$1 billion paid family and medical leave payroll tax would hit lowest earners hardest

When Minnesota’s state Senate passed a bipartisan bill last year to cut the lowest rate of state income tax, a DFL complaint was that it was “titled (sic) toward the rich and leaves working Minnesotans behind.”

The reasoning behind this was that higher earners would see a greater decrease in their tax burden than lower earners in dollar terms. By contrast, when you looked at the impact of the tax cut in percentage terms, lower earners saw a greater cut in their income tax burden than higher earners. As I wrote at the time:

…while the income tax burden of an individual in the $150,000 to $249,999 income range would fall by $1,161, that is only a 12 percent reduction in their effective income tax burden. The burden falls by 100 percent for households in the $20,000 to $29,000 range, eliminating it completely, and by 56 percent for those in the $30,000 to $49,000 range.

The DFL’s proposed payroll tax of 0.7% to fund its scheme for paid family and medical leave (PFML) works in exactly the same way, but in the opposite direction.

Table 1 shows the state income tax, PFML payroll tax, and total tax payable at different incomes. At an income of $30,000, for example, you owe $915 in state income tax. Under the proposed PFML scheme, you would pay a payroll tax of 0.7%, which works out at $210. Your total tax payable would, then, increase from $915 to $1,125, an increase of 23%. For someone earning $100,000, by contrast, their total tax burden would go up by a greater dollar amount — $700 — but the percentage increase would be lower — 13%.*

Table 1: Increase in state tax burdens resulting from paid family and medical leave payroll tax

Source: Center of the American Experiment

By the logic employed by the DFL last year, the PFML tax is “titled (sic) toward the rich and leaves working Minnesotans behind.”

*The result is the same if we split the payroll tax between employer and employee and calculate using 0.35%. Evidence finds, however, that the incidence of payroll taxes — who actually bears the burden — falls on the worker in the form of lower wages.