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In December 2017, an employer credit for paid family and medical leave (Internal Revenue Code §45S) was enacted as part of the Tax Cuts and Jobs Act (P.L. 115-97). Sponsored by Sen. Deb Fischer, this two-year pilot program gives a tax credit to employers who offer paid family and medical leave to qualifying employees, therefore incentivizing employers to provide leave by reducing the program’s cost. There is now a proposal to extend the pilot for another three years. We believe this is worth considering.
The Fischer tax credit is a voluntary program and not a mandate on businesses. The amount of credit received is contingent upon how much leave the business provides. If a business replaces 50% of employees’ wages during the period of leave, then the credit rate is 12.5%. If they provide 100% wage replacement, then the credit is 25%. To prevent abuse of the credit and ensure workers receive adequate leave, the minimum standard for eligibility is at least 50% wage replacement for a minimum of two weeks.
An important feature of this credit is that it targets the most vulnerable employees. Low-wage workers are the least likely to receive paid leave. Data show that only 4% percent of workers in the bottom 10% of the wage distribution have access to some amount of paid family leave. Most of these workers are also not eligible for job protected unpaid leave under the Family and Medical Leave Act. Employees are only credit-eligible if their compensation in the preceding year did not exceed 60% of a “highly compensated employee” (defined as $72,000 in 2018). This aims at addressing the concern that this policy merely subsidizes already existing employee-sponsored plans.
Finally, the credit applies to a broader base and not only new parents. Any employee can take leave for any of the three reasons — parental leave, medical leave, and family care leave. This is different from existing Republican proposals that typically only cover parental leave.
Of course, a voluntary tax credit program has its limitations. Will employers respond to this incentive to offer a new benefit to their low wage employees? Will it end up subsidizing existing paid leave programs at companies? Is a two-year pilot program enough incentive to change employer behavior? It is tough to offer a new benefit, but then take it away in case the credit is not extended. These are questions worth exploring.
Unfortunately, the current credit is only in effect in the 2018 and 2019 fiscal years. Between the decision of employers to utilize the credit, the time to design and implement a program and it being widely used by employees, the two-year window is clearly not long enough. Therefore, an extension of the pilot program is worth considering. As proposed, the Paid Family Leave Pilot Extension Act would extend the credit for three years and commission a GAO study in order to get data on how the credit is working. If possible, we would suggest an even longer extension of the credit, and more frequent data gathering on the employer and employee response, to gauge its success.
A pilot program enables the data collection and analysis before implementing a permanent policy. Under a pilot, data on take-up rates (of both employees and employers), productivity outcomes, costs and employee retention and attraction can be consciously monitored.
The debate on paid leave and how best to design policies is spurring innovative solutions. From voluntary tax credits to Social Security to opt-in type programs, as proposed in New Hampshire and Vermont. While there are many approaches, the best policy will be the one that the data show as truly improving access to paid leave for the most vulnerable workers. Therefore, an evaluation of these diverse solutions is key to solving the puzzle of the best evidence-based policy design.
Between the decision of employers to utilize the credit, the time to design and implement a program, and it being widely used by employees, the two-year window provided by the pilot tax credit for paid family and medical leave is clearly not long enough. Therefore, an extension of the pilot program is worth considering.
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