New Payroll Tax Proposed to Pay for New Entitlement
Paid Medical Leave Insurance Plan Would Tax All Workers for the Benefit of Few
January 2007
The Legislature will be considering several proposals this Session that would impose a new tax on workers' paychecks to create a new state entitlement program.
The idea behind paid medical leave insurance for employees is not a new one; nor is it exclusive to Washington state. Many states have debated this issue for several years. What is at play is the time-honored tradition of pitting employee against employer, worker against boss. It seems that these two groups survive solely to egg each other on in perpetuity.
Currently, under the federal Family and Medical Leave Act (FMLA) of 1993, full-time employees of larger businesses (with more than 50 employees) are entitled to up to 12 weeks of job-protected, unpaid leave for specific medical purposes. This leave is primarily used to take care of an ailing spouse, parent, or child or maternity/paternity leave. The paid family medical leave insurance system would require employers to tax worker paychecks to pay for partial wage-replacement benefits.
When Congress passed the FMLA, it did so based on the compromise that the leave would be unpaid, and small businesses would be exempt. Economically speaking, if an employee is unable to work for a long period of time, the business loses out on productivity. Businesses should not be unnecessarily hit twice via government mandate by allowing a long period of leave as well as shouldering the financial burden at the same time. What gets lost among the debate is that many private companies already provide wage-replacement benefits voluntarily.
The paid medical leave insurance proposal would create an insurance system in which every employee in every business would pay into the system and benefits would be given out by the state's Department of Labor and Industries. According to one proposal, premiums would be taken out of employees' paychecks at the rate of $0.02 cents per hour. Maximum benefits to employees would be $250 per week for 5 weeks for a total of $1,250. L&I would be required to adjust the benefits annually using the Consumer Price Index. Of course, once the program is started, there could be tremendous pressure to increase benefit payouts even more in the future.
The state-run insurance program would cost taxpayers between $50-60 million per year to administer and pay out benefits. The Department of Labor and Industries is assuming a payout rate of about $55 million per year to about 62,000 claimants.[1]
While evidence shows that larger companies are more apt to provide paid family leave to employees, smaller businesses are better able to adapt to employees’ needs on a case-by-case basis. A 2004 national survey by the National Federation of Independent business showed that 93% of small businesses polled had granted the latest request received for unpaid family leave. Only 2 percent of those polled had denied family leave requests but each respondent that had denied the request had re-arranged the worker’s schedule to compensate. It also showed that 67% of the businesses continued to pay wages or other compensation, such as paid vacation or paid sick leave.[2]
Supporters of family leave insurance claim that it is a good move for employers and employees: "paid leave helps keep good workers and increase productivity and profitability." Implementing a mandatory, state-run insurance program that applies to every company is only going to tie the business community’s hands even when many already provide wage-replacement leave benefits.
The possible impact on small businesses is particularly troublesome because small businesses are the victim of higher regulatory compliance costs – the same holds true for this debate. Small businesses are more likely to transfer the duties and responsibilities of an excused employee to another employee, often creating overtime labor costs.
Many employers, both large and small, already pay employees who take leave under the Federal Medical Leave Act. According to the U.S. Department of Labor, 65% of employees already receive some sort of payment when they take medical leave.[3]
Other concerns over a program of this kind surround the actual cost to employees, taxpayers and employers. According to the Office of Financial Management, the cost to administer and pay out benefits for such a program escalates about 15% per biennium. The cost of the program will grow every year, and every year, the Department of Labor and Industries will need to increase the premiums it takes out of every worker's paycheck. So, while the program may only cost each worker approximately $40 a year to begin with, that $40 will quickly rise to $50 and more.
Realistically, the $250 maximum weekly benefit is not sufficient for many real-world scenarios. While a worker is on leave, any paid benefits are of help, but $250 per week is an unsustainable amount for many people – particularly for urban area residents. The concern lies in that, if the $250 benefit were implemented, it would not stay at $250 for very long. Lawmakers would be tempted to increase the maximum weekly benefit to model California's paid family leave bill, which allows a maximum weekly benefit of $840 at a cap of six weeks, with higher payroll taxes to match.
Washington is already an expensive and complicated state in which to conduct business. The establishment of yet another state-run bureaucracy will only serve to pile on more regulations and complications to employers – while providing employees little benefit and less take-home income. The Federal Family and Medical Leave Act, along with the state’s Family Leave Act and Family Care Act, already provide for the health, well-being and job protection for our state’s citizens.
[1] Fiscal Note, http://www.ofm.wa.gov/fns/legsearch.asp?BillNumber=1173&SessionNumber=59
[2] NFIB National Small Business Poll: Family and Medical Leave, National Federation of Independent Business report, 2004.
[3] “Family and medical leave: evidence from the 2000 surveys,” Jane Waldfogel, Medical Labor Review, September 2001, pgs. 21-22.