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Amid the raging tax reform debate, media coverage has largely overlooked a provision in the Senate tax bill that would provide a tax credit to employers that provide paid family and medical leave to their employees. As stated:
The proposal would allow eligible employers to claim a general business credit equal to 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on Family and Medical Leave (“FMLA”) if the rate of payment under the program is 50 percent of the wages normally paid to an employee, The credit is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent.
As I have written several times before, the US strongly and urgently needs a policy to address the lack of access to paid family and medical leave, particularly for the lowest wage workers. The AEI-Brookings Report on Paid Family and Medical Leave highlights the importance of this policy and why its time has come. Over the last several decades, there have been tremendous changes in labor force participation, family structures, and fathers’ involvement in child care. Nearly 36.5 million women and 30 million men lived with at least one child under 18 in the household in 2015. Of these, 70% of women and 93% of men were in the labor force. Further, of the 3.1 million mothers with at least one child under a year old in 2015, 1.8 million were in the labor force (about 58%). With the joint responsibilities of the workplace and the family increasing, the case for providing paid time off work for specific family needs is more relevant than ever, and a federal paid leave policy could support the needs of millions of America’s working parents who currently lack access to paid leave through their employers or existing state laws.
However, the problem is most acute for the lowest wage workers, as shown in the chart below.
Most proposed paid leave policies would be an improvement over the status quo if they expand access to these workers. Unfortunately, employer tax credits are unlikely to push forward in this direction. Although compliance with the proposed policy would be voluntary, employers that decide to offer paid leave to their employees for a minimum of two weeks would get a maximum credit of 25% of wages reimbursed. This still leaves employers to bear a large fraction of the cost of providing paid leave. Given these employer costs, it is questionable whether this credit would spur many businesses to offer new paid leave benefits. It would be fair to say that such a policy would end up subsidizing firms that are already offering paid leave, with potential but ambiguous benefits going to firms that do not currently offer paid leave. Prior work shows that larger firms with higher skilled employees are most likely to offer these benefits currently, so these firms would most benefit from the provision in the tax bill.
But what about low wage workers? As mentioned earlier, the real problem with paid leave policies that exist today is that they are largely unavailable to low-wage workers. These workers are more likely employed in small- and medium-sized businesses that are currently less likely to offer these policies, and these businesses will remain unlikely to offer these policies under the proposed voluntary tax credit provision because of the cost. An additional issue is that more than 40% of the lowest wage workers are not covered by the job protection that comes with the FMLA, largely due to their employment in firms with fewer than 50 employees who are exempt from the FMLA. So even if they do get access to paid leave through the state or their employer, they are much less likely to take it up because of reasonable concerns about not having a job to return to after their leave. So unless the proposed provision expands job protection as well as pay, the impact on these workers is likely minimal.
Some of this is reflected in the JCT estimate of the cost of this policy. According to the JCT, the provision at its peak (in 2019), would only cost $1.5 billion, after which it would sunset. In comparison, the FAMILY Act by some estimates could cost up to $150 billion per year, and even the provision of paid parental leave through state unemployment insurance, as under the Trump proposal, would cost over $2 billion per year. While a costly policy is certainly not a goal, a realistic policy that pushes the needle on paid leave is likely to have much higher costs than this provision suggests. Some part of the JCT estimate could reflect the fact that employers are unlikely to respond to temporary tax incentives for such an employee benefit. But mostly, I believe it suggests a reasonable assumption on the part of JCT economists that a voluntary tax credit is unlikely to expand the provision of paid leave across the country.
In contrast, the AEI-Brookings Working Group recommends financing an eight weeks paid parental leave program through a payroll tax on employees and with spending cuts to keep the policy deficit neutral. This means that the cost of funding paid leave is not borne by the employer, but rather shifted completely onto the employee as an earned benefit. By doing so, and maintaining strict eligibility rules for who qualifies for the leave, the burden on businesses is reduced and employees are much more likely to have access to leave when they need it. This also allows small and medium-sized businesses to consider providing paid leave at minimal costs.
There are good reasons to applaud the inclusion of a paid leave provision in the tax bill, particularly given the challenge that policymakers often face in garnering support for this issue. But it is important to recognize that this is only a small step forward in this debate, not a giant leap. Much more can, and should be, done.
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