MARGARET M. HECKLER, SECRETARY OF HEALTH AND HUMAN SERVICES,
PETITIONER V. SANDRA TURNER, ET AL.

   No. 83-1097

   In the Supreme Court of the United States

   October Term, 1983

   On Writ of Certiorari to the United States Court of Appeals for the
Ninth Circuit

   Brief for the Petitioner

                       PARTIES TO THE PROCEEDING

   In addition to the parties named in the caption, Debra Scruggs and
Jerrylean Baker were appellees in the court of appeals.  Kyle
McKinsey, Deputy Director of the California Department of Social
Services, and Mary Ann Graves, Director of the California Department
of Finance, were appellants in the court of appeals.

            TABLE OF CONTENTS
   Opinions below
   Jurisdiction
   Statute and regulations involved
   Statement
   Summary of argument
   Argument:
      Amounts withheld for taxes on earned income received
      by AFDC beneficiaries may not be deducted
      from "income" under Section 402(a)(7) of
      the Social Security Act, 42 U.S.C. (Supp. V)
      602(a)(7), in determining AFDC eligibility and
      benefits
      A. The langauge and structure of Sections 402(a)(7)
          and (8) require the inclusion of mandatory payroll
          deductions within OBRA's flat $75 work
          expense disregard
      B. The legislative history and administrative
          interpretation of Sections 402(a)(7) and (8) do
          not require specialized treatment of mandatory
          payroll deductions
      C. Inclusion of mandatory payroll deductions within
          the flat $75 work expense disregard enacted
          by OBRA is entirely consistent with the
          congressional policies underlying the AFDC
          program
   Conclusion
   Appendix

                            OPINIONS BELOW

   The opinion of the court of appeals (Supp. App. 1a-36a) /1/ is
reported at 707 F.2d 1109.  The opinion of the district court (Pet.
App. 29a-56a) is reported at 559 F. Supp. 603.

                             JURISDICTION

   The judgment of the court of appeals (Pet. App. 57a) was entered on
June 10, 1983.  A petition for rehearing was denied on September 7,
1983 (Pet. App. 58a-59a).  On November 18, 1983, Justice Rehnquist
extended the time for filing a petition for a writ of certiorari to
and including January 5, 1984.  The petition was filed on January 4,
1984, and was granted on February 27, 1984.  The jurisdiction of this
Court is invoked under 28 U.S.C. 1254(1).

                   STATUTE AND REGULATIONS INVOLVED

   Section 402(a)(7) of the Social Security Act, 42 U.S.C. (Supp. V)
602(a)(7), provides in relevant part:

         A State plan for aid and services to needy families with
      children must * * *

         (7) except as may be otherwise provided in paragraph (8) or
      (31) and section 615 of this title, provide that the State
      agency --

         (A) shall, in determining need, take into consideration any
      other income and resources of any child or relative claiming aid
      to families with dependent children, or of any other individual
      (living in the same home as such child and relative) whose needs
      the State determines should be considered in determining the
      need of the child or relative claiming such aid * * *.

   Section 402(a)(8) of the Social Security Act, 42 U.S.C. (Supp. V)
602(a)(8), provides in relevant part:

         (A) * * * (I)n making the determination under paragraph (7),
      the State agency --

         (i) shall disregard all of the earned income of each
      dependent child receiving aid to families with dependent
      children who is (as determined by the State in accordance with
      standards prescribed by the Secretary) a full-time student or a
      part-time student who is not a full-time employee attending a
      school, college, or university or a course of vocational or
      technical training designed to fit him for gainful employment;

         (ii) shall disregard from the earned income of any child or
      relative applying for or receiving aid to families with
      dependent children, or of any other individual (living in the
      same home as such relative and child) whose needs are taken into
      account in making such determination, the first $75 of the total
      of such earned income for such month (or such lesser amount as
      the Secretary may prescribe in the case of an individual not
      engaged in full-time employment or not employed throughout the
      month);

         (iii) shall disregard from the earned income of any child,
      relative, or other individual specified in clause (ii), an
      amount equal to expenditures for care in such month for a
      dependent child, or an incapacitated individual living in the
      same home as the dependent child, receiving aid to families with
      dependent children and requiring such care for such month, to
      the extent that such amount (for each such dependent child or
      incapacitated individual) does not exceed $160 (or such lesser
      amount as the Secretary may prescribe in the case of an
      individual not engaged in full-time employment or not employed
      throughout the month);  and

         (iv) shall disregard from the earned income of any child or
      relative receiving aid to families with dependent children, or
      of any other individual (living in the same home as such
      relative and child) whose needs are taken into account in making
      such determination, an amount equal to the first $30 of the
      total of such earned income not already disregarded under the
      preceding provisions of this paragraph plus one-third of the
      remainder thereof * * *;  and

         (B) provide that (with respect to any month) the State agency
      --

         (ii)(I)

                      * * * * *

         (II) in the case of the earned income of a person with
      respect to whom subparagraph (A)(iv) has been applied for four
      consecutive months, shall not apply the provisions of
      subparagraph (A)(iv) for so long as he continues to receive aid
      under the plan and shall not apply such provisions to any month
      thereafter until the expiration of an additional period of
      twelve consecutive months during which he is not a recipient of
      such aid.

   45 C.F.R. 233.20(a)(6)(iv) provides:

         With reference to commissions, wages, or salary, the term
      "earned income" means the total amount, irrespective of personal
      expenses, such as income-tax deductions, lunches, and
      transportation to and from work, and irrespective of expenses of
      employment which are not personal, such as the cost of tools,
      materials, special uniforms, or transportation to call on
      customres.

   45 C.F.R. 233.20(a)(3)(ii)(D) provides in relevant part:

      (I)n determining need and the amount of the assistance payment,
      after all policies governing the reserves and allowances and
      disregard or setting aside of income and resources * * * have
      been uniformly applied:

                      * * * * *

      (D) Net income, * * * and resources available for current use
      shall be considered;  income and resources are considered
      available both when actually available and when the applicant or
      recipient has a legal interest in a liquidated sum and has the
      legal ability to make such sum available for support and
      maintenance.

                          QUESTION PRESENTED

   Whether the $75.00 standard work expense disregard under Section
402(a)(8) of the Social Security Act, 42 U.S.C. (Supp. V) 602(a)(8),
which is deducted from "income" under Section 402(a)(7) of the Act, 42
U.S.C. (Supp. V) 602(a)(7), in determining eligibility and benefits
under the Aid to Families with Dependent Children program, encompasses
all work expenses, including mandatory payroll deductions.

                               STATEMENT

   This case involves the proper computation of benefits payable under
Subchapter IV, Part A, of the Social Security Act, Aid to Families
with Dependent Children (AFDC), 42 U.S.C. (& Supp. V) 601 et seq.  In
particular, the case presents the question whether net income (after
mandatory deductions for social security, local, state, and federal
income taxes) or gross income is to be utilized by the states in
calculating AFDC benefits under Section 402(a)(7) of the Act, 42
U.S.C. (Supp. V) 602(a)(7).

   1. The AFDC program is a joint federal/state public assistance
program that was created in 1935 to aid needy families with dependent
children.  Social Security Act, ch. 531, 49 Stat. 620.  The federal
government reimburses the states for a percentage of the funds they
expend aiding families with needy children.  42 U.S.C. (& Supp V) 603.
 In return, the states administer their assistance programs pursuant
to a "state plan" that conforms to applicable federal statutory and
regulatory requirements.  42 U.S.C. (& Supp. V) 602.  State plans
establish both the "standard of need," which is "the amount deemed
necessary by the State to maintain a hypothetical family at a
subsistence level," and the "level of benefits," which determines the
maximum amount of assistance actually paid.  Shea v. Vialpando, 416
U.S. 251, 253 (1974);  Rosado v. Wyman, 397 U.S. 397, 408-409 (1970).
The amount of the AFDC grant is determined by comparing a family's
income, as computed according to Section 402(a)(7) of the Social
Security Act, 42 U.S.C. (Supp. V) 602(a)(7), with the state standard
of need.  If a family's income under Section 402(a)(7) "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." Shea, 416
U.S. at 254.  /2/

   Prior to 1981, Section 402(a)(7) required state agencies to "take
into consideration any * * * income and resources of any child
claiming aid to * * * dependent children," as well as all "expenses
reasonably attributable to the earning of any such income," in
calculating a family's eligibility for AFDC benefits.  76 Stat. 188
(1962).  In 1981, however, Congress radically changed the AFDC program
with the enactment of the Omnibus Budget Reconciliation Act of 1981
(OBRA), Pub. L. No. 97-35, 95 Stat. 357.  While keeping intact the
langauge in Section 402(a)(7) that instructs the states to take into
account a family's income and resources, Congress eliminated the
requirement that the states also consider the expenses reasonably
attributable to the earning of income.  42 U.S.C. (Supp. V) 402(a)(7).
 Instead, Congress amended Section 402(a)(8) of the Social Security
Act to create a flat $75 "work expense" deduction, or "disregard," to
be taken from an individual's "earned income." 42 U.S.C. (Supp. V)
602(a)(8)(A)(ii).  At the time this last amendment was made, the term
"earned income" in Section 402(a)(8) was defined in a long-standing
administrative regulation as the "total amount (of wages or salary),
irrespective of personal expenses, such as income-tax deductions * *
*." 45 C.F.R. 233.20(a)(6)(iv).

   Because state, federal and social security taxes had been regarded
by the Secretary and most states as expenses reasonably attributable
to the earning of income within the meaning of Section 402(a)(7), /3/
the Secretary advised state agencies that, in light of OBRA's deletion
of the work expenses deduction from Section 402(a)(7), mandatory
payroll deductions were to be included within the newly created $75
work expense disregard of Section 402(a)(8).  That disregard,
moreover, was to be taken from gross rather than net income, in
accordance with the Secretary's past administrative construction of
Section 402(a)(8).  45 C.F.R. 233.20(a)(6)(iv).  The State of
California published regulations implementing these instructions.
California Dep't of Social Services, Manual of Pol'y and Proc.,
Eligibility and Assistance Standards, EAS Section 44-113.21,
44-113.212 to 44-113.213 (Nov. 10, 1981).  /4/ Under the new formula,
the average AFDC grant to the majority of the 45,000 AFDC families
with earned income within California was reduced.

   2. Respondents, a class of all past, present and future AFDC
recipients in California, brought this suit in the United States
District Court for the Northern District of California to challenge
the California regulations implementing the Secretary's instructions.
/5/ Respondents asserted that those regulations improperly construed
the term "income" in Section 402(a)(7) as gross income, and
erroneously included all work expenses -- including mandatory payroll
deductions -- within the $75 work expense disregard of Section
402(a)(8).  They argued that, from the inception of the AFDC program,
Congress had intended the term "income" in Section 402(a)(7) to mean
net income actually available for use.  Respondents therefore claimed
that they were entitled to have state and federal taxes and social
security deductions disregarded by the State when calculating
resources under Section 402(a)(7).

   The district court agreed with respondents, holding that Congress
did not intend the term "incomd" in Section 402(a)(7) to include
mandatory payroll deductions.  Accordingly, the court granted
respondents' motion for summary judgment and enjoined the State of
California from implementing its new regulations (Pet. App. 48a).  The
court also enjoined the Secretary from terminating the provision of
federal matching funds to the State (ibid.).

   3. The court of appeals affirmed (Supp. App. 1a-36a).  The court
noted that no provision of the Social Security Act defined the word
"income" in Section 402(a)(7) and concluded that the literal language
of the section was of little aid in resolving the question of
congressional intent (Supp. App. 12a).  The court, therefore, examined
at some length the legislative history and administrative
interpretation of Title IV of the Social Security Act (id. at
12a-28a).  Its inquiry, however, focused almost entirely on the
intentions of pre-OBRA Congresses (ibid.).

   The court of appeals reasoned that Section 402(a)(7), as originally
enacted, indicated Congress's "genuine * * * concern that resources
counted against a family be actually available for its use" (Supp.
App. 13a).  Thus, the court concluded that Section 402(a)(7), as
passed in 1939, required the states to use income net of mandatory
payroll withholdings in calculating AFDC benefits, even though
"mandatory payroll deductions did not exist in 1939" (Supp. App. 13a).
 The court buttressed this conclusion by referring to past and present
administrative regulations which provide that income must be actually
available for use before it is utilized in calculating AFDC benefits
(id. at 13a-16a).

   The court of appeals concluded that, until about 1974, there was no
consistent categorization of mandatory payroll deductions as "work
expenses" (Supp. App. 26a-27a).  The court accordingly rejected the
argument that Congress had intended mandatory payroll deductions to be
subsumed within Section 402(a)(8)'s work expense disregard, even
though the OBRA Congress had specifically deleted Section 402(a)(7)'s
mandate to deduct expenses "reasonably attributable" to the earning of
income.  Because the court doubted that "Congress had adequate notice"
that payroll deductions were considered work expenses, it "refuse(d)
to hold that (by amending Sections 402(a)(7) and (8)) Congress has
repealed a forty-year-old policy by implication" (Supp. App. 28a).

   Finally, the court of appeals asserted that its construction of
Sections 402(a)(7) and (8) of the Social Security Act served the
legislative purposes underlying the Act (Supp. App. 28a-36a).  The
court noted that the legislative history of Title IV evidenced a
strong congressional desire to promote employment as an alternative to
the AFDC program (id. at 29a, citing 42 U.S.C. 601).  The court then
observed that the Secretary's construction of Sections 402(a)(7) and
(8) would discourage employment, because under that approach some AFDC
recipients could increase their disposable income by refusing
employment in order to receive full AFDC grants (Supp. App. 32a-34a).
Relying primarily on its perception of the intent of pre-OBRA
Congresses to avoid financial disincentives to employment, the court
concluded that mandatory payroll deductions "are not income for
purposes of AFDC calculations performed pursuant to 42 U.S.C. Sections
602(a)(7) and 602(a)(8)" (Supp. App. 34a).

                          SUMMARY OF ARGUMENT

   The court of appeals concluded that the legislative history and
administrative interpretation of Section 402(a)(7) of the Social
Security Act, 42 U.S.C. (Supp. V) 602(a)(7), as well as the
congressional purposes underlying the AFDC statute, compelled the
states to deduct mandatory payroll withholdings in addition to Section
402(a)(8)'s flat $75 work expense disregard (42 U.S.C. (Supp. V)
602(a)(8)(A)(ii)) in calculating AFDC benefits.  A reasoned analysis
of the language of Sections 402(a)(7) and (8), their legislative and
administrative history, and the congressional goals informing the AFDC
program demonstrate the error of the lower court's decision.

   A. In calculating the amount of an AFDC grant, the Social Security
Act plainly requires the states to consider, first, the gross wages or
"earned income" of an AFDC beneficiary, as well as any other income
available to the applicant.  42 U.S.C. (Supp. V) 602(a)(7), 602(a)(8).
 The states are then required to consider the various "disregards"
authorized by Congress in Section 402(a)(8) of the Act.  As modified
by the Omnibus Budget Reconciliation Act in 1981, that section permits
the states to disregard to to $160 in child care expenses as well as a
flat $75 deduction "in lieu of itemized work expenses" (S. Rep.
97-139, 97th Cong., 1st Sess. 435 (1981)).

   The "disregards" provided by Section 402(a)(8) are to be taken from
gross income (45 C.F.R. 233.20(a)(6)(iv)).  Moreover, the flat $75
work expense disregard contained in Section 402(a)(8) subsumes the
mandatory payroll withholdings at issue here for the simple reason
that, prior to OBRA, the Secretary and the states uniformly treated
mandatory payroll deductions for income and social security taxes as
itemized work expenses.  See Shea v. Vialpando, 416 U.S. 251, 254-255
(1974).  There is no mention in the language or legislative history of
OBRA of an additional disregard for tax withholdings.

   B. The court of appeals disagreed with the above construction of
Section 402(a)(7) of the Social Security Act (42 U.S.C. (Supp. V)
602(a)(7)) on the basis of the legislative history and administrative
interpretation of that section.  The lower court's reading of the
background of Section 402(a)(7), however, is seriously flawed.

   Contrary to the arguments successfully presented by respondents
below, Section 402(a)(7), as originally enacted in 1939 (53 Stat.
1379-1380), did not require the states to deduct mandatory payroll
withholdings from an AFDC applicant's income.  Indeed, in 1962
Congress specifically amended Section 402(a)(7) so that work expenses,
such as mandatory payroll deductions, would not be considered in the
AFDC benefit calculation (76 Stat. 188) -- an amendment that would
have been unnecessary if the court of appeals' construction of Section
402(a)(7) were correct.  That work expense provision, which permitted
an AFDC beneficiary to deduct from his income the actual amount of all
expenses "reasonably attributable" to the earning of income (ibid.),
was abolished by Congress in 1981 and replaced with the flat $75 work
expense disregard of Section 402(a)(8).

   Agency practices regarding the treatment of mandatory payroll
deductions also refute respondents' and the court of appeals'
interpretation of Section 402(a)(7).  The "availability" doctrine
adopted by the court of appeals (Supp. App. 15a-17a) has never been
applied to mandatory payroll withholdings.  Indeed, the "availability"
concept -- i.e., that earned income is not "income" within the meaning
of Section 402(a)(7) unless it is actually "available" to defray
living expenses -- sweeps so broadly that it would completely negate
Congress's clear intent in 1981 to enact a flat work expense disregard
in place of an itemized work expense deduction.  Work expenses such as
uniform costs, public transportation fares, and union dues are as
"unavailable" to employed AFDC recipients as income and social
security tax deductions.  Yet these expenses plainly fall within the
ambit of OBRA's work expense cap.  Mandatory payroll deductions should
be accorded no different treatment.

   C. The Secretary's construction of Sections 402(a)(7) and (8) is
fully consistent with the congressional policies underlying the AFDC
program.  The changes in the benefit calculation process mandated by
OBRA do indeed result in lowering the level of payments received by
many AFDC recipients with earned income.  Congress, however, was well
aware of the impact of its actions.  The Senate and the House of
Representatives amended Sections 402(a)(7) and (8) in 1981 despite the
fact that -- as was repeatedly brought to their attention -- the
amendments might create financial disincentives to employment.

   Congress concluded in 1981 that previous attempts to encourage
employment and self-sufficiency on the part of AFDC recipients by
means of financial incentives had been unsuccessful.  It therefore
"embarked on a new course" (James v. O'Bannon, 715 F.2d 794, 809 (3d
Cir. 1983), petition for cert. pending, No. 83-6168)).  That "new
course" coupled the amendments to Sections 402(a)(7) and (8) with
"provisions * * * aimed at providing employment for AFDC recipients,"
in order to "decrease welfare dependency, and emphasize the principle
that AFDC should not be regarded as a permanent income guarantee" (S.
Rep. 97-139, supra, at 502-503).  The court of appeals failed to give
effect to this most recent expression of the legislative will.

                               ARGUMENT

 AMOUNTS WITHHELD FOR TAXES ON EARNED INCOME RECEIVED BY AFDC
BENEFICIARIES MAY NOT BE DEDUCTED FROM "INCOME" UNDER SECTION
402(a)(7) OF THE SOCIAL SECURITY ACT, 42 U.S.C. (SUPP. V) 602(a)(7),
IN DETERMINING AFDC ELIGIBILITY AND BENEFITS

   This case presents a straightforward question of statutory
construction:  whether mandatory payroll deductions fall within the
flat $75 work expense disregard enacted by Congress as part of the
1981 OBRA amendments to the AFDC program (42 U.S.C. (Supp. V)
602(a)(8)(A)(ii)).  Of the four courts of appeals that have addressed
the issue, three have agreed with the government's position that
mandatory payroll deductions are included within the newly created
work expense disregard.  James V. O'Bannon, 715 F.2d 794 (3d Cir.
1983), petition for cert. pending, No. 83-6168;  Bell v. Massinga, 721
F.2d 131 (4th Cir. 1984), petition for cert. pending, No. 83-6269;
Dickenson v. Petit, 728 F.2d 23 (1st Cir. 1984).  Only the Ninth
Circuit, in a decision examined but rejected by the above three
courts, has concluded otherwise.

 A. The Language And Structure Of Sections 402(a)(7) And (8) Require
The Inclusion Of Mandatory Payroll Deductions Within OBRA's Flat $75
Work Expense Disregard

   The court of appeals found that the language of Section 402(a)(7)
"is not helpful" in resolving the contentions raised by respondents
(Supp. App. 12a).  The language of the AFDC statute, however, is not
as unilluminating as the lower court concluded.  Indeed, the language
and structure of Sections 402(a)(7) and (8) plainly demonstrate that
mandatory payroll deductions should not be accorded specialized
treatment in the calculation of AFDC benefits but instead are included
within the "work expense" disregard of Section 402(a)(8).

   Section 402(a)(7) requires that "any * * * income and resources" of
an AFDC beneficiary be considered in determining need, "except as * *
* otherwise provided in (Section 402(a)(8))" (42 U.S.C. (Supp. V)
602(a)(7)).  Section 402(a)(8), by its express terms, applies to
"earned income" (42 U.S.C. (Supp. V) 602(a)(8)), which is an obvious
subset of the more inclusive term "income" utilized by Congress in
Section 402(a)(7).  Indeed, because the various subsections of a
statute should be "reconciled so as to produce a symmetrical whole"
(FPC v. Panhandle Eastern Pipe Line Co., 337 U.S. 498, 514 (1949)),
the "most natural reading of (Sections 402(a)(7) and (8)) is that
'earned income,' within the meaning of Section (4)02(a)(8), is merely
one kind of 'income' within the meaning of Section (4)02(a)(7)" (James
V. O'Bannon, 715 F.2d at 802).

   Thus, in calculating the amount of an AFDC grant, the Social
Security Act plainly requires the states to consider all "income" of a
recipient (42 U.S.C. (Supp. V) 602(a)(7)).  If that "income" includes
"earned income," the provisions of Section 402(a)(8) come into play
(42 U.S.C (Supp. V) 602(a)(8)).  That section, as amended in 1981,
authorizes the states to disregard from the "earned income" of an
applicant up to $160 in child care expenses as well as a flat $75
deduction "in lieu of itemized work expenses" (S. Rep. 97-139, 97th
Cong., 1st Sess. 435 (1981)).  The flat $75 work expense disregard of
Section 402(a)(8), moreover, is to be taken from gross -- not net --
income for the simple reason that the term "earned income" in Section
402(a)(8) has been consistently defined as "the total amount (of wages
or salary), irrespective of personal expenses, such as income-tax
deductions" (45 C.F.R. 223.20(a)(6)(iv)).

   In light of the above statutory scheme, the proper outcome of this
litigation is apparent.  The AFDC benefit calculation begins with
gross income, and the payroll deductions disputed by respondents are
subsumed within the Section 402(a)(8) "work expense" disregard.
Indeed, the court of appeals conceded that "if mandatory payroll
deductions enter into income at all, they must be treated as
work-related expenses subject to the $75 ceiling enacted by OBRA,
because no separate disregard for payroll withholding exists" (Supp.
App. 26a (emphasis deleted)).  The court below avoided this
straightforward result only by holding that mandatory payroll
deductions "are not income" for purposes of computing AFDC benefits
(id. at 34a).  That conclusion, however, required the court to contort
not only the structure, /6/ but also the legislative history and
administrative interpretation of the Social Security Act.

 B. The Legislative History And Administrative Interpretation Of
Sections 402(a)(7) And (8) Do Not Require Specialized Treatment Of
Mandatory Payroll Deductions

   The court of appeals found that Section 402(a)(7), as originally
enacted, required the states to "offset only net income in determining
assistance payments" (Supp. App. 13a).  It also concluded that "the
agency charged with the administration of this statute has long
regarded it as dealing with net income exclusively" (id. at 15a).
Accordingly, the court held that mandatory payroll deductions are not
within the "income" the states must consider under Section 402(a)(7).
That holding, however, ignores the legislative history and
administrative practices it purports to implement.

   Because the court of appeals' decision relies so heavily upon its
strained construction of the legislative and administrative history of
Sections 402(a)(7) and (8), a somewhat extended examination of the
background of both sections is necessary at this point.

   1. In its earliest formulation, Section 402(a)(7) required state
agencies to "take into consideration any * * * income and resources of
any child claiming aid to dependent children." Social Security Act
Amendments of 1939, ch. 666, Section 401(b), 53 Stat. 1379-1380.  The
section was passed as an amendment to the Social Security Act of 1935,
which as originally enacted did not require the states to decrease the
size of AFDC grants paid to needy families with other income sources.
See Social Security:  Hearings Before the House Comm. on Ways and
Means, 76th Cong., 1st Sess. 2254 (1939) (Social Security Act
Amendments of 1939) (colloquy between Rep. Duncan and Arthur
Altmeyer).  The 1939 amendment resolved the possible problem of
overpayment under the 1935 Act, but in turn created another
difficulty, because "families with working members incurred certain
employment-related expenses that reduced available income but were not
taken into account by the States in determining eligibility for AFDC
assistance." Shea v. Vialpando, 416 U.S. 251, 259 (1974).

   The Social Security Board, the federal entity then charged with
administration of the AFDC program, sought to alleviate the inequities
created by the 1939 amendment by encouraging the states "to allow
credit for work-related expenses." Shea, 416 U.S. at 259.  See Section
3140 of the HEW Handbook of Public Assistance Administration, Part IV
(1957) (permitting states to allow a reasonable credit for work
expenses when there is a determination that such expenses in fact
exist);  Bureau of Public Assistance, Federal Security Agency, Social
Security Board, State Letter No. 4 (Apr. 30, 1942) (J.A. 25)
(Executive Director of Social Security Board encourages state agencies
to recognize that "when a person is working there may be additional
needs which must be met").  The Board also instructed the states that
income should not be counted in determining need unless it was
actually available to an AFDC applicant.  Thus, the states were
prohibited from considering as a resource those "sources from which
income, contributions, maintenance, or support are not in fact
available and forthcoming." Guide to Public Assistance Administration,
Section 202, at 1-2 (1942) (J.A. 23).  /7/

   The treatment of work expenses in the calculation of AFDC benefits,
however, ultimately was not left to administrative discretion.  In
1962, Congress addressed the "work expense" quandary by amending
Section 402(a)(7).  That amendment, which "made mandatory the
widespread but then optional practice of deducting employment expenses
from total income in determining eligibility for assistance" (Shea,
416 U.S. at 260), required the states to consider, in addition to
"income and resources," all "expenses reasonably attributable to the
earning of any such income." Public Welfare Amendments of 1962, Pub.
L. No. 87-543, Section 106(b), 76 Stat. 188.  /8/

   The next important change in the AFDC statute came as a result of
the Social Security Amendments of 1967, Pub. L. No. 90-248, Section
202(b), 81 Stat. 881.  Although Section 402(a)(7)'s directive
regarding expenses reasonably related to the earning of income was not
altered, Congress made that directive subject to the provisions of a
new section, Section 402(a)(8), 42 U.S.C. 602(a)(8).  That section
created several new deductions (or "disregards") from "earned income"
that were designed to encourage AFDC grant recipients to seek
employment.  One such "work incentive" required state agencies to
disregard, with respect to any month, the first $30 of "earned income"
plus one-third of the remainder (81 Stat. 881);  another required the
states to disregard the "earned income" of full-time students (ibid.);
 a third permitted income to be set aside for the future needs of a
dependent child (ibid.).

   Pursuant to 42 U.S.C. (Supp. V) 1302, the Secretary of Health,
Education, and Welfare (the agency then administering the AFDC
program) thereafter issued regulations defining the term "earned
income" in Section 402(a)(8) and incorporating the "earned income"
disregards of the section into the AFDC benefit calculation.  The
definition of "earned income," which has remained essentially
unchanged since its original promulgation in 1969, was derived from a
definition appearing in the Assistance Payments Administration, HEW,
Handbook of Public Assistance Administration (Mar. 24, 1952).  The
regulation provided that "earned income" is gross income -- the "total
amount (of wages or salary), irrespective of personal expenses, such
as income tax deductions, lunches, and transportation to and from
work, and irrespective of expenses of employment which are not
personal, such as the cost of tools, materials, special uniforms, or
transportation to call on customers." 45 C.F.R. 233.20(a)(6)(iv).  /9/

   A second regulation established the order in which the new
disregards of Section 402(a)(8) would be applied.  The disregards
would be "deducted from gross income rather than from net income," and
after that deduction "the amount allowed for work expenses" would be
subtracted.  Notice of Final Policies and Requirements, 34 Fed. Reg.
1394 (1969).  See also 45 C.F.R. 233.20(a)(7)(i) (codifying the
preceding sequence of calculations).  Most important for present
purposes, these regulations "permitted income tax withholdings to be
deducted from gross income, but they did so by grouping that deduction
together with deductions for all other work-related expenses,
including lunches, transportation and the like" (James v. O'Bannon,
715 F.2d at 804).  /10/

   Because of the growing complexity of the process by which AFDC
eligibility and benefits were determined, the states began
experimenting with various ways of simplifying administrative
procedures.  The principal device utilized by the states during this
period was the imposition of a flat deduction for certain work
expenses.  Although the specifics of the various state plans differed,
/11/ there was impressive unanimity on one point:  by 1972 virtually
every state in the nation considered mandatory payroll deductions for
income and social security taxes to be "expenses reasonably
attributable" to the earning of income within the meaning of the
then-current version of Section 402(a)(7) (76 Stat. 188).  /12/

   State attempts to simplify the consideration of "expenses
reasonably attributable" to the earning of income were challenged in
court.  In Shea v. Vialpando, this Court concluded that Section
402(a)(7) did not permit a state to substitute a flat deduction for
such expenses, but rather required individual computation (416 U.S. at
264-265).  The decision of the Court, however, "treated tax
withholdings no differently than other work related expenses" (James
v. O'Bannon, 715 F.2d at 796-797).  Indeed, in line with the universal
practice of the states at the time the case was decided, Shea
repeatedly listed "mandatory payroll withholdings" as "expenses
reasonably attributable to the earning of income" within the meaning
of Section 402(a)(7) (416 U.S. at 254, 255).  /13/

   It was against this background that Congress passed the Omnibus
Budget Reconciliation Act in 1981.  The Senate Report on OBRA noted
that "the current earned income disregard provisions have resulted in
serious problems" (S. Rep. 97-139, 97th Cong., 1st Sess. 501 (1981)).
Among these problems was the fact that, "(b)ecause Federal law neither
defines nor limits what may be considered a work-related expense,
there is now great variation among the States and many instances of
abuse" (ibid.).  Additionally, the "requirement for itemization of
individual work expenses" that was explicated in Shea "has resulted in
administrative complexity and error" (id. at 501-502).  Finally, the
Senate Report noted that, under the existing AFDC provisions,
"families may remain on welfare even after they are working full time
at wages well above the State welfare standard" (id. at 502).  OBRA
amended Sections 402(a)(7) and (8) to deal systematically with these
difficulties.

   The first two problems identified by Congress -- uncertainty
regarding what constitutes a work-related expense and the
administrative burden associated with individualized computation of
those expenses -- were alleviated by deleting Section 402(a)(7)'s
requirement that the states consider expenses "reasonably
attributable" to the earning of income, and substituting in its place
flat $75 work expense and $160 child-care disregards in Section
402(a)(8).  42 U.S.C. (Supp. V) 602(a)(7), (a)(8).  These changes,
which were provided "in lieu of itemized work expenses" (S. Rep.
97-139, supra, at 435), were made to free state agencies from the
burden of computing work expenses on an individualized basis and to
eliminate any uncertainty regarding whether particular items were in
fact deductible as work expenses.  Id. at 502.  See also H.R. Conf.
Rep. 97-208, 97th Cong., 1st Sess. 978-979 (1981).

   The third problem noted by the Senate Report was addressed by
altering the application of the "work incentive" disregards enacted in
1967.  Because the "work incentive" disregards had not in fact
resulted in AFDC recipients attaining "self sufficiency" (S. Rep.
97-139, supra, at 502), Congress determined to try another means to
achieve that goal.  Accordingly, OBRA restricted the availability of
the "$30 and one-third" disregard to the first four months "in which a
welfare recipient is employed" (ibid.) and altered the sequence in
which the "work incentive" disregard would be calculated (H.R. Conf.
Rep. 97-208, supra, at 978-979).  /14/ Congress then coupled these
changes with "provisions * * * aimed at providing employment for AFDC
recipients" (S. Rep. 97-139, supra, at 502,503).  See pages 46-47,
infra.

   2. Considered in light of the foregoing chronology, respondents'
construction of the legislative and administrative history of the AFDC
statute simply does not withstand analysis.  Indeed, the historical
background just set forth refutes respondents' assertions, adopted by
the court of appeals, that Section 402(a)(7) has always dealt only
with net income (Supp. App. 13a), that the section has been
consistently so construed by the Secretary (id. at 15a), and that
nothing in OBRA alters this result (id. at 17a-28a).

   a. The court of appeals' finding (Supp. App. 13a) that Section
402(a)(7), since its enactment in 1939, has required the states to
disregard mandatory payroll withholdings is plainly wrong.  It ignores
the context in which Congress was acting in 1939, as well as the
subsequent legislative modifications of Section 402(a)(7).

   In 1939, Congress could not have intended the states to consider
only income net of mandatory tax withholdings in determining
assistance payments under Section 402(a)(7) for the simple reason that
mandatory payroll withholdings for federal income taxes did not begin
until 1943.  See Bell v. Hettlemean, 558 F. Supp. 386, 391 n.7 (D.
Md.), aff'd 721 F.2d 131 (4th Cir. 1983), petition for cert. pending,
No. 83-6269.  Although nominal withholdings for social security taxes
began as early as 1937, "such mandatory payroll deductions were not
generally encountered in 1939, especially not by welfare recipients"
(ibid.).  Thus, it is quite unlikely that Congress even considered --
let alone provided for -- the deduction of mandatory payroll
withholdings when it enacted Section 402(a)(7) in 1939.  The court of
appeals' contrary conclusion is simply not supported by any credible
evidence.  /15/

   Indeed, if the 1939 legislation in fact reflected Congress's desire
that only those resources "actually available for its use" be "counted
against a family" (Supp. App. 13a), there would have been no need to
amend Section 402(a)(7) in 1962 to provide for expenses (reasonably
attributable" to the earning of income.  76 Stat. 188.  Such expenses,
under the court of appeals' rationale, would have been automatically
deducted under Section 402(a)(7) because they were not "available" to
the family.  Congress, however, apparently did not agree with this
interpretation of Section 402(a)(7), inasmuch as it explicitly amended
the section to reach the result already obtained under the court of
appeals' construction of the statute.

   In order to avoid the difficulties that the 1962 amendment to the
Social Security Act creates for its reading of Section 402(a)(7), the
court of appeals noted that, "(i)n the legislative history of the 1962
amendment, which first brought 'work related expenses' into AFDC law,
there is no reference to mandatorily withheld taxes as work-related
expenses" (Supp. App. 26a).  The court similarly tried to evade the
conceptual difficulties posed by the 1981 deletion of the "work
expense" deduction by claiming that, at least prior to 1974, mandatory
payroll deductions were not routinely considered work expenses (id. at
27a-28a).  Neither observation blunts the plain force of the 1962 and
1981 legislative actions.

   The fact that Congress did not include mandatory payroll deductions
on some "master work expense list" buried in a 1962 legislative report
does not, of course, demonstrate that such deductions were not in fact
work expenses within the meaning of amended Section 402(a)(7).  /16/
And, whatever the practice of the Secretary and the states regarding
the treatment of work expenses following the 1939 amendment, /17/ by
the time this Court rendered its decision in Shea it was clear that
mandatory payroll deductions were treated as work expenses by
virtually every state.  Shea, 416 U.S. at 254-255;  J.A. 47-53.  See
pages 19-20, supra.  If, in enacting OBRA, Congress was perceptive
enough to note the "great variation" among the states as to "what may
be considered a work-related expense" (S. Rep. 97-139, supra, at 501),
it was certainly aware of the single item of work expenses that was
recognized by all the states:  mandatory payroll deductions.  /18/
Thus, in 1981, when Congress provided Section 402(a)(8)'s flat $75
work expense disregard "in lieu of itemized work expenses" under
Section 402(a)(7) (S. Rep. 97-139, supra, at 435), it certainly knew
that at least one category of work expenses -- mandatory payroll
deductions -- would be affected by its actions.  /19/

   The court of appeals' construction of the legislative history
behind Section 402(a)(7) boils down to a rather remarkable syllogism:
In 1939 Congress intended mandatory payroll withholdings to be
excluded from income under Section 402(a)(7), even though such
withholdings were nonexistent at the time.  Accordingly, when Congress
amended Section 402(a)(7) in 1962 and 1981 first to create and then to
abolish the deduction of expenses reasonably attributable to the
earning of income, the treatment of mandatory payroll withholdings was
not affected because such deductions were "non-income items" rather
than "work expenses." Therefore, because Congress did not specifically
state in 1962 what it could not have meant in 1939 (i.e., that income
tax and social security deductions were "work expenses" that should be
excluded under Section 402(a)(7)), Congress did not mean what it said
in 1981.  Such a novel reading of the 45-year history behind Section
402(a)(7) cannot be correct.

   b. In the court below, respondents sought to bolster their argument
that Section 402(a)(7) requires the states to consider mandatory
payroll deductions when calculating AFDC benefits by relying on past
administrative practice.  The court of appeals accepted this
submission, finding that "the agency charged with the administration
of (Section 402(a)(7)) has long regarded it as dealing with net income
exclusively" (Supp. App. 15a).  The court's reading of the
administrative implementation of Section 402(a)(7), however, is no
more accurate than its interpretation of the statute's legislative
history.

   The court of appeals noted that, soon after Section 402(a)(7) was
enacted in 1939, the "Social Security Board adopted a policy statement
providing that Section (4)02(a)(7)(A) income must 'actually exist' and
be 'available to the applicant'" (Supp. App. 13a).  See J.A. 17-26.
This policy has been continuously implemented by the agencies
administering the AFDC program (see Lewis v. Martin, 397 U.S. 552, 555
(1970)) and is currently reflected in a regulation published at 45
C.F.R. 233.20(a)(3)(ii)(D).  But, despite the lower court's reliance
on the "availability" concept embodied in Section 233.20(a)(3)(ii)(D),
the regulation -- and the policy behind it -- were never intended to
control the treatment of mandatory payroll withholdings in the
computation of AFDC benefits.

   The 1940 policy statement regarding "availability" (Supp. App. 13a)
was adopted immediately following the enactment of Section 402(a)(7)
to prevent overly harsh application of the new requirement that states
consider the "income and resources" of an AFDC applicant (53 Stat.
1379-1380).  The policy, however, was plainly not addressed to
mandatory payroll withholdings (which, as noted earlier, did not even
exist to any appreciable degree in 1940).  Rather, the "availability"
policy was designed to prevent state agencies from considering as
"income" certain property or relationships (such as family and
friends) from whom no income would, in fact, be forthcoming.  /20/ The
"availability" concept relied upon by the court below has never
controlled the treatment of mandatory payroll withholdings in
determining AFDC eligibility and benefits, and 45 C.F.R.
233.30(a)(3)(ii)(D) has never been so applied by HHS or any
predecessor agency.  /21/

   Ultimately, the "availability" theory propounded by respondents and
adopted by the court of appeals must be rejected because it sweeps too
broadly.  If income tax and social security withholdings must be
deducted from an AFDC recipient's "income" under Section 402(a)(7)
because such sums are not "available" to meet other living expenses,
there is no reason not to deduct other work-related expenses as well.
Sums expended for uniforms, transportation to work, cafeteria lunches,
union dues and gifts for departing co-workers are all "expenses"
incurred as a result of employment that are not otherwise "available"
for living expenses.  In short, the "availability" theory sweeps all
work-related expenses within its scope, and in the process obliterates
Congress's expressed desire in 1981 to provide a flat "work expense"
disregard in place of an itemized work expense deduction.  S. Rep.
97-139, supra, at 435.

   The court of appeals, in apparent recognition of this fact, limited
its holding to state and federal income taxes that are deducted from
an AFDC recipient's paycheck (Supp. App. 36a).  But such a limitation
is hardly a principled boundary within which to cabin the
"availability" doctrine.  As the First Circuit noted in Dickenson v.
Petit, 728 F.2d at 25, "the time of payment seems to us but a
superficial distinction;  all necessary expenses must be met
sometime." In addition, taxes are not the only expenses deducted from
a worker's paycheck.  Other expenses -- such as union dues -- are also
deducted periodically from a worker's salary.

   Moreover, the simple fact that certain sums are deducted from a
worker's paycheck does not demonstrate that those funds are not
"available" to the worker.  In the case of union dues and mandatory
payroll deductions, for example, the funds are "available" to the
worker in a very real sense:  the funds withheld are satifsying
financial obligations incumbent upon union members and taxpayers.  The
"availability" theory adopted below, therefore, ignores economic
reality.  Mandatory payroll deductions are "available" to a worker for
the obvious reason that they have been availed of to pay his debts.

   In any event, if respondents and the court of appeals are correct
that the "availability" theory controls the treatment of mandatory
payroll withholdings, that conclusion leads to a most anomalous
result:  during the period between 1967, when the "work incentive"
disregards of Section 402(a)(8) were added to the AFDC statute, and
the enactment of OBRA, the states erroneously deducted mandatory
payroll deductions from an AFDC applicant's earned income in
determining eligibility and benefits.  /22/ A hypothetical AFDC
application, processed according to respondents' construction of
pre-OBRA law, demonstrates why this is so.  /23/

   If, as respondents argued successfully below, 45 C.F.R.
233.20(a)(3)(ii) (1970) required the states to deduct mandatory
payroll withholdings as part of an "availability" determination, that
determination could only have taken place after the disregards
provided for by Section 402(a)(8) had been calculated.  Prior to OBRA,
therefore, the "$30 plus one-third" work incentive disregard of
Section 402(a)(8) would have been the first deduction considered by
the states.

   Assuming that an applicant had an income of $900, the "work
incentive" disregard of Section 402(a)(8) would have resulted in a
deduction of $330 from the applicant's "earned income," leaving him
with $570 in income to be "considered" by the state under Section
402(a)(7).  Assuming further that the applicant had $125 in
transportation, meal, and child care expenses, and another $25 in
mandatory payroll withholdings, respondents' pre-OBRA construction of
Section 402(a)(7) would have resulted in the following procedure:
Because the $125 in transportation and other related expenses would be
classified by respondents as expenses "reasonably attributable to the
earning of income" (76 Stat. 188), that sum would have been deducted
by the state, leaving the applicant with an "income" under Section
402(a)(7) of $445.  According to respondents, the state would then
have deducted the $25 in mandatory payroll withholdings under the
"availability" concept of 45 C.F.R. 233.20(a)(3)(ii)(D), leaving the
applicant with $420 in "income" under Section 402(a)(7).  In truth,
however, that mandatory payroll withholding deduction would not have
been made.

   Because the $330 "work incentive" deduction was made "for
computation purposes only," that sum would have been, in fact,
"available" to the AFDC recipient following the deduction of
work-related expenses under Section 402(a)(7) (James v. O'Bannon, 715
F.2d at 806).  Therefore, when the state reached the point in the FADC
calculation process where mandatory payroll deductions would have been
taken into account under the "availability" theory, the AFDC applicant
would have had not $420 but $750 in income "actually available" for
current use.  45 C.F.R. 223.20(a)(3)(ii) (1970).  Since the "amount of
monies remaining available to a beneficiary would not have been
affected by tax withholdings, as long as those withholdings had been
less than the amount of the work incentive disregard, * * * (such
withholdings) would not be disregarded at all." James v. O'Bannon, 715
F.2d at 806.

   The result set out above, of course, "was not the practice before
OBRA" (James v. O'Bannon, 715 F.2d at 806).  Furthermore, the
universality with which mandatory payroll withholdings were
disregarded from income prior to OBRA demonstrates that such
withholdings were not processed under the administrative
"availability" theory adopted below;  rather, mandatory payroll
withholdings were treated as "expenses reasonably attributable to the
earning of * * * income" under Section 402(a)(7) (76 Stat. 188).  /24/

   Thus, there is no merit to the court of appeals' conclusion that
the Secretary's position in this case -- i.e., that OBRA modified the
treatment to be accorded mandatory payroll withholdings by deleting
Section 402(a)(7)'s work expense deduction -- "is in flat
contradiction with the regulatory interpretation of 42 U.S.C. Section
602(a)(7) embodied in 45 C.F.R. Section 233.20(a)(3)(ii)(D), which has
been agency policy for forty years" (Supp. App. 25a-26a).  The evident
"agency policy for forty years" has been to treat mandatory payroll
deductions as what they are -- work expenses.  Nor is there any merit
to the lower court's assertion that the Secretary's position requires
a court to assume that the OBRA Congress "chose to repeal sub silentio
the 'income available' standard of the 76th Congress" (Supp. App.
28a).  As the Third Circuit aptly noted, "there was quite simply no
such standard with respect to tax withholdings to be overruled" (James
v. O'Bannon, 715 F.2d at 807).

   c. After examining the legislative history and administrative
interpretation of Section 402(a)(7), the court of appeals proceeded to
disagree with the Secretary's argument that, whatever the proper scope
of the term "income" in that section, the "earned income" provisions
of Section 402(a)(8) are applicable to this case and require rejection
of respondents' contentions (Supp. App. 17a-28a).  The court found
that Section 402(a)(8) did not "control" the calculation of "income"
under Section 402(a)(7) (Supp. App. 19a), that the concept of "gross
income" had been given conflicting regulatory definitions (id. at
25a), and that, in any event, the Secretary's construction of Section
402(a)(8) was contrary to the legislative intent underlying the AFDC
program (Supp. App. 26a).  None of these assertions, however, rebuts
the Secretary's reading of Section 402(a)(8).

   The government's submission regarding the proper interaction of
Sections 402(a)(7) and (8) is simple and straightforward.  Section
402(a)(7) requires the states to consider "and * * * income and
resources" of an AFDC beneficiary in determining need "except as * * *
otherwise provided in (Section 402(a)(8))" (42 U.S.C. (Supp. V)
602(a)(7)).  The provisions of Section 402(a)(8) apply specifically to
"earned income." That term, given a natural reading, encompasses all
income earned by an employee -- including income deducted for
mandatory payroll withholdings.  /25/ Thus, when considering the wages
of an AFDC recipient in the calculation of statutory benefits, state
welfare agencies must look to the provisions of Section 402(a)(8), not
Section 402(a)(7).  And Section 402(a)(8) provides a flat $75 work
expense disregard from "earned income," which is to be taken "in lieu
of itemized work expenses" (S. Rep. 97-139, supra, at 435).

   The court of appeals rejected the above construction of Section
402(a)(8) based on a peculiar reading of 1981 congressional intent.
Section 402(a)(8), as amended by OBRA, was not dispositive of this
case, the court concluded, becuase "before 1981 Section (4)02(a)(8)
did not act in any way whatever as a substitution for or limitation on
Section (4)02(a)(7)" (Supp. App. 18a).  In short, the court found
that, because Section 402(a)(8) did not deal with or limit work
expenses prior to 1981, the section did not deal with or limit them
after OBRA.  This conclusion simply ignores the clear language enacted
by Congress in OBRA.

   As the court below noted, "any reasonable expenses attributable to
the earning of income were controlled by Section (4)02(a)(7) from 1967
until 1981" (Supp. App. 19a).  But, in 1981, Congress deleted the work
expense provision from Section 402(a)(7) and substituted instead a
flat $75 disregard in Section 402(a)(8).  It is highly unlikely that,
in doing so, Congress failed to recognize that Section 402(a)(8) would
henceforth "control all calculations applying to earned income" (Supp.
App. 19a).

   At the time Congress acted in 1981, Section 402(a)(7) had long
provided that its terms would govern unless "otherwise provided in
(Section 402(a)(8))" (42 U.S.C. (Supp. V) 602(a)(7)).  Congress could
hardly have been ignorant of this inerplay between Sections 402(a)(7)
and (8).  Indeed, the OBRA Congress evidenced its awareness of how
Sections 402(a)(7) and (8) interact by altering the order in which the
Secretary, by regulation, had previously provided for the computation
of the "earned income" disregards of Section 402(a)(8).  /26/ In sum,
the facts that Section 402(a)(8) would thereafter control the
treatment of work expenses formerly handle under Section 402(a)(7),
and that such expenses would be deducted from "earned income" as
defined by the Secretary, were hardly items that slipped by an unwary
Congress.

   Nor can it be presumed, as the court of appeals appears to suggest
at one point (Supp. App. 24a-25a), that Congress was unaware that the
work expense disregard of Section 402(a)(8) would be taken from gross
rather than net income.  The court below asserted that, although the
Secretary has defined "earned income" since 1969 as including
"personal expenses * * * such as income-tax deductions" (45 C.F.R.
233.20(a)(6)(iv)), the regulation is not entitled to any particualr
deference in determining the proper construction of Section 402(a)(8)
because "the term gross income has been differently defined at
different times in the history of agency administration of AFDC"
(Supp. App. 25a).  The court's statement that the Secretary's "simple
definition" of "earned income" is "inconsistent with earlier
pronouncements," is wholly incorrect (ibid.).

   The supposed "inconsistent" agency construction of gross income
referred to by the court of appeals is a 1961 HEW Report which found
that, during three months in 1959, certain states were equating "gross
income" with "take-home pay." See note 17, supra.  This report
regarding the practice of state agencies is hardly convincing evidence
of an inconsistent federal construction of the term "earned income."
Moreover, as noted earlier, the report was prepared before there was
any formalized deduction for work expenses in the AFDC statute, and
the report's use of the phrases "gross" or "net" income therefore had
no special significance to the computation of AFDC benefits.

   Thus, neither thelegislative or administrative histories of
Sections 402(a)(7) and (8), nor the past administrative construction
of the term "earned income," support the decision below.  The real
basis for the lower court's holding apparently lies elsewhere -- in
the notion that the government's interpretation of Section 402(a)(8)
would "undermine() the purposes of both OBRA and the AFDC Act" (Supp.
App. 26a).  It is to these congressional concerns, upon which the
court of appeals "primarily" relied (id. at 3a), that we turn in the
final section of this brief.

 C. Inclusion Of Mandatory Payroll Deductions Within The Flat $75 Work
Expense Disregard Enacted By OBRA Is Entirely Consistent With The
Congressional Policies Underlying The AFDC Program

   The court of appeals noted that "legislative and administrative
histories are usually pursued in an effort to ascertain something more
important, the purpose of Congress in enacting a specific piece of
legislation" (Supp. App. 28a).  Therefore, after addressing the
legislative and administrative background of Sections 402(a)(7) and
(8), the court deovted the last section of its opinion to an extensive
analysis of the congressional policies underlying the AFDC program
(Supp. App. 28a-36a).  The court found that these policies required it
to reject the Secretary's construction of OBRA.

   The court of appeals first assumed that "'(t)he primary purpose of
the OBRA amendments to the AFDC program is to reduce or eliminate
welfare benefits for those considered by Congress to be less needy
than those completely without resources -- persons or households that
have available other sources of income or resources with which to
support themselves'" (Supp. App. 30a) (quoting Philadelphia Citizens
in Action v. Schweiker, 669 F.2d 877, 879 (3d Cir. 1982)).  /27/ The
court found that its reading of OBRA accomplished that purpose,
because it in fact resulted in reducing the size of the pre-OBRA AFDC
grant of one of the respondents.  /28/

   The court of appeals then noted that an underlying goal of the AFDC
program is to help "parents * * * attain or retain capability for the
maximum self-support and personal independence consistent with the
maintenance of continuing parental care and protection'" (Supp. App.
29a (quoting 42 U.S.C. 601)).  This statutory language, the court
stated, "stands today" (Supp. App. 29a).  And, on the basis of that
language, the court rejected the Secretary's construction of OBRA
because it resulted in a financial disincentive to employment.  /29/
The court concluded that if it was "to give any meaning at all to the
purposive language which remains within the AFDC Act," respondents'
method of calculating income under Section 402(a)(7) "is required"
(Supp. App. 33a).

   The court of appeals' analysis of congressional purpose, like its
analyses of the legislative and administrative histories of Sections
402(a)(7) and (8), is unfairly selective.  The decision fails to give
full scope to the benefit reductions envisioned by Congress, and
disregards the "new course" set by that body in 1981 (James v.
O'Bannon, 715 F.2d at 809).  As the First Circuit recently remarked,
"OBRA clearly placed cost-cutting ahead of the previously
oft-enunciated goal of minimizing work disincentives." Sweeney v.
Murray, No. 83-1738 (Apr. 27, 1984), slip op. 14 n.11.

   The method of calculating AFDC benefits adopted by the court of
appeals does, indeed, reduce the size of some AFDC grants for
recipients with earned income.  It does not, however, result in the
full savings contemplated by Congress at the time OBRA was enacted.
The Congressional Budget Office calculated that adoption of the flat
$75 work expense disregard included in OBRA, along with related
changes, would reduce federal AFDC expenditures by approximately $206
million dollars in fiscal year 1982 (S. Rep. 97-139, supra, at 447,
552).  /30/ That estimate was made on the assumption that the work
expense disregard would be deducted from gross income.  /31/ HHS has
estimated that, under the court of appeals' construction of Section
402(a)(7), those savings would be reduced by approximately $57
million.  Thus, the position espoused by respondents would cut the
projected savings of the flat $75 work expense disregard by over 25%.
/32/

   The most serious error committed by the court of appeals in the
course of its discussion of congressional policy, however, was its
refusal to enforce the plain language of OBRA because of the alleged
financial disincentives inherent in such action.  The court reasoned
that, in restraining the growth of government spending, "the choice is
not between making higher or lower benefit payments.  * * * The choice
is between working and not working.  If the disincentive provided is
strong enough, there is no reason to believe that AFDC recipients will
work in order to pay handsomely for the privilege.  If that
eventuality materializes, the result of the statutory construction
which the (state and federal) governments urge will be a rise in
government spending through increased welfare payments" (Supp. App.
33a-34a) (emphasis in original).

   There is, of course, some force to the policy observations made by
the court of appeals, and the merits of respondents' position are
indeed worthy of debate.  That debate, however, was settled against
respondents when Congress enacted OBRA in 1981.

   The legislative hearings, committee reports, and debates on the
floor of Congress prior to the enactment of OBRA in 1981 demonstrate
conclusively that the Senators and Representatives who voted to amend
Sections 402(a)(7) and (8) had heard arguments suggesting that they
might be creating some financial disincentives to employment.  On the
first day of House hearings on the AFDC provisions of OBRA, the
Secretary of Health and Human Services was greeted by Representative
Stark, Chairman of the House Subcommittee on Public Assistance and
Unemployment Compensation, with the observation that the proposed
changes would result in giving a mother extra money for "quitting her
job," thereby "setting up a situation in which it is irresponsible for
a mother trying to feed her children to keep working" (House Hearings
3).  Subsequent speakers before both House and Senate committees
repeatedly noted the employment disincentives that, in their view,
were inherent in the proposals pending before Congress, /33/ and the
report of the Congressional Budget Office, which was included in the
Senate Report, reiterated the possible creation of financial
disincentives found unacceptable by the court of appeals.  S. Rep.
97-139, supra, at 552.  /34/

   Indeed, precisely because of the concerns ventilated by respondents
in the district court and court of appeals, the House Subcommittee on
Public Assistance and Unemployment Compensation drafted a version of
Section 402(a)(8) that would have substantially increased the flat
work expense disregard of OBRA.  The committee proposed allowing AFDC
recipients to deduct, as work expenses, the lesser of 20% of their
earned income or $175.  127 Cong. Rec. H3730 (daily ed. June 26,
1981).  This version of Section 402(a)(8), however, was rejected on
the floor of the House, and a substitute version of Sections 402(a)(7)
and (8) -- identical to the provision passed by the Senate (H.R. Conf.
Rep. 97-208, supra, at 978-979) -- was adopted by the House of
Representatives.  127 Cong. Rec. H3926-H3927 (daily ed. June 26,
1981).  Before that action was taken, strong statements were made on
the floor of the House decrying the possible disincentives created by
amended Sections 402(a)(7) and (8).  /35/ But, despite vigorous
presentation of the same policy arguments accepted by the court of
appeals, the AFDC proposals contained in OBRA were adopted by the
House of Representatives and subsequently enacted into law.

   The OBRA Congress did not ignore the "purposive language which
remains within the AFDC Act" (Supp. App. 33a).  The AFDC program still
has "encouraging self-sufficiency of AFDC recipients" as one of its
"fundamental goal(s)" (James v. O'Bannon, 715 F.2d at 809).  The OBRA
Congress merely "abandoned the financial incentives approach which the
87th Congress had embraced" (ibid.).

   The Senate Report on LBRA reflects congressional disillusionment
with the use of financial incentives to promote employment of AFDC
recipients.  The Report found that, "despite the ("$30 and one-third")
work incentive and other amendments added to the law in an effort to
increase employment," AFDC recipients have not "move(d) into
employment" or "become self-sufficient" (S. Rep. 97-139, supra, at
502).  /36/ Thus, "(h)aving determined that providing financial
incentives for work was not achieving the goal of self-sufficiency and
that such incentives were leading to ever-increasing public
expenditures, Congress embarked on a new course" (James v. O'Bannon,
715 F.2d at 809).

   That "new course" was to establish various work programs designed
"to improve the employability of participants through actual work
experience" (42 U.S.C. (Supp. V) 609);  to make jobs available "as an
alternative to aid otherwise provided under the State plan" (42 U.S.C.
(Supp. V) 614(a));  and to establish "work incentive demonstration
program(s)" (42 U.S.C. (Supp. V) 645(a)).  The OBRA Congress concluded
that these work programs, in combination with the benefit reductions
of OBRA, "are expected to decrease welfare dependency, and emphasize
the principle that AFDC should not be regarded as a permanent income
guarantee" (S. Rep. 97-139, supra, at 502-503).

   Accordingly, the goals underlying the AFDC program have not changed
-- just the means provided by Congress to achieve them.  Although the
policy concerns pressed by respondents and relied upon by the court of
appeals are certainly not frivolous, it is simply "no longer possible
to argue that interpretations of AFDC that create disincentives to
employment must, because they have such an effect, be regarded as
inconsistent with the purposes of the program" (James v. O'Bannon, 715
F.2d at 809-810).  In sum, "Congress was aware of what is was doing"
(Maine v. Thiboutot, 448 U.S. 1, 8 (1980)) when it enacted OBRA in
1981, and the clear import of amended Sections 402(a)(7) and (8)
should be given effect by this Court.

                              CONCLUSION

   The judgment of the court of appeals should be reversed.

   Respectfully submitted.

   REX E. LEE

      Solicitor General

   RICHARD K. WILLARD

      Acting Assistant Attorney General

   KENNETH S. GELLER

      Deputy Solicitor General

   RICHARD G. WILKINS

      Assistant to the Solicitor General

   WILLIAM KANTER

   RICHARD A. OLDERMAN

      Attorneys

   MAY 1984

   /1/ The court of appeals filed two opinions in this case.  The
first opinion, issued June 10, 1983, was reproduced in the appendix to
the certiorari petition.  Pet. App. 1a-28a.  The court issued a
revised opinion on August 11, 1983.  That revised opinion is
reproduced as a supplemental appendix to this brief.

   /2/ States need not, however, pay the entire difference between a
family's income and the statewide standard of need.  States may
establish "dollar maximums on the amount of public assistance payable
to any one individual or family." Rosado, 397 U.S. at 408-409.

   /3/ See Shea, 416 U.S. at 254-255;  Bell v. Hettleman, 558 F. Supp.
386, 392 n.8 (D. Md.), aff'd, 721 F.2d 131 (4th Cir. 1983), petition
for cert. pending, No. 83-6269.

   /4/ The California regulations provide in relevant part:

      Section 44-113.21 -- Computation of Net Nonexempt Earned Income
      for Aid to Families with Dependent Children

                      * * * * *

         .211 Determine the total amount of commissions, wages, or
      salary earned as an employee during or applicable to the month
      (i.e., total income irrespective of expenses, voluntary or
      involuntary deductions) * * *.

         .212 Determine the total profit earned from self-employment
      by a recipient whose earnings are not exempted under Section
      44-111.22 by offsetting the business expenses against the gross
      income from self-employment.

         a. Personal expenses such as income tax payments, lunches,
      entertainment and transportation to and from work are not
      classified as business expenses and shall not be deducted from
      gross income in determining total profit earned from
      self-employment.

                      * * * * *

         .213 For each recipient, combine any total earnings
      determined in .211 above with any total profit determined in
      .212.

   /5/ The Secretary was brought into the action by the State of
California as a third-party defendant.

   /6/ In order to calculate the disregards provided by Section
402(a)(8), the court of appeals' decision requires the states, first,
to subtract mandatory payroll expenses under Section 402(a)(7), then
to calculate the amount to be disregarded under Section 402(a)(8) on
the basis of gross -- not net -- income, and finally to subtract that
amount from net income.  The decision, in short, creates "an
exceedingly cumbersome definition of gross income for purposes of
subsection 402(a)(8)." Dickenson v. Petit, 569 F.Supp. 636, 640 (D.
Me. 1983), aff'd, 728 F.2d 23 (1st Cir. 1984).

   The decision is all the more remarkable because it requires an
initial step in the need-determination process -- the subtraction of
mandatory payroll expenses under Section 402(a)(7) -- that is not
mentioned anywhere in the regulations implementing the section.  In
light of the fact that the regulations at 45 C.F.R. 233.20(a)(3)
through 233.20(a)(11) have historically given very detailed
instructions to state agencies on the treatment of income and
resources, it is "implausible * * * that such detailed regulations * *
* would omit such an important step." James v. O'Bannon, 557 F. Supp.
631, 640 (E.D. Pa. 1982), aff'd, 715 F.2d 794 (3d Cir. 1983), petition
for cert. pending, No. 83-6168.  See also Dickenson v. Petit, 569
F.Supp. at 645.

   /7/ This 1942 policy is now codified at C.F.R. 233.20(a)(3)(ii)(D),
which provides that income is considered "available" to an AFDC
recipient "both when actually available and when the applicant or
recipient has a legal interest in a liquidated sum and has the legal
ability to make such sum available for support and maintenance."

   /8/ As of 1962, therefore, AFDC benefits were calculated by
comparing the total income and resources of a family, as reduced by
the expenses reasonably related to the earning of that income, with a
state's standard of need.  Unless the AFDC grant was thereafter
limited by application of a state level of benefits cap, no other
steps were involved.

   /9/ The 1952 Handbook definition was apparently drafted to
implement an "earned income" disregard applicable to recipients of aid
to the blind.  The Handbook defined "earned income" as "the total
amount (of wages or salary), irrespective of personal expenses such as
income-tax deductions, lunches, and transportation to and from work"
(Assistance Payments Administration, HEW, Handbook of Public
Assistance Administration, Section 3162.2 (Mar. 24, 1952)).

   /10/ As a result of the 1967 amendments to the AFDC statute, the
benefit calculation process proceeded in three steps:  (1) the state
considered the recipient's total income and resources, (2) it then
deducted from the recipient's "earned income" the various disregards
provided by Section 402(a)(8), and (3) finally, the state deducted the
expenses reasonably attributable to the earning of income under
Section 402(a)(7).  The AFDC benefit calculation was more finely tuned
than when the program was originally enacted in 1935 -- but it was
also considerably more complex.

   /11/ A study conducted by the Department of Health, Education, and
Welfare in late 1971 and early 1972 disclosed that four states
(Arizona, Arkansas, Colorado and Vermont) "either allowed a flat
amount to be disregarded for mandatory tax withholdings, or else
included mandatory tax withholdings within an overall flat sum
disregard" (James v. O'Bannon, 715 F.2d at 806-807).  See J.A. 47-51,
52-53.  A fifth state (Florida) placed a 7% cap on the amount of
mandatory tax withholding that could be deducted as "work expenses"
(J.A. 47, 52).  The remainder of the states permitted AFDC recipients
to deduct the full amount of specified mandatory payroll deductions --
including income and social security taxes -- as expenses reasonably
attributable to the earning of income (J.A. 47-52, 52-53).

   /12/ In response to the movement among the states to standardize
work expenses, the Department of Health, Education, and Welfare
conducted orientation sessions on the treatment of such expenses for
its Regional Offices in the late summer of 1971.  Following these
sessions, the Department analyzed the various items recognized by the
states as expenses reasonably attributable to the earning of income.
That study (J.A. 43-53) showed that, despite some variations in
methodology (see note 11, supra), 48 of the 50 states, as well as the
District of Columbia, classified mandatory withholdings for income and
social security taxes as expenses reasonably attributable to the
earning of income within the meaning of Section 402(a)(7) (76 Stat.
188).  The practice of two states (Alabama and Maryland) regarding the
treatment of mandatory payroll deductions was not analyzed in the
study because state procedures were "(n)ot identifiable from State
agency plan material in central office" (J.A. 47, 48).

   As a result of this study, an internal agency memorandum suggested
that the Department should develop a national standard for expenses of
employment.  The memorandum, which is reprinted as a supplemental
appendix to this brief, suggested that (Supp. App. 37a-38a):

      as a minimum, a State agency must recognize the following as
      expenses reasonably attributable to the earning of income:

         Mandatory Payroll Deductions

         Transportation

         Personal Expenses, including lunches

         Tools, Uniforms and other such needs

         Child Care

   /13/ Shea also cited with approval (416 U.S. 255-256 n.3) the
Second Circuit's opinion in Connecticut Dep't of Public Welfare v.
HEW, 448 F.2d 209, 216 (1971).  That case interpreted the Secretary's
regulations governing Section 402(a)(7) (76 Stat. 188) as requiring
the deduction of "personal expenses such as income-tax deductions"
(448 F.2d at 216).

   /14/ Prior to OBRA, the "$30 and one-third" disregard of Section
402(a)(8) was the first deduction made in the AFDC benefit
calculation.  As the court of appeals noted (Supp. App. 18a), this had
the effect of increasing the size of the disregard, since it was
calculated on the basis of an unreduced percentage of a recipient's
total income.  Following OBRA, the disregard is calculated after the
$75 work expense and $160 child-care expense disregards have been
subtracted.  H.R. Conf. Rep. 97-298, supra, at 979.  See 45 C.F.R.
233.20(a)(11).

   /15/ The court of appeals stated that, in the legislative debat
preceding the enactment of Section 402(a)(7) in 1939, "concern was
expressed that the needy not be penalized through inclusion in their
income of sums not actually available to them" (Supp. App. 13a)
(citing Social Security:  Hearings Before the House Comm. on Ways and
Means, 76th Cong., 1st Sess. 2254 (1939) (Amendments Act of 1939)
(testimony of Arthur Altmeyer);  84 Cong. Rec. 6851 (1939) (remarks of
Rep. Poage)).  The debate on Section 402(a)(7) did evidence such
concern -- but that concern had very little to do with the concept of
mandatory payroll deductions.

   In imposing, for the first time, a requirement that the states
consider the income and resources available to AFDC applicants in
determining need, Congress wanted to make certain that the states
would not include in the benefit calculation future or potential
sources of income.  Accordingly, the materials cited by the court of
appeals deal not with congressional concern regarding the treatment of
earned income by AFDC recipients, but rather with state consideration
of resources that might be available to such recipients from friends
and relatives.  See Social Security:  Hearings Before the House Comm.
on Ways and Means, supra, at 2254 (testimony of Arthur Altmeyer)
("(t)here is a distinction * * * between requiring that relatives
support and requiring that when relatives do support a person that the
actual amount of that support be taken into consideration");  84 Cong.
Rec. 6851 (1939) (remarks of Rep. Poage) ("(t)he law under which the
Texas old-age assistance program was developed contained no reference
to the ability of children to support an applicant, but this item soon
became the chief object of the case workers' investigations").  The
fact that Congress expressed its view that the states should not
consider potential income from friends and family as a resource under
Section 402(a)(7) thus has no bearing on the decidedly different
question of how the earned income of an AFDC recipient should be
regarded by the states.

   /16/ In any event, 42 U.S.C. (Supp. V) 1302 "vests the Secretary
with extensive power to promulgate regulations in order to assure
efficient administration of AFDC" (James v. O'Bannon, 715 F.2d at
806).  In light of the fact that the Secretary exercised this "'broad
rulemaking power' to classify withheld taxes as work expenses," the
Third Circuit concluded that "it is a strained reading of the 1962
legislative history to argue that, because tax withholdings were not
specifically mentioned, Congress intended that they not be included
within the category of 'any work expenses reasonably attributable to
the earning of income'" (ibid. (quoting Arizona Dep't of Public
Welfare v. HEW, 449 F.2d 456, 468 (9th Cir. 1971)).

   /17/ On the basis of administrative materials prepared prior to the
1962 amendment to Section 402(a)(7) (Section 3140 of the HEW Handbook
of Public Assistance Administration, Part IV (1957);  Bureau of Public
Assistance, Federal Security Agency, Social Security Board, State
Letter No. 4 (April 30, 1942) (J.A. 24);  HEW, Public Assistance
Report No. 43, State Methods for Determining Need in the Aid to
Dependent Children Program, at 25 (Mar. 1961)), the court of appeals
concluded that, prior to the 1962 amendment, "neither the states nor
the agency regarded mandatory payroll deductions as work expenses"
(Supp. App. 21a).  But, although none of the administrative materials
cited by the court explicitly refers to mandatory payroll deductions
as "work expenses," they hardly support the court of appeals
conclusion that such deductions were not considered work expenses.

   For example, although the 1961 HEW report relied upon by the court
of appeals did find that, during the months of May, June and July
1959, the states studied were equating "gross income" with "take-home
pay," that fact does not demonstrate that payroll deductions were not
considered "work expenses" by those states.  Rather, because the AFDC
statute at the time did not explicitly recognize any deduction for
"work expenses," the states' equation of "gross income" with
"take-home pay" is readily explained as an effort, using imprecise
terminology at a time when the terminology made no difference, to
consider legitimate work expenses -- in this case, mandatory payroll
deductions -- in the calculation of AFDC benefits.

   /18/ Indeed, during the legislative hearings prior to the enactment
of OBRA, witnesses before various committees in both Houses of
Congress identified mandatory payroll withholdings as "work expenses"
that would be affected by the proposed legislation.  See, e.g.,
Spending Reduction Proposals:  Hearings Before the Senate Comm. on
Finance, 97th Cong., 1st Sess., Pt. 1, at 227 (1981) (testimony of
Marian Wright Edelman, Children's Defense Fund) ("The Administration
would set standard caps on work expenses of $75 per month for work
expenses (tax, transportation, uniforms, supplies, etc.) and $50 per
month per child for day care.  These caps do not reflect the real cost
of working");  Budget Issues for Fiscal Year 1982:  Hearings Before
the House Comm. on the Budget (Vol. 1), 97th Cong., 1st Sess. 419-420
(1981) (document appended to testimony of Marian Wright Edelman)
(pending proposals would limit the amount of work-related expenses a
parent can claim "by setting a standard maximum deduction for these
costs regardless of whether actual expenses incurred were greater.
Currently, a working parent can deduct all actual work-related
expenses (such as transportation, child care, supplies, and taxes)
from earned income before her AFDC eligibility and grant levels are
calculated");  Administration's Proposed Savings in Unemployment
Compensation, Public Assistance, and Social Services Programs:
Hearings Before the Subcomm. on Public Assistance and Unemployment
Compensation of the House Comm. on Ways and Means, 97th Cong., 1st
Sess. 88-89 (1981) (testimony of Christine Pratt-Marston, National
Anti-Hunger Coalition) ("In place of the current system, which
encourages AFDC women to take low paying jobs by recognizing that even
those jobs involve costs, the Reagan Administration proposes to
operate AFDC in a world which does not exist, that is, a world in
which full time day care can be purchased for $50 a month, and in
which the combination of Social Security and FICA taxes,
transportation, and uniforms or other mandatory payroll deductions
will never exceed $75 a month") (hereinafter cited as House Hearings).

   The court of appeals dismissed the above legislative history as
"weak evidence" of congressional intent (Supp. App. 24a).  However,
even if the statements of witnesses before congressional committees
prior to the passage of legislation are not conclusive on the question
of legislative intent (see 2A C. Sands, Sutherland Statutory
Construction, Section 48.10 (4th Ed. 1973)), they do illustrate the
operative facts that were before the legislature.  This Court has
recognized that legislative reports must be "read in conjunction with
the hearings conducted by the relevant House and Senate Committees"
(Federal Open Market Committee v. Merrill, 443 U.S. 340, 357 (1979)).
The Court, therefore, has repeatedly cited statements made during
congressional hearings as evidence of legislative intent.  See, e.g.,
Grove City College v. Bell, No. 82-792 (Feb. 28, 1984), slip op. 7
n.11, 12-13 n.19;  United States v. Weber Aircraft Corp., No. 82-1616
(Mar. 20, 1984) slip op. 10 & n.22;  Kosak v. United States, No.
82-618 (Mar. 21, 1984) slip op. 10-11 n.17.

   In this case, the testimony offered during the congressional
hearings "seem(s) merely to highlight what appears to be clear, though
warmly debated, legislative and regulatory history" (Bell v.
Hettleman, 558 F. Supp. at 396 n.16).  Accordingly, the probative
value of the statements dismissed by the court of appeals is plain:
Congress, like the witnesses who appeared before it, operated under
the assumption that mandatory payroll deductions were "work expenses."

   /19/ Congressional action since the OBRA amendments in 1981
reinforces the above conclusion.  While considering a bill to restore
the AFDC work incentives removed by OBRA, the House Ways and Means
Committee noted (H.R. Rep. 97-587 (Pt. 1) 97th Cong., 2d Sess. 12
(1982) (emphasis added)):

      Prior to Federal amendments enacted in the 1960's, if an AFDC
      parent took a job, the family's AFDC benefits were reduced
      dollar-for-dollar by the amount of any earnings.  In other
      words, there was no net financial gain from working.
      Furthermore, any work-related expenses -- such as transportation
      and child day care costs, and mandatory tax and other wage
      deductions -- could result in the family actually having less
      net or disposable income than if the parent did not work.

   The House Ways and Means Committee, therefore, was fully aware in
1982 that mandatory payroll deductions were "work-related expenses."
It is unlikely that this fact escaped these same legislators in 1981.
See S. Rep. 98-300, 98th Cong., 1st Sess. 167-168 (1983) (projected
cost savings for OBRA were calculated on the assumption that the only
deductions from gross income would be the various disregards of
Section 402(a)(8)).

   /20/ The most significant language in the 1940 policy statement
cited by the court of appeals is found in paragraphs (a) and (b) of
that document (Supp. App. 14a n.8 (emphasis added)):

         (a) The income or resource shall actually exist.  Attributing
      a definite amount of income to sources or to kinds of property
      that produce either no income or less than the amount attributed
      to them is fictitious and such an imputed amount cannot properly
      be considered as an actual resource.

         (b) The income or resource shall be available to the
      applicant.  To be regarded as available, an income or resource
      must be actually on hand or ready for use when it is needed.
      Consideration does not mean attributing a resource to sources
      from which income, contributions, maintenance, or support are
      not in fbact available and forthcoming.

   /21/ See James v. O'Bannon, 715 F.2d at 805 ("no cases decided
prior to OBRA have been called to our attention holding or even
suggesting that tax wihholdings were deducted from gross earnings in
order to satisfy the 'availability' theory upon which the plaintiffs
rely").

   /22/ 45 C.F.R. 233.20(a)(3)(ii) (1970) provided that "net income *
* * available for current use" shall be determined "after policies
governing * * * disregard * * * have been * * * applied" (emphasis
added).

   /23/ The example that follows is taken from the Third Circuit's
opinion in James, 715 F.2d at 806.

   /24/ Respondents may well assert that the "availability"
determination should be the first, not the last step, in the AFDC
calculation process.  Indeed, the court of appeals apparently adopted
this view of the procedure.  See Supp. App. 16a-17a.  But, aisde from
the impossibility of determining what income is actually "available"
to an AFDC recipient prior to applying the various disregards and
deductions expressly provided by Congress, the contention founders on
the plain langauge of 45 C.F.R. 233.20(a)(3)(ii) (income "actually
available" to the applicant shall be determined "after all policies
governing the reserves and allowances and disregard or setting aside
of income and resources * * * have been uniformly applied").
Respondents cannot have it both ways -- they cannot assert that
mandatory payroll withholdings must be deducted because of an
administrative "availability" policy, and then ignore the plain
language of the regulation from which they draw that policy.

   /25/ There is nothing in the legislative history of Section
402(a)(8) to indicate that Congress intended the term "earned income"
to be read in a way inconsistent with its plain language.  Indeed, in
another section of the Social Security Act, which deals with the
Supplemental Security Income program, Congress specifically defined
the term "earned income" as "wages," not "take-home pay." 42 U.S.C.
1382a(a)(1)(A).  In any event, at the time Section 402(a)(8) was
amended in 1981, the Secretary had long defined "earned income" for
AFDC purposes as the "total amount (of wages or salary), irrespective
of personal expenses, such as income-tax deductions" (45 C.F.R.
233.20(a)(6)(iv)).

   /26/ As discussed earlier (pages 18-19, supra), soon after Section
402(a)(8) was enacted, the Secretary promulgated regulations
prescribing the order in which its "earned income" disregards would be
computed.  See Notice of Final Policies and Requirements, 34 Fed. Reg.
1394 (1969).  These regulations provided that the "$30 and one-third"
work incentive disregard would be calculated before work expenses were
deducted under Section 402(a)(7) (ibid.).  OBRA specifically
"change(d) the order" in which these calculations would be performed
(H.R. Conf. Rep. 97-208, supra, at 978).  Following OBRA, the "$30 and
one-third" disregard is to be calculated after the work expense and
child-care disregards are deducted from earned income (ibid.).  See 45
C.F.R. 233.20(a)(3)(ii).

   /27/ The court of appeals noted that the Third Circuit rendered the
above description of the legislative goals underlying OBRA "(w)ithout
citation of authority" (Supp. App. 30a).  There is, of course,
plentiful authority for the Third Circuit's statement.  See, e.g., S.
Rep. 97-139, supra, at 2 (purpose of OBRA is "to restrain Federal
spending");  id. at 502 (OBRA amendments to the AFDC program are
designed to alleviate a "serious problem" under prior law;  i.e., that
"families may remain on welfare even after they are working full time
at wages well above the State welfare standard");  House Hearings
10-11 (testimony of Secretary Schweiker) (AFDC proposals "are designed
to improve the program by:  Limiting eligibility to those most in
need;  Strengthening work requirements;  Making AFDC a temporary
safety net for those who are not economically independent;
Emphasizing individual responsibilities;  and Improving
administration").

   /28/ The court utilized the income of one of the respondents,
Catherine Bass, to illustrate its conclusion.  It found that, prior to
OBRA, Bass would have received a $231 "financial incentive" for
retaining her employment (the "financial incentive" represents the
difference between the AFDC grant Bass "would have received * * * for
doing nothing and the grant she would have received under pre-OBRA law
if she retained her employment") (Supp. App. 31a-32a (emphasis in
original)).  The court found that, under respondents' method of
considering "income" in the calculation of AFDC benefits, the
"financial incentive" disappears, and Bass would receive "$105 less a
month" for working "than she would receive for staying at home" (id.
at 32a).  Under the Secretary's construction of Sections 402(a)(7) and
(8), Bass's grant would be reduced even further.  The court found that
if Bass's $84 in mandatory payroll withholdings were not excluded from
income under Section 402(a)(7), it would "cost" her "$189 monthly to
go to work" (Supp. App. 32a).

   /29/ As noted in the previous footnote (note 28, supra), even
respondents' method of calculating AFDC benefits under OBRA results in
a reduction of benefits to recipients with earned income.  The court
nevertheless concluded that respondents' construction of OBRA is
preferable to the Secretary's reading of the Act because respondents'
"method of calculation provides less of a disincentive to work than
does that advanced by the government" (Supp. App. 33a) (emphasis in
original).

   /30/ The projected savings for subsequent years was comparable.  S.
Rep. 97-139, supra, at 552 (projecting savings of $212 million in
1983, $218 million in 1984, $222 million in 1985, and $226 million in
1986).

   /31/ The Congressional Budget Office reported that its estimate was
based on the following assumption (S. Rep. 97-139, supra, at 552):
"The provision to limit the earnings disregard would standardize the
work expense at $75 per month prorated for part-time or part-month
work, cap child care expenses at $160 per month per child, and apply
the disregards in the following order:  1) flat $30;  2) $75 (or
prorated amount);  3) child care expenses;  and 4) one-third of the
remaining expenses." There is no indication that, as respondents would
have it, the Congressional Budget Office even contemplated that
mandatory payroll deductions were not a "work expense" within the
proposed $75 disregard, or that the flat disregard would be subtracted
in addition to mandatory payroll deductions.  See J.A. 76 (affidavit
of Linda S. McMahon) ("projected cost savings for the earned income
disregard provisions, which included the $75 work expense limit, were
based on subtracting the disregard from gross rather than net
income").  It should be noted that only a portion -- estimated at
approximately $100 million -- of the $206 million in savings is
directly attributable to the $75 standard work expense provision.

   /32/ The court of appeals was apparently undisturbed by the effect
of its decision, because its limitation of the flat $75 work expense
disregard did not negate the savings achieved by the "chief
economizing feature" of OBRA, "the repeal of the old work incentive
disregard" (Supp. App. 34a n.15).  Aside from the fact that OBRA did
not "repeal" the work incentive disregard, but merely limited its
applicability, the lower court's ranking of the AFDC savings
contemplated by OBRA is erroneous.

   The Congressional Budget Office estimated that OBRA's restriction
of the "$30 and one-third" disregard to the first four months of an
AFDC applicant's employment would result in a savings of $168 million
in fiscal year 1982 (S. Rep. 97-139, supra, at 447, 552).  By
comparison, the fiscal year 1982 savings estimated as a result of the
new flat work expense cap were $206 million (ibid.).  The work expense
cap was also estimated to result in significantly greater savings than
the limitation of the work incentive disregard through fiscal year
1986 (id. at 552).  Thus, the work expense cap, rather than the
"repeal" of the "old work incentive disregard," was the "chief
economizing feature" of OBRA (Supp. App. 34a).

   /33/ See, e.g., House Hearings 26 (remarks Rep. Russo) ("Are we in
this particular program to include a disincentive for those
individuals who are working poor, to say:  Look, I cannot get these
benefits that are just sufficient to help my childred and family out.
I can get all those benefits if I stop working and collect welfare");
id. at 41 (remarks of Rep. Rangel) ("What then are the probable
consequences of the President's Program?  * * * The marginally poor,
actually penalized by the President's Program for working, would have
a great disincentive to continue to work");  id. at 46 (remarks of
Rep. Chisholm) ("Not only will the cumulative effect of the
administration's proposals adversely impact upon needy recipients, but
they may also act as disincentives for those individuals who are
working, trying to become self-sufficient, but require some level of
cash or medical assistance to supplement their income.  * * * (Some)
may actually find themselves better off if they stop working");  id.
at 85 (remarks of Angela Sosnowski, National Anti-Hunger Coalition)
("I would also like to say that the income disregard and the
work-related expenses are also very important.  If in fact, the
proposed Reagan cuts on AFDC were enacted, then it would not pay for
me to work.  It would be, he in fact is providing incentive for me not
to work, but he is providing incentive for me to remain on the welfare
rolls");  id. at 88-89 (prepared statement of National Anti-Hunger
Coalition) ("In place of the current system, which encourages AFDC
women to take low paying jobs by recognizing that even those jobs
involve costs, the Reagan Administration proposes to operate AFDC in a
world which does not exist, that is, a world in which full time day
care can be purchased for $50 a month, and in which the combination of
Social Security and FICA taxes, transportation, and uniforms or other
mandatory payroll deductions will never exceed $75 a month.  Any
working AFDC mother whose work-related expenses exceed those amounts
will either have to absorb the costs out of minimum wage or lower
earnings, or will have to quit working");  id. at 197 (remarks of Bert
Seidman, American Federation of Labor) ("We oppose the
Administration's proposal to reduce the amount of earnings disregarded
when determining income to be counted in calculating benefits payable
to AFDC recipients.  * * * Not to deduct the actual costs of
work-related expenditures in determining AFDC payments which working
mothers are entitled would in many cases deprive the family of enough
income on which to live and force them to give up the wages from work
and rely totally on welfare");  id. at 265 (statement of Albert P.
Russo, American Federation of State, County, and Municipal Employees)
("We strongly caution against the imposition of severe reductions of
current, allowable disregards which would impact so adversely upon the
working poor as to cause them -- as a matter of economic survival --
to abandon their work places and to rely totally on AFDC and other
program benefits available to the poor");  id. at 314 (remarks of Rev.
Timothy McDonald, Georgia Public Assistance Coalition) ("Furthermore,
if employment is our goal, work related expenses must be used to
encourage work, rather than as a disincentive to work");  id. at 318
(remarks of Kevin M. Aslanian, Welfare Recipients League, Inc.)
("(T)he current system barely helps AFDC recipients meet their work
related expenses.  To change the current system will only result in
women being forced to make a choice between feeding their children or
meeting their work-related expenses");  id. at 323 (prepared statement
of Welfare Recipients League, Inc.) (the proposed $75 work expense cap
"is unrealistic" and "will increase the case-load of nonworking
welfare recipients");  id. at 331 (remarks of Nancy Duff Campbell,
Women's Rights Project, Center for Law and Social Policy) (Congress is
urged to reject Administration proposals "to ensure, first, through
the disregard for work expenses, that recipients are not economically
worse off by working, as they might be, for example, if they have
child care costs or other work expenses that eat up most of their
income");  id. at 359-360 (remarks of Elizabeth Wickenden, Consultant
on Social Policy, New York, N.Y.) ("to place a limit on what may
legitimately be spent for work-related expenses without reducing
benefits is an open invitation to idleness.  It is another
Alice-in-Wonderland absurdity.  What woman -- with child care and
other work expenses above the limit whatever it is to be -- is going
to endanger her children's welfare by going to work?");  Spending
Reduction Proposals:  Hearings Before the Senate Comm. on Finance,
97th Cong., 1st Sess., Pt. 1, at 218 (remarks of Marian Wright
Edelman, Children's Defense Fund) ("We are concerned that many of the
welfare proposals will be a disincentive for parents to work by
cutting back the amount of allowable work expenses");  id. at 227
(prepared statement of Children's Defense Fund) ("The Administration
would set standard caps on work expenses of $75 per month for work
expenses (tax, transportation, uniforms, supplies, etc.) * * *.  These
caps do not reflect the real cost of working * * * (and may force
mothers to) simply give up working");  id. at 283 (remarks of Robert
E. McGarrah, American Federation of State, County and Municipal
Employees) ("The proposed changes, we believe, will force many
(parents) to give up work, and if they do, their children -- will
suffer the most").

   We note that these dire predictions were repeatedly disputed by
Administration spokespersons and Members of Congress, and have not
proven correct.  See GAO, An Evaluation of the 1981 AFDC Changes:
Initial Analyses (Mar. 30, 1984).

   /34/ The Congressional Budget Office remarked that the $75 work
expense cap and limitation on the applicability of the "$30 and
one-third" disregard might "increase the work disincentives found in
the current AFDC program.  Currently, AFDC families, on the average,
are able to retain about 50 percent of their earned income.  Under the
proposed changes, AFDC families would be able to retain only about 20
percent of their earned income" (S. Rep. 97-139, supra, at 552).

   /35/ 127 Cong. Rec. H3510-H3511 (daily ed. June 25, 1981) (remarks
of Rep. Rostenkowski, Chairman of the House Committee on Ways and
Means) (House committee proposals regarding Sections 402(a)(7) and (8)
"are not as drastic or severe as the changes proposed by the
administration" because the "committee was concerned that the
administration's proposals would eliminate any financial incentive for
single parents with children to remain in the workforce.  For example,
under the administration's bill, a California AFDC family of three,
after the mother had been on the job for 4 months, would have
disposable monthly income of $434.  Whereas, a mother with the same
number of children, but who didn't work, would have $578.  Thus, the
first family is penalized $144 per month for working");  127 Cong.
Rec. H3910-H39111 (daily ed. June 26, 1981) (remarks of Rep. Biaggi)
("In the area of the Aid to Families with Dependent Children -- the
substitute proposes to cut approximately $450 million from the program
and will harshly penalize working poor families by reducing the
percentage of earned income that beneficiaries can keep from 50 to 20
percent.  This seems contradictory in a time when we are giving new
thoughts to programs like workfare.  This proposal may lead to welfare
recipients quitting their jobs, thus adding to the overall cost of
welfare").

   /36/ The Report noted (S. Rep. 97-139, supra, at 502):

      The $30 and one-third disregard was added to the law in 1967
      because it was believed that it would operate as an incentive
      for mothers to move into employment and to become
      self-sufficient.  Statistics indicate that this has not been the
      case.  For many years the Department of Health and Human
      Services (DHHS) has been conducting a survey of AFDC recipients
      which includes the question of employment status of mothers.
      Results of these surveys show that, despite the work incentive
      and other amendments added to the law in an effort to increase
      employment, the percentage of AFDC mothers who work has remained
      constant.

         According to the 1961 survey, 14.3 percent of AFDC mothers
      were working full or part time.  In 1967, before the disregard
      provision was put into effect, the percentage had grown very
      slightly to 14.9 percent.  In 1979, it dropped to 14.1 percent.
      DHHS statistics also show that under current law, AFDC mothers
      are not achieving the goal of self-sufficiency.  Only about 8
      percent of AFDC case closings are due to the earnings of the
      mother.  (In California only about 2 percent of case closings
      are due to the mother's earnings, and in New York only about 3
      percent are due to the mother's earnings.)

                               APPENDIX