Massachusetts’ Minimum Wage Hike and New Payroll Tax Will Leave Workers Behind

Late last month, Massachusetts Governor Charlie Baker (R) signed into law legislation that will have serious repercussions for the Bay State’s future. HB 4640, which passed both legislative chambers in one day, gradually raises the state minimum wage to $15 per hour, authorizes a lavish paid leave program through a payroll tax, and establishes a sales tax holiday for consumers. Many have touted HB 4640 as a bipartisan “grand bargain” in order to keep similar measures and other pro-taxpayer questions off the ballot on election day this fall. While some cheer this decision as a victory for workers, ultimately this law will harm those same workers it is designed to help - and sadly taxpayers or voters will not have the option to vote on these important issues themselves in November.

Massachusetts joins the company of New York and California in signing a  $15 minimum wage bill into law. This legislation will raise the minimum wage from $11 per hour in 2019 to $15 per hour in 2023. In addition, the minimum wage for tipped workers, currently $3.75 per hour, gradually increases to $6.75 over the same time period.

Lawmakers are  ignoring the economic reality that minimum wage hikes typically fail to raise overall wage levels and often reduce employment opportunities for many unskilled and young workers who are now more expensive to employ. These added costs will be particularly burdensome to small businesses who already struggle with slimmer margins than bigger box retailers. For many “mom and pop” shops, they could be forced to slash employee hours, be hesitant to hire additional workers, or close their doors for good as we have seen in other areas with a $15 minimum wage. For big businesses, they could respond to minimum wage hikes by laying off their employees or increasing automation rather than hire actual workers.

A 2016 Heritage Foundation report found that if Massachusetts adopted a $15 minimum wage, the state would lose 101,000 jobs, with 23 percent of employees directly affected by the minimum wage increase.

A University of Washington study confirms this trend as it found that Seattle’s minimum wage hike sent ripples through the economy. Seattle saw the number of hours worked in low-wage jobs decrease by nine percent, which translates to about $125 per month - a lot of money for struggling families. Faced with rising labor costs, employers were forced to cut hours and seek out alternatives, such as automation to compensate for the increased wages.

Other studies confirm this trend, even from more progressive-leaning organizations. In a July 2015 post from the Brookings Institute, their economists note regarding a $15 minimum wage: “In job markets where young or less-educated workers already have difficulty finding jobs and gaining important work experience, such mandates will likely make it much harder.” In the same way, when a massive federal minimum wage increase was being contemplated in Washington D.C., the Congressional Budget Office (CBO) found that even a three dollar increase could kill up to a million jobs.  

This action creates new unnecessary roadblocks for businesses and workers already benefiting from the recent pro-growth changes made to the federal tax code under the Tax Cuts and Jobs Act. As a result of these changes, more than five million Americans have received bonuses, higher wages, and more benefits from hundreds of companies in all 50 states, amounting to $4 billion more in the wallets of working class families.

The bill also establishes a paid family and medical leave program, which lawmakers have claimed to be the most generous in the country. Starting in January of 2021, workers will be able to take up to three full months off in order to care for an ill family member or a new baby. They will also be given up to five months to deal with their own health needs. This program will be funded through an additional payroll tax of 0.63 percent, which will be split between both employers and employees. While employers with fewer than 25 employees received a carve-out and are not required to pay in, it is important to note that their employees will still be responsible to pay their share of the tax.

Despite Governor Baker promising no new taxes or fees during his 2014 campaign for the office he now holds, the payroll tax included in this legislation is expected to raise $800 million in new tax revenue annually.

Low income earners will bear a much heavier burden from the payroll tax than from the income tax.. In a 2016 report from the Tax Policy Center, 44 percent of households did not pay federal income tax in 2015, but 60 percent of those households paid payroll tax. Since payroll tax is a tax on work, increasing it would discourage people from joining the workforce and from working longer hours.

Finally, this deal establishes a two-day sales tax holiday, which is a window of time when goods are exempted from state and local sales tax. Instead of this gimmicky attempt to help consumers, lawmakers should have embarked on meaningful reforms to Massachusetts’ 6.25 percent sales tax rate to better serve consumers and expand commerce.

It is clear that the so-called “grand bargain” will make taxpayers, workers, and Main Street businesses worse off. The effects of this deal might not be felt immediately, but Governor Baker and the legislature have made it much more difficult for businesses in the state to compete and be successful.