The cost of paid family and medical leave has risen by 30% in one year
In February, as the bill for a paid family and medical leave (PFML) scheme was sailing through committee hearings at the capitol without any estimate of what it would cost, I had to rely on the fiscal note for a previous, basically identical scheme from the previous session (HF1200 in 2021-2022) that was completed in April 2022. I noted that:
Then, payouts were estimated at $781 million annually, covered by the revenue from the payroll tax. But this was based on some very favorable assumptions. It assumed that the average length of leave taken would be 6.6 weeks and the average weekly benefit would be $568.
We do, finally, have a fiscal note for the current proposal. What does it tell us?
First, the annual cost of the PFML program has ballooned from $781 million to $1 billion, an increase of 30% in one year.
And, again, this is based on some favorable assumptions.
The new fiscal note is more opaque than the previous one — it doesn’t lay out the assumptions behind its estimates so clearly — but, as before, we can calculate the annual cost with this equation:
Average weekly benefit x Average weeks of leave taken x Number of recipients annually = Total annual payout
We know the ‘Number of recipients annually’ and the ‘Total annual payout’ from the fiscal note. Also, whenever assumptions about ‘Average weeks of leave taken’ in the fiscal note are given, the figure is six weeks. And, finally, the Department of Employment and Economic Development told the Senate Jobs Committee that they expected the ‘Average weekly benefit’ to be about $850. That gives us the following:
$850 x 6 x 204,057 = $1.0 billion
But there is reason to doubt these assumptions.
Level of payout
As I noted in February:
…the average annual salary in Minnesota is $66,000, which makes the state’s average weekly wage $1,269 ($66,000 / 52). The current bill proposes to pay out:
“(1) 90 percent of wages that do not exceed 50 percent of the state’s average weekly wage; plus
(2) 66 percent of wages that exceed 50 percent of the state’s average weekly wage but
not 100 percent;”So, 50% of that $1,269 — $635 — would be replaced at a rate of 90%, giving a payout of $571 ($635 x 0.9); the second 50% would be replaced at a rate of 66%, giving a payout of $419 ($635 x 0.66). Together, the total weekly payout for the worker on the average weekly wage in Minnesota would be $990 ($571 + $419)…
This assumption has changed significantly in the last year, with the assumed average weekly benefit rising to $850, an increase of 50%. But this is still an underestimate if we use the average weekly wage, which we should given that the DFL wants every employer in the state to sign up to this scheme. As I noted in February:
…the DFL assures us that if you like your paid family and medical leave plan, you can keep it. Under the proposal, businesses could opt out of the state-run program.
They would, however, have to pay an accounting fee and would need to offer their own benefits that are at least on par with the state’s program.
But if your business’ scheme has to match the state’s scheme, why not just use the state’s scheme and save the heavy cost of complying with the opt-out? Clearly, the intention of this bill is to draw all of Minnesota’s workers into the state scheme. That being so, the state’s average weekly wage is the appropriate one to use for this calculation.
Length of leave taken
The assumed average length of leave taken seems to have been reduced from 6.6 weeks last year to 6.0 weeks this year. But, as I noted in February, this is still a favorable assumption:
The…assumption is that, while workers are eligible for 24 weeks of paid leave, they will, on average, only take 6.6 weeks, or a little more than a quarter of those offered. If, however, those Minnesotans utilizing this scheme take just half of the weeks they are entitled to, which is not an unreasonable assumption, then the number in the fiscal note calculation rises from 6.6 weeks to 12.
The cost under conservative assumptions
What happens if we plug the values from these conservative assumptions into our equation?
Table 1 shows us the total annual payout and payroll tax required to fund it under three scenarios. It is worth noting, before we proceed, that the estimated cost of administering the PFML scheme has risen by 59% in one year.
Table 1: The cost of PFML under various assumptions
In scenario 1, we keep the fiscal note assumptions but use the figure for the average weekly benefit for the average salary. If we assume that the average weekly benefit is that for the average salary earner, the total annual payout climbs by 18.1% and the payroll tax required to cover that rises to 0.93%.
In scenario 2, we keep the fiscal note assumptions but use an estimate of 12 weeks for average weeks of leave taken. If we assume that the workers using the PFML scheme use half the weeks they are entitled to, the total annual cost rises by 97.8% and the payroll tax necessary to fund this increases to 1.55%.
In scenario 3, we assume that the average weekly benefit is that for the average salary earner and that the average number of weeks taken is half of those the worker is entitled to under the scheme. If we assume that the average weekly payout is that for the average salary earner and that they take half the weeks available to them, the total annual payout climbs by 129.3% and the payroll tax rate needed to support it becomes $1.80%.
Conservative changes to the assumptions behind these estimates lead to wildly different estimates.
The regressive effects of these payroll tax hikes
Another point I’ve made is that the PFML payroll tax is, by the DFL’s own logic, regressive, in that it hikes taxes by a greater percentage on lower paid workers than on higher paid workers.
Table 2: PFML payroll taxes by income under various assumptions
Table 2 shows that under the fiscal note assumptions the total state tax payable would increase by 13% for someone earning $100,000 annually but by 37% for someone earning $20,000. But we also see that if the average weekly payout is that for the average salary earner, that they take half the weeks available to them, and that the PFML payroll tax rose to 1.80% to fund this, a worker earning $100,000 annually would see their state taxes rise by 33% but one earning $20,000 would see them increase by 95%.
These numbers are brutal, but they are also distinct possibilities.