltimore, Md., for plaintiffs.

Stephen H. Sachs, Atty. Gen. of Maryland, Dennis M. Sweeney, Joel J. Rabin and Nancy B. Shuger, Asst. Attys. Gen., Baltimore, Md., for defendant Kalman R. Hettleman.

J. Frederick Motz, U.S. Atty., Glenda G. Gordon, Asst. U.S. Atty., Baltimore, Md. and Diane C. Moskal, Regional Atty, U.S. Dept. of Health and Human Services, Philadelphia, Pa., for defendant Richard S. Schweiker.

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

all persons in the State of Maryland (a) who have applied or will apply for AFDC benefits, (b) who have been or will be employed during the period for which they have applied for AFDC, (c) whose earnings were subject to mandatory state, local, federal, or F.I.C.A. income tax withholding, (d) whose AFDC benefits have been or will be denied, reduced or terminated on or after the ninetieth day prior to the filing of this action due to defendant's policy of counting F.I.C.A., state, local, or federal income taxes, mandatorily deducted from an individual's gross earnings, as income available to those persons in computing the amount of their monthly AFDC checks, and (e) who would be eligible for AFDC or for an increased amount of AFDC but for the policy of defendant which is challenged in this action.¹

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):

Under HEW regulations all AFDC plans must specify a statewide standard of need, which is the amount deemed necessary by the State to maintain a hypothetical family at a subsistence level. Both eligibility for AFDC assistance and the amount of benefits to be granted an individual applicant are based on a comparison of the State's standard of need with the income and resources available to that applicant. 45 CFR § 233.20(a)(2)(i). The "income and resources" attributable to an applicant, defined in 45 CFR §§ 233.20(a)(6)(iii-viii), consist generally of "only such net income as is actually available for current use on a regular basis ... and only currently available resources." 45 CFR § 233.20(a)(3)(ii)(c).... In determining net income, any expenses reasonably attributable to the earning of income are deducted from gross income. 42 USC § 602(a)(7) 42 USCS § 602(a)(7). If, taking into account these deductions and other deductions not at issue in the instant case, the net amount of "earned income" is less than the predetermined statewide standard of need, the applicant is eligible for participation in the program and the amount of the assistance payments will be based upon that difference. 45 CFR §§ 233.20(a)(3)(ii)(a) and (c).

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:

(7) provide that the State agency shall, in determining need, take into consideration any other income and resources of any child claiming aid to dependent children;

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

(7) provide that the State agency shall, in determining need, take into

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