The Potluck

Minnesota paid leave program will require higher taxes than originally thought, actuary says

By: - October 31, 2023 3:38 pm

Supporters of paid family and medical leave rally in front of the House Chamber on May 2, 2023. Photo by Andrew VonBank/Minnesota House Info.

Minnesota employers and workers will have to pay about 18% more than originally thought for a new state-run paid family and medical leave program slated to start in 2026, according to a state-commissioned actuarial analysis.

Given the new analysis, the annual payroll tax on wages — 0.78% split between the employer and the worker in the first three years — would be $468 on $60,000 of taxable income, if the state takes up the actuary’s recommendation. In later years, the cost would be $493 based on a .83% tax. The prior estimate was $420 based on a 0.7% tax.

The program was a key Democratic victory at the Capitol this year, guaranteeing Minnesota workers 12 weeks of paid family leave and 12 weeks of paid medical leave per year — up to 18 weeks total. About 130,000 workers are projected to use the benefit each year at a cost of about $1.4 billion to bond with a newborn, recover from an illness or care for a loved one.

One of the law’s lead authors, Sen. Alice Mann, DFL-Edina, said the actuary’s report looks “great” and that the projected cost increase isn’t significant.

“It’s right in line with what we were thinking, and I’m not surprised by anything in there,” Mann said of the report.

Republicans, meanwhile, said the actuary’s report vindicated their opposition to the law and their warnings of soaring costs.

“The Democrats ‘un-paid’ leave plan is more expensive than expected before it’s even been implemented,” Senate Minority Leader Mark Johnson, R-East Grand Forks, said in a statement. “This one-size-fits-all approach is costly to employers, employees, and taxpayers.”

The analysis, conducted by Milliman, is based on a slew of informed assumptions about future demand for benefits and job growth in the state; the actual costs of the program “will almost certainly differ,” according to the actuary’s report.

A spokesperson for the Minnesota Department of Employment and Economic Development, which will administer the program, said the actuary’s report is very similar to previous projections and noted the funding requirements are far below the 1.2% cap on payroll taxes in the law.

Under the Minnesota law, employers must fund at least half of the cost of the tax on wages but may opt-out of the state program as long as they offer equal or greater benefits.

The state also kicked in $128 million in start-up costs and $668 million in seed funding so that employees can access benefits as soon as they begin paying taxes for them.

The paid family and medical leave program will bring Minnesota in line with 11 other states and all high-wealth nations in ensuring workers have paid time off.

Washington state, which served as a model for the Minnesota law, launched with a much lower payroll tax of 0.4% and ran up a $8.7 million deficit. Since launching the program in 2020, Washington has raised payroll taxes to 0.8%.

The Minnesota law instructs DEED to adjust tax rates using a formula based on the previous year’s costs to ensure it’s adequately funded. That formula leads to large swings in the payroll tax from 0.7% in the first year to 0.92% in the second to 0.78% in the third year, according to the actuary’s projections.

Republicans pointed out that would mean a 31% increase in taxes from the first year to the second under the state formula.

The actuary recommends DEED instead tax workers and employers 0.78% in the first three years and 0.83% in subsequent years in order to provide a smoother pattern for businesses and workers.

A spokesperson for DEED said the agency was reviewing the actuary’s recommendations.

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Max Nesterak
Max Nesterak

Max Nesterak is the deputy editor of the Reformer and reports on labor and housing. Previously, he was an associate producer for Minnesota Public Radio after a stint at NPR. He also co-founded the Behavioral Scientist and was a Fulbright Scholar to Berlin, Germany.