Problems with Paid Family Leave Redux

Last week I wrote about the unintended consequences of the proposed DC family leave benefit, which is to be financed by a payroll tax on all employers in the District. 

My objections were that the tax increases the cost of operating in the District and that this will likely push some businesses contemplating opening in DC to Maryland or Virginia instead. The other objection I had was that it specified a benefit to be provided that not all companies may want to provide. In an ideal world companies would pay wages to workers and then allow workers to get their own insurance, pensions, transportation, food, and the like on their own and not have these things provided by their workplace. Today, the tax breaks afforded most fringe benefits behoove companies to give many of these things to their workers in lieu of wages, and that’s not efficient. 

I received a surprising amount of feedback from my article, most of which was positive—a first for me—and some readers suggested that I missed a couple issues relevant to the benefit. The first is that while tying the tax to payroll may make sense as far as this benefit is concerned, it also tends to make it more difficult for people to understand the true cost involved. 

A tax that’s .62% of payroll may not seem like a lot, but for a restaurant that has $1 million of revenue that translates to a tax of $2,100 a year, assuming that payroll is one-third of total revenue. For businesses other than restaurants, where payroll typically equals two-thirds of revenue, double that number. That amounts to 2.2% instead of 4.4% of profits, on top of the 8.95% DC corporate profits tax on revenue over $1 million. If they expand the tax to cover medical leave as well—which is on the table—that would add another thousand dollars or so to a restaurant’s cost of doing business. In fact, a better way to see this is as a 50% increase on the tax on business profits, except that this doesn’t vary much with the business cycle.

The other point a restaurant owner suggested to me is that their workers are typically young and part-time, and often have another job. In short, they see this as a benefit few of their twenty-something employees would claim, yet they still would be paying for it. Fortune 500 companies may find the tax easy to swallow, but not so for businesses like my local kebab house that are on the verge of hanging on. This tax, combined with a sharply higher minimum wage and other government mandates—such as the city’s inexplicable refusal to charge for-profit food trucks to use city-owned property for their business, increasing restaurants’ competition further—are hurting their bottom lines, and life is getting more precarious for businesses on the margins. 

Businesses that want to offer this benefit can already do so. A new company called Freya Solutions allows them to purchase insurance to cover such a benefit for their employees, and the company has the ability to tweak the replacement rate and the length of the benefit so as to maximize the bang for the buck the business gets from the service in terms of employee recruitment and retention. 

David Brunari wrote today in the Washington Business Journal that this tax will generate $420 million a year—or about how much the corporate income tax currently raises for the District. He also noted that a majority of the benefit would go to people who live outside of Washington DC.

Governments interfere too much in compensation decisions as it is. Mandating an entirely new benefit exacerbates an already-difficult problem for employers in the District