The Other Issue Surrounding a $15 Minimum Wage

To call Minneapolis’ move to impose a $15 minimum wage “controversial” is certainly a gross understatement.  Republicans in the legislature tied policy provisions that would have pre-empted the city from taking such a step to the annual pensions bill, with the resulting veto telegraphed long beforehand.  Concern about restaurant workers and tip credits kept the issue front and center in the media, along with dueling reports from economists studying the effect of a $15 minimum wage in Seattle.  Nevertheless, Minneapolis has now joined other cities across the country – most notably Washington, D.C.; Seattle; and San Francisco – that have raised their minimum wage to this level.

Largely absent from the debate, however, has been an analysis of how these higher wages would interact with the considerable number of tax credits and income support programs the state and federal governments offer.  Such programs generally have income thresholds above which households lose eligibility and program benefits.  The result is that gains in earned income can be offset by a loss of cash and non-cash benefits creating a higher wage “penalty” in many cases. 

To shed some light on this issue, we updated the model we created for our 2007 Disincentives to Earn report, which examined the interactive effects of changes in income with 16 different state and federal programs that provide cash and noncash benefits to households (Table 1).  We have modeled the latest available period, which runs July 1 through September 30, 2016.¹

There are a number of issues to keep in mind when considering our findings. 

• We assume that households automatically participate in any program or tax credit for which they are eligible.  Clearly this is not the case in reality.  Some programs have waiting lists and in other cases households do not apply for benefits for a variety of reasons including unfamiliarity with their availability.²  Switching certain programs “off” would affect the findings in material ways. 
• Minneapolis’ $15 minimum wage is scheduled to fully phase in for large businesses on July 1, 2022.  Since income thresholds for benefit eligibility change annually, assuming a $15 minimum wage for 2016 purposes could inadvertently push households over income eligibility thresholds for programs.  To adjust for this we have discounted the $15 minimum wage from July 1, 2022 to July 1, 2016 using a 2.2% inflation rate (the average of the CPI from 1996-2016), which sets the rate at $13.16 for 2016.  Note also that we assume in each instance the adult works full-time (40 hours per week, 2080 hours per year).
• We assume that the parent places children in childcare centers (as opposed to an in-home setting), because of the flexibility that a center offers regarding hours of operation and because centers are more likely to accept the hassles of dealing with child care assistance programs.  We further assume the modeled family chooses a center that charges the reimbursable rate.
• While most of the programs modeled provide a cash benefit, Medical Assistance and MinnesotaCare provide a service (health insurance) instead.  To calculate a cash value for this benefit, we have used federal data to estimate the average employee health insurance premium costs for employer-sponsored single, single-plus-one, and family health care plans in Minnesota in 2015.³  We set the value of the state-sponsored benefit equal to the cost of the plan the household would need to purchase if Medical Assistance or MinnesotaCare were not available, less any health insurance premium costs the household actually incurred.  Note that this methodology assumes that the household is able to obtain employer-sponsored health care in lieu of Medical Assistance or MinnesotaCare.  If the household instead sought insurance on the private market or participated in an employer sponsored plan with above average employee costs, the value of the benefit would likely increase, and dramatically so in some cases.

Model Results

Our findings look at the marginal effective tax rate (METR) associated with the additional income generated by the higher minimum wage – calculated as the lost value of benefits as a share of the net increase in wages.  For the single-parent household with children that we modeled, the METR exceeds 35% in every instance.  However, the METR tends to increase as family sizes decline, since all things being equal larger families have higher income thresholds and so are less likely to lose eligibility for programs under a $15 minimum wage.

For a single-parent household with three children, we modeled two family combinations: one where the children are aged 1, 2½, and 6; and another where the children are aged 3, 6, and 9.  As Table 2 indicates, the marginal tax rate for both households is the same: 38.9%, or $2,960 of foregone benefits relative to $7,613 of additional wages.  Although the value of the benefits is high in both circumstances, the overwhelming majority of those benefits are the result of childcare costs.⁴

The reduced benefits are attributable to a variety of factors.  At the higher income levels, the family loses eligiblity for MFIP and moves from MFIP childcare to the Basic Sliding Fee program, which comes with a required premium payment that reduces the value of the benefit.  The value of Section 8 housing vouchers decline because gross benefits are reduced by 30% of the higher income.  Finally, the household realizes reduced EITC and WFC benefits, although those are offset by a higher federal tax credit and higher renter’s property tax refund and federal child care credit payments – both of which are generated by the higher out-of-pocket costs associated with reduced benefits.

Our two-child and single child models again capture the influence of child care, but introduce several other program eligibility complexities.  As the table indicates, about half of the economic benefits of the minimum wage increase are lost for our two-child households and up to 3/4ths for the single child households.  Households with one and two children face the same issues that the three-child households do with regard to reduced benefits: new or greater premium payments associated with the Basic Sliding Fee childcare program, reduction in the value of Section 8 housing vouchers, and reduced EITC and WFC benefits.  However, in both the single child and two-child households, the additional wages push the parent (but not any children) above the eligibility thresholds for Medical Assistance; bumping the parent onto MinnesotaCare where the premium co-pay requirements reduce the value of the benefit.  The differential in the METR between the one- and two-child households is largely the result of the single child household’s loss of SNAP benefits at the higher income level.

Our single adult-only household has the lowest marginal tax rate on the additional wage income (38%).  This is a function of the fact that the adult is eligible for very few income support programs to begin with (only Section 8 housing and energy assistance), and that while Section 8 housing benefits are reduced by 30% of the higher income, the higher out-of-pocket rent payment generates a higher renter’s property tax refund.

Complexity Underneath the Advocacy

While most of the debate has been focused on the business impacts and resulting business behaviors triggered by the new minimum wage law, it’s important to recognize that the recipients of the wage increases themselves may also experience some unanticipated consequences, not just with respect to job access but also their economic well being.

The magnitude and extent of any effective tax rate concern the new minimum wage represents as reflected in actual METRs faced by real Minnesota households is essentially unknowable.  The fragmented nature of work support and assistance programs, the influence of household demographics, and the relative lack of information on programs and program combinations actually used by households makes such calculations practically impossible.

However, the interactive effects are real and are important to appreciate in both designing safety net supports and regulating private sector wages.  One of the conceptual appeals among higher minimum wage advocates of increasing the minimum wage is to export the cost of low-income economic supports from the public sector onto the private sector.  Our METR analysis shows that worker gains of minimum wage policy are likely to be smaller than advertised and the private sector will not be fully picking up where government leaves off.