Thursday, July 6, 2017

Paid Leave: Trump's Budget Boondoggle

So far, Donald Trump has been a good president for the American economy. He has also been good for Wyoming by halting and starting the rollback of regulations on the minerals industry (though in fairness, Congressman Cheney deserves most of the kudos for that). If only the Congressional Republicans could get their act together and actually give us back some sort of pre-Obamacare free-market based health insurance system - and if they could also cut taxes - we would be in a pretty good shape as a country.

At least for the time being.

See, Trump just could not leave it alone. The welfare state, that is.
He just has to put his fingerprints on it. A new, potentially very costly entitlement program is on its way.

As of today, we the United States of America have built most of the entitlement programs that constitute a standard, egalitarian welfare state. The left has won a major victory over the past half century in that they have built some $2.7 trillion worth of egalitarian entitlement programs. To their chagrin, though, they have not been able to take that welfare state quite to the finishing line: we are still about 2.5 entitlement programs away from completing the egalitarian welfare state.

Obamacare took us half way to single-payer health care (anyone who wants that in America has a pathological death wish); the remaining two entitlement programs are universal child care (a wet progressive dream) and paid family leave.

The last item is now in Trump's budget - and if passed, it is going to have direct, profound and very negative consequences for Wyoming.

The way Trump's paid leave program is constructed, it is supposed to be yet another joint venture between the federal government and the states. It will run as an amendment to the existing federal unemployment insurance system, and there is a very good reason for this. According to the White House's own Office of Management and Budget there are enough cost reductions to be found in the existing unemployment insurance program to pay for Trump's paid leave idea.

Don't believe it. Don't believe it for a second. This program is a cost bomb waiting to go off. And when it goes off, it will do so right in the middle of the Wyoming state budget.

The paid-leave program would piggy-back on the unemployment insurance program, thus utilizing the same financing mechanism. Employers pay a tax on their payroll to fund the unemployment insurance system. Under normal conditions, a balance occurs that goes into a trust fund, by means of which the state can have a safety margin in the event of a rapid increase in unemployment.

Interestingly, while paid leave adds spending on one side of the unemployment insurance program, it is not supposed to add anything on the tax side. The Trump administration is confident that there will be no increase in the unemployment tax, because the as the system is today, it is full of waste and fraud. Just by whipping it into shape, they say, the state government should find enough money to pay paid-leave benefits.

It is not hard to believe that government is wastefully run. For example, in Medicare and Medicaid, some studies suggest, we are losing a dime to waste, fraud and abuse for every dollar we spend. It should be possible to find similar cost savings in the unemployment insurance system. 

The problem is that the paid-leave program is not just a ten-percent mark-up on unemployment insurance. It is a much bigger deal than that. 

Let us look at some numbers and see how much it might cost us here in Wyoming. Based on existing state-level paid family leave programs, it is reasonable to expect that the average benefit paid out to a parent would run be about $500 per week. The Trump program would mandate six weeks of leave, putting the total cost to Wyoming taxpayers at $3,000 per parent on paid leave, per year.

In 2015 there were some 7,700 children born in our state (adoption parents are also eligible, but for simplicity we only focus on newborns for now). Assuming that number is going to be 7,500 in 2018 due to a shrinking population (and birth rates always decline in bad economic times), and assuming that one parent per child born will take paid leave, the total amount that the state would have to pay out would quickly reach $22.5 million per year.

In 2016, the unemployment insurance system in Wyoming collected $59.5 million in taxes. The $22.5 million in benefits would constitute a 37.8-percent cost markup. Even if only half of all parents would use it (a modest assumption) the paid-leave program would quickly create a need for higher taxes.

If we are not going to see taxes go up, we would have to severely restrict access to the program. To be blunt, in order to make it fit within a reasonable waste-and-fraud band of savings, our state lawmakers would have to put a cap on the paid-leave program at fewer than 2,000 families with newborns. Alternatively, the state would have to cap the benefit to about $130 per week.

Given that the California program pays out a maximum benefit of more than $1,100 per week, it is not very likely that those restrictions would survive for very long - if they were even put in place at all. Exactly one election after the program was created, new candidates for our legislature, and for governor, would promise to "fix" the program and remove the restrictions that prevent "everyone" from getting "what they need". Alas, once the paid-leave program is created, it will only move in one direction: benefits will rise and - even more importantly - the time of leave will extend dramatically. 

Current state-based programs in the United States offer 12 weeks. Internationally, the length of benefits runs anywhere from 25 to more than 100 weeks; the federal Canadian program offers 50 weeks. In other words, it is only a matter of time before the Trump paid-leave program will cover 12, 24, 36 weeks... 

At the same length as the California program, we here in Wyoming would be on the hook for another $45 million per year in taxes. At the Canadian program length, our tax bill would exceed $180 million per year.

These are taxes that our employers will have to pay on top of everything else they are, and will be, on the hook for. Such as a Gross Receipts Tax...

It could be objected to these numbers that government employees should not be included; they have their own program. Assuming that this is correct, the cost would drop by 25 percent as the eligible population is confined to private-sector employees only. However, the tax base would shrink accordingly, so the cost-revenue parity of the program would remain the same.

It could also be objected that utilization of paid leave programs is relatively low in other states, and therefore costs are kept much lower than the maximum value used in this article. There is some truth to this: when the California program was created a very small share of parents even knew about it, let alone used it. However, over the first decade of its existence, its costs grew by more than 87 percent. Furthermore, if the rate of utilization is adjusted for "knowledge", i.e., how many people knew about the program, then the rate of parents using it goes up dramatically.

An outlook at paid-leave programs in countries that have had them for a longer time than any U.S. state suggests that utilization rates can run close to 100 percent. Therefore, it is perfectly reasonable - in fact the only responsible thing to do - to assess the cost of the program at its maximum entitlement value.

It is also important to note that the income replacement rate used in this example - $500 per week - is less than half of what the California program caps out at. With California replacement rates, the cost of a Wyoming program could easily rise 20 percent right off the bat.

Until we have the fine-print of Trump's paid family leave program, we can only speculate as to how exactly it is going to impact our state budget. My guess is that we will see those details toward the end of the summer, when Congress gets around to the budget. In the meantime, though, it is important that our elected officials - the Congressional delegation as well as state lawmakers and our governor - are aware of what this program could do to our state.

There is never a good time to add another entitlement program. Doing it today, with our state's budget as it is, would be far more than fiscally irresponsible. 

I hope Governor Mead and Secretary Murray, who apparently have a very good idea of what federal overreach is, will call our Congressional delegation and tell them what a bad idea this paid-leave program is. 

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