For many Americans who have contracted COVID-19, the lack of a comprehensive national paid family and medical leave benefit has created a dangerous choice: go to work sick or risk losing necessary income. With paid family and medical leave benefits, people could continue to be paid while having time off to care for and bond with a new child, to care for a loved one with a serious medical condition, and to address one’s own serious health condition.
The vast scope of the COVID-19 pandemic has highlighted the need for a comprehensive national paid leave benefit, and multiple proposals to create such a benefit have been introduced. The most widely supported proposal is the Family and Medical Insurance Leave (FAMILY) Act, which would finance benefits through a modest payroll tax increase. President Biden embraced the substance of the proposal during his campaign and indicated he would pay for a national paid leave program by raising taxes on the wealthy, but his campaign also promised not to raise taxes on workers earning less than $400,000 a year.
Although some experts have assumed the Biden administration cannot support a payroll tax–financed paid leave program without raising taxes on workers earning less than $400,000, we find that the package of tax policies proposed by the administration, as well as additional policies Congress is considering, would significantly reduce taxes for families with low and moderate incomes. Considered in combination, the administration and Congress could enact a new self-financed paid leave program without increasing overall average taxes for workers earning less than $400,000 a year.
Paid leave is affordable and would be offset by changes to other major tax provisions
Under the FAMILY Act, paid family and medical leave benefits would be paid for by a new payroll tax capped at the Social Security taxable maximum ($142,800 in 2021) and divided equally between employees and employers. The most recent estimate from the Social Security actuaries (PDF) finds that a combined employer-employee rate of 0.62 percent would be needed to finance benefits. This rate is consistent with levels used in the 10 existing state paid leave programs and means that a worker at the top of the middle income quintile ($88,500 in 2022) would pay a little over $5 a week for coverage. High earners at or above the taxable maximum would pay roughly $8.50 per week.
But not all employers and employees will experience higher costs because many employers already pay for medical leave benefits. Most economists assume an employer-paid payroll tax is passed on eventually to employees in lower wages, but a pass through of the employer tax may be less likely for paid leave. The Bureau of Labor Statistics National Compensation Survey finds that 40 percent of workers have access to short-term disability leave and 78 percent have access to paid sick leave. Only 15 percent of employees are required to pay some of the cost of the short-term disability benefit.
In existing state paid leave programs, medical benefits represent two-thirds of the cost of the program according to a forthcoming paper in the Contemporary Economic Policy journal, meaning many employers are already paying for these benefits. Moving to a publicly financed program would have a small effect on existing employer budgets, and some employers may decide to fully absorb the modest cost, particularly if they are trying to retain highly skilled and highly compensated employees.
For most workers, the Biden-Harris administration’s proposed tax policies would more than offset the cost of paid leave. Three key components of the administration’s tax policy are expanding and making fully refundable the child tax credit, expanding the earned income tax credit for workers without children and an expanded child and dependent care tax credit.
In an analysis of the administration’s proposed changes to direct taxes on individuals, the Urban Institute’s Tax Policy Center finds that workers earning up to $159,800 (the fourth income quintile) in 2022 would have taxes reduced by an average of $1,280, with the tax savings dropping to $600 by 2030. Taxpayers at lower quintiles also experience substantial tax savings. Workers at the 95th percentile ($331,500 in 2022 and $360,600 in 2030) would experience an average reduction of $740 in taxes in 2022 and a $560 increase in taxes in 2030. These reductions would, on average, more than offset the cost of a 0.62 percent payroll tax for workers earning up to $400,000.
With congressional modifications to administration proposals, a paid medical leave benefit can be enacted while honoring the Biden-Harris tax pledge
Although the Biden-Harris campaign tax proposals do not fully offset the paid medical leave payroll tax benefits, tax policy is a dynamic process. Congress and the administration are considering additional policies that would reduce taxes substantially across a wide income range, including for workers earning close to $400,000 a year. One of these proposals, repealing the $10,000 cap on deducting state and local taxes, would reduce average taxes at the 90th to 95th percentile by an average of $850 in 2018, more than covering the paid leave payroll tax.
The Biden-Harris campaign plan also included a two-year expansion of the child tax credit, but a permanent expansion of this credit, which has been widely discussed, would reduce taxes for millions of workers with low and moderate incomes. If neither of these proposals are enacted, the alternative minimum tax provision could be modified so all workers earning less than $400,000 have income taxes fully offset by the $443 maximum annual increase in payroll taxes.
The paid leave new benefit would fill a serious gap in our social insurance protections. The cost of a modest new payroll tax can be offset for most workers by tax policies the administration is supporting and additional policies being considered by Congress that would reduce taxes for workers near the $400,000 income level. Ultimately, Congress can enact a payroll-financed comprehensive paid family and medical leave program while honoring the Biden-Harris tax pledge.