D.C.’s paid-leave law needs improvement

Birds are silhouetted as they fly over the Lincoln Memorial.
Editor's note:

This piece originally appeared in The Washington Post on October 10, 2017.

The District recently passed one of the most expansive paid-leave laws in the nation. Signed without the approval of Mayor Muriel E. Bowser (D), the law has had its fair share of opposition. Today, the D.C. Council will reopen the law to consider a slew of amendments. Some of the proposed changes make sense. Others threaten to make the law worse.

The need for paid-leave reform is not in question. Only a small minority of workers (14 percent) have access to paid family leave from their employers, and nearly half of all private-sector employees do not have access to paid time off of any kind upon the birth of a child or their own illness. This has well-documented economic and social ramifications, such as reducing women’s labor force participation and compromising children and parent’s health outcomes, which we recently documented in the  AEI-Brookings Paid Family Leave report, focusing on parental leave only.

The question is what reform should look like. Beginning in 2020, the District will provide paid parental, family and medical leave to D.C. workers. The benefit will be paid for with a nearly $250 million annual payroll tax on D.C. employers and will provide the highest wage-replacement rate in the nation – 90 percent for employees making up to 150 percent of the minimum wage, which covers approximately half of D.C.’s workforce, and a reduced wage replacement rate of 50 percent after that.

Because this is considerably more generous than other state paid-leave programs, the District’s policy is subject to considerable uncertainty as to the actual cost of the program and take-up rates for the program, which has raised red flags in D.C.’s chief financial office. Also, it is unique in being funded by an employer-only payroll tax, which may discourage employers from hiring in the District or encourage relocation to friendlier business climates, such as Virginia.

But what appears costless in theory is likely to be costly in practice.

Given these concerns, multiple members of the D.C. Council have proposed scrapping the existing public program for large companies and simply requiring them to provide paid leave for their employees through a mandate. The appeal of a mandate is easy to see. It is less costly from the perspective of the budget, and there would be a lower payroll tax than under current law because the size of the public program would be considerably smaller.

But what appears costless in theory is likely to be costly in practice. It is worth underscoring that paid-leave employer mandates were universally rejected by the AEI-Brookings Joint Working Group, a group that pulled together scholars on paid-leave policy from across a wide ideological spectrum and of which we are members. While social insurance broadly distributes the costs of providing leave, an employer mandate shifts all of the costs onto the individual firm, which could result in reduced wages, reduced hiring or discrimination.

Our report recommended sharing the cost between an employee payroll tax, so that employees could earn the benefit through their own work, and cutting government spending elsewhere in a way that would not adversely affect low-income families. We fear that imposing a new tax on employers will cause them to hire less and to discriminate against women or others with a need for paid leave.

Other amendments propose an opt-out provision, which is to say that companies that provide paid leave on their own could opt-out of the public program while still paying an additional but reduced employer payroll tax. This is appealing in terms of reducing the burden on business. But without information about how many District employers would likely take advantage of the opt-out clause, the cost and size of the program remain uncertain.

The most positive amendment on the table is the one that proposes splitting the financing between employers and employees. Economists believe that it is employees who ultimately bear the burden of payroll taxes, but at least this proposal is in line with existing practice of splitting the cost. However, it may be subject to legal and political challenges given D.C.’s restrictions on taxing commuters.

There are better ways to improve the District’s paid-leave law, including scaling the benefit to be more in line with existing state policies and analyzing the cumulative effects of D.C.’s paid-leave policy alongside its other new business mandates. A good faith fiscal effort would also include a review of the District’s budget to see if there are additional savings to help cover the cost of the program.

It’s good that the District is pursuing paid leave reform and that the council is exploring ways to make the law better. We applaud the effort but think a more modest approach should be considered until we have more information about how it is working and what it will cost.