Would Minnesotans support a new payroll tax to cover paid family and medical leave?
Its a new legislative session in St. Paul but a scheme for paid family and medical leave is, once again, on the agenda.
How would it work?
The proposed scheme would take the form of a new 0.6% payroll tax which, according to Bill Marx, the House chief fiscal analyst, would be split between the employee and employer’s income. This revenue would be used to pay for a maximum length of 12 weeks per year for medical or pregnancy leave and up to another 12 weeks for other qualifying exigencies for those who qualify.
The Center Square reports:
That tax would be collected from premiums starting on January 1, 2022, and placed into a fund to pay for assessments. Benefits would be paid out starting on July 1, 2023.
The program’s fiscal year 2021 expenditures would total nearly $11 million in administrative costs, with no benefits paid out.
“Accounting for the cost of the estimated annual benefit payment as estimated by the [Institute for Women’s Policy Research] along with the estimate of the cost of the business grants program, the annual costs of this program without administrative costs is $785,568,922,” the fiscal note states.
Who will really pay?
The first question to ask is who will really pay for this?
Of course, the plan is that the cost will be split evenly between employees and employers. But, in reality, the ‘incidence‘ of a tax, i.e. who really bears the burden, might not conform to such plans. Research taking this into account finds, in fact, that the burden of other payroll taxes, such as the Social Security tax which is nominally split equally between employee and employer, is passed on to the employee in full in the form of lower wages.
In all likelihood, the same will apply to this tax: Minnesota’s employees will pay it, not its employers.
Who will really benefit?
What about the other end?
The bill’s sponsor Rep. Laurie Halverson, D-Eagan, said the money is there to be used for payouts for serious medical conditions like childbirth and cancer. But not all of us will face these events. People who don’t will, in effect, be paying for those who do. That, of course, is how insurance works. But this is a compulsory insurance scheme, we have no choice whether or not we participate in it.
This situation would be exacerbated if the payouts were not connected to what had been paid in. Roughly speaking, someone who earns Minnesota’s median annual wage of $42,630 will pay $256 into the fund while someone on the state’s Annual 10th percentile wage ($22,630) would pay $136 into it. But will payouts for the one worker be 88% higher for the one worker than for the other? Or will they be the same? If it is the latter, then the plan is even more clearly redistributional.
There is also the question of what happens if claims are greater than funds. Rep. Halverson said this week that: “Paying out without having a fund to pay out of would create deficit spending and that isn’t smart budgeting.” Quite so, but does this mean that, if the fund is emptied out by unexpectedly high claims that payouts will be cut back? Or will legislators simply dip into the General Fund? We have to look at our legislators and ask ourselves which is most likely.
Why not cut payroll taxes instead?
Minnesota’s workers are already some of the heaviest taxed in the United States. Before burdening them with yet another claim on their incomes, it might be worth asking two questions: First, what problem is this intended to solve? and, Second, is there a better way of solving it?
In answer to the first, Rep. Halverson says that the fund is necessary so that people can “keep buying groceries and buying drugs and keep feeding their family and putting a roof over their head while recovering from an illness or injury.”
But, moving on to the second question, it isn’t obvious that a new payroll tax is the solution to that problem. Couldn’t we just as well cut payroll taxes by the proposed 0.6%, leaving the money with those who have earned it so that they can save for a rainy day? Do we really need the state government to get involved with a new bureaucracy which will rack up costs of $11 million before paying out a single cent?
John Phelan is an economist at the Center of the American Experiment.