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Paid Parental Leave Proposal Increases Cost of Employment and Burdens States

President Trump’s first budget proposal includes an unfunded mandate that likely will lead to tax hikes. This comes in the form of a paid family leave program that would require employers to provide parents and adoptive parents with six weeks of paid family leave. The budget estimates the federal government would spend about $26 billion over 10 years to partially fund the new employer mandate, which would be administered by state unemployment insurance programs.

Though the specific workings of the program are sparse, below is what the budget proposes:

Provide paid parental leave benefits.—The Administration proposes establishing a new benefit within the Unemployment Insurance (UI) program to provide up to six weeks paid leave to mothers, fathers, and adoptive parents. States are expected to adjust their UI tax structures to maintain sufficient balances in their Unemployment Trust Fund accounts. (p. 117)

That means states will be forced to increase payroll taxes by raising unemployment taxes to fund the new paid leave program.

The lack of details aside (how much is the benefit and who is eligible), the paid family leave plan will be costly on employers and burden state finances.

First, relying on funding this program via state unemployment insurance programs, many of which are already financially strapped, is a recipe for disaster. As Ben Casselman of FiveThrityEight.com details, California had to borrow billions of dollars from the federal government to cover the costs of its unemployment benefits during the Great Recession. In 2016, years after the end of the recession, California’s unemployment trust fund was still $6 billion in debt to the federal government.

Other states can ill afford more financial pressure on their unemployment programs. Casselman notes:

At least nine other states owe money either to the federal government or to private bondholders. Just 18 states have enough cash to get through a year-long recession, the minimum considered sufficient by the federal government.

It is unknown how much Trump’s paid family leave plan would dole out to participants, but states would be forced to raise taxes to cover the added costs or cut unemployment benefits. It doesn’t make sense to place greater financial burdens on state unemployment funds when they are not adequately funded to serve their primary purpose. It is already commonplace for states to trim unemployment benefits during recessions when unemployment is high and unemployment trust funds are strained. It is worthwhile to question whether paying out unemployment benefits or paid leave would take priority when funds are strained.  

Second, research shows that payroll taxes have a negative impact on hiring and economic growth—a big problem since much of Trump’s budget proposal relies on greater economic growth. A Congressional Budget Office analysis finds that reducing payroll taxes would increase employment. Even former President Obama realized this and presented policies that would reduce payroll taxes in order to get more people into the workforce. It is odd that President Trump, who campaigned on creating jobs, would promote a policy that would likely raise payroll taxes, a known job killer.

Third, as Cato policy analyst Vanessa Brown Calder points out “paid leave means women pay.” Analysis on paid maternity leave requirements show women do not necessarily come out on top when these policies are adopted. Some research delivers “evidence that access to job-protected paid maternity leave can actually exacerbate gender inequality among highly educated workers.” Other research suggests government-mandated paid leave policies would lower women’s wages.

It is time to decouple social welfare programs from employment. Putting higher taxes on employment means you will get less of it. If the motive behind paid family leave policies is to get, and keep, more women in the workplace, making employment more expensive is the wrong way to go about it.