By Derrick Max
4/01/2024 -- Sitting on Governor Youngkin's desk is a paid family and medical leave bill that would provide eight weeks of paid leave per year for most employees in the Commonwealth. The program would pay employees 80 percent of their weekly salary up to an amount equal to 80 percent of the regional average salary for their qualified leave. Interestingly, teachers, state employees, and constitutional officers are not covered under this program -- presumably, these employees already have paid leave benefits and the General Assembly did not want to tax their allies.
The arguments against mandatory paid family and medical leave policies are well known. First, mandated paid leave increases leave usage -- thus harming firm productivity, particularly in smaller businesses where absent employees have a far greater negative impact. Second, studies show that mandated leave has a negative impact on female workers, who are more likely to use time off to care for children or aging parents especially if that leave is paid. This fact is surely considered during hiring and promotion considerations. Third, mandated paid leave limits the ability of employees to choose wages or other benefits they may value more than paid leave. In fact, the taxes used to cover paid leave are an employment tax that reduces employment and puts downward pressure on wages.
In addition to these practical concerns about implementing a mandatory paid leave program, the bill passed in Virginia is far worse than most such bills. The bill on Governor Youngkin's desk will require a new 250-person agency, that would initially collect a .66 percent tax on employment divided between employees and employers. While the tax is technically divided, economic studies show that employers typically pass on the "incidence" of their portion of the tax to employees through lower wages over time.
It is also important to note that the Virginia bill will tax all wages up to the Social Security Wage Cap which is $168,600. Thus high-wage workers will pay $1,113 per year, while low-income workers ($30,000 per year) will pay $200 per year with very little difference in benefits. By comparison, several states cap the taxable wage at half the Social Security cap. Additionally, most of the 13 states with mandatory leave have a lower tax-to-benefit ratio and the ones that use private insurance to operate their program have far greater benefits at much lower costs without having to fund a massive government agency.
The taxes collected under this new paid leave program would be used to pay an estimated $1.4 billion into a "Family and Medical Leave Trust Fund" needed to cover first-year leave benefits and the $33 million needed to pay for the annual cost of reviewing claims and doling out the new leave benefits. This, it turns out, is a difficult process. In Oregon, where they have a similar program it takes months for employees to get their leave reimbursements, putting employees at great risk. Because it will take two years to set up this massive new agency, the bill authorizes a loan of $100 million to cover start-up costs to be paid back by 2032 (the bill estimates that they will borrow $70 million next year, and $30 million the following year).
According to the official fiscal impact statement for this bill, by 2030 (just four years after it is created), this program will begin paying out more in benefits ($1.834 billion) than it collects in tax revenue ($1.686 billion) -- meaning the trust fund will have an annual deficit of over $148 million in 2030 ($181.5 million if you add in annual operating costs). Using conservative estimates, without added taxes, this means the trust fund would run actual deficits by 2038. Of course, the legislation requires the trust fund to be fully funded at 140 percent of the prior year's expenditures, meaning those who wrote this bill knew that taxes would need to be raised to meet its obligations. In short, the .66 percent tax in the bill is the camel under the tent that legislatures know is not nearly enough to fund this program over the long term. Within five years, taxes will have to grow to 1 percent, and within ten years to 1.25 percent of payroll.
Of course, the above assumes the benefits under this act remain the same. This is not likely. The original bill provided 12 weeks of paid leave, a month more than is included in the final version sitting on the Governor's desk. As with most entitlements, supporters often pass a lower benefit bill knowing that once the program is in place, they can grow it over time. The intent of the authors is clear, 12 weeks of paid leave per year is their goal.
What is lost in this current debate is that just two years ago, Virginia implemented a provision to allow for private insurance to cover wages during family and medical leave. This was a reasonable approach to build on the large number of employers who already provide paid leave to their employees privately. The law made it easier to expand such leave benefits to small and medium businesses through an insurance instrument, without a massive new government agency and risky new government trust fund. Last year, AFLAC was the first company to be approved as a seller of this new insurance instrument.
This was the right approach, as most employees already have paid leave options as reported recently by the Cato Institute. Because these programs are not mandated "one size fits all" benefits, they are tailored to the needs of individual employers with their employees as a part of broader benefits packages. The danger of mandated paid family and medical leave is that it will limit flexibility and harm small employers who can not afford to have employees take extended leave. Worse yet, many large businesses may opt to end their more generous private leave plans because of the complexity of getting their plans approved as an alternative to the government-mandated program.
Governor Youngkin should veto this bill -- and allow the private market to continue to close the gap in paid leave benefits through private insurance and employer-employee benefit negotiations. The Democrat's dystopian view of employers as unwilling or unable to help accommodate the needs of their employees without the heavy hand of government is backward thinking.
Derrick Max is the President of the Thomas Jefferson Institute for Public Policy. He may be reached at dmax@thomasjeffersoninst.org.
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