Too many U.S. employers are breaking the social contract by paying unfairly and inefficiently low wages. These low wages are one reason why even people who work regularly throughout the year can qualify for income assistance programs like Medicaid and the Supplemental Nutrition Assistance Program (SNAP).
Further, the Republican-led One Big Beautiful Bill (OBBB) that passed last year will sharply cut Medicaid and SNAP over the next decade by well over $1 trillion combined.
The combination of these trends—low-road employers paying insufficient wages and big upcoming cuts to Medicaid and SNAP—has led to a flurry of policy proposals at the state level to address them. One proposal—employer assessment fees (EAFs)—appears at first glance to address both problems by imposing a tax on firms that employ workers who receive Medicaid or SNAP, with the tax often calculated as the number of workers receiving these benefits multiplied by the average cost of those benefits. But EAFs are not the optimal solution to either problem and might cause undesirable collateral damage.
Here’s why:
- Medicaid and SNAP do not make it easier for employers to offer lower wages. In fact, they likely raise the wages needed to attract workers—and that’s a good thing.
- This is not universal across all safety net and income support programs. Some of these, like the Earned Income Tax Credit (EITC), do see some of their benefits likely bypass workers and captured by low-wage employers.
- If you make Medicaid-receiving workers more expensive to employ, then employers will try to employ fewer of them and/or lower their market wages. And if the tax is proportional to the average cost of benefits like Medicaid, this incentive is large.
- Employer assessments fees are generally a large tax imposed on a small base. But revenue is maximized when tax bases are broad.
- The targets of EAFs can be more effectively reached with other policies.
- Raising minimum wages and passing legislation to strengthen workers’ rights to unionize and bargain collectively are alternative policies for forcing employers to pay more.
- Broad-based taxes are alternative polices for raising revenue.
- Higher corporate income taxes or employer-side payroll taxes would be more progressive alternatives for taxing employers.
- Another alternative would be to penalize firms that don’t offer employer-sponsored health insurance (ESI) to workers. This is not a huge base, but it is by definition wider than those who receive Medicaid (which is just a subset of all workers not receiving ESI through the firm.)
Below, we expand on these points.
Medicaid and SNAP do not make it easier for employers to offer lower wages
A concern is often expressed that Medicaid and SNAP “subsidize” low-wage employers by making it easier for them to offer lower wages. Intuitively, thinking that Medicaid and SNAP subsidize low-wage employers actually gives these employers far too much credit for caring about the living standards of their workers. Higher pay is not given out of the goodness of employers’ hearts—it happens when policy or market conditions change. Medicaid and SNAP do not change labor market conditions in any way that lowers workers’ pay, and when these programs are cut in coming years, low-wage employers are not going to think “we need to raise our wages to help these employees who are seeing cuts to other income sources.” They will instead raise wages only if policy mandates they do or if market conditions change.
In reality, Medicaid and SNAP actually boost lower-wage workers’ meager leverage to demand higher pay by making periods of non-work less miserable. This slightly improved fallback position for low-wage workers keeps them from being forced as quickly by material deprivation into accepting any possible wage offer from employers. Policy changes that reduce how many workers receive Medicaid or SNAP will put further downward pressure on wages. We should support policies that expand the number of workers who have their wages supplemented by safety net programs, not policies that penalize and stigmatize using benefits.
This wage-boosting effect is not universal among all public income support programs. The Earned Income Tax Credit (EITC), for example, pays more as workers supply more hours to the paid labor market. This boost to labor supply puts some downward pressure on market wages and can lead to some of the EITC benefits bypassing workers and being captured by employers (unless it is complemented by strong minimum wages.)
Making workers who receive safety net benefits more expensive will reduce demand for them
If you make workers who receive safety net benefits more expensive for employers to keep on payroll, then you increase the incentive for these employers to hire fewer of them or offer them lower wages.
Supporters of EAFs could argue this logic could be employed against any effort that made workers more expensive, like minimum wages. But minimum wages apply to all workers, and employers by definition cannot lower wages to absorb the higher costs minimum wages impose. Fully substituting away from workers whose pay has been lifted by minimum wages and toward other inputs essentially means employers would have to make costly investments in plant, capital, equipment, and processes.
Conversely, only a small fraction of workers receives safety net benefits. Absent binding minimum wages, employers can lower their market-based pay to recoup the EAFs (at least until they run into the relevant minimum wage in the labor market.) Trying to substitute away from workers who receive safety net benefits toward workers who are less likely to receive these benefits is more doable for employers than substituting away from all lower-wage labor.
These employer efforts to figure out who on their payroll is likely to trigger an EAF could lead to collateral damage. Workers from groups that are more likely to receive safety net benefits might be discriminated against across-the-board, regardless of whether or not they are actually enrolled in Medicaid or SNAP. Basically, EAFs mean that populations who are more likely to use benefits—like low-income single moms—would face even greater barriers in the labor market. Workers of color are also overrepresented among the families who use SNAP and Medicaid.
Further, the direct benefits of broad-based minimum wages to workers are large—all low-wage workers get a raise if their pay was lower than the new minimum. The direct benefits to any worker from an EAF is nonexistent—their pay does not rise, and they are not more likely to receive employer benefits.
The indirect benefits of EAFs are simply the revenue they raise, and if this revenue can be raised in less costly ways, then EAFs are not optimal.
EAFs are a large tax on a small base
Workers who receive Medicaid benefits constitute roughly 10% of the overall workforce (and their share of total hours is significantly less than this). This is a relatively small base for a tax. But the size of proposed EAFs is often quite large, sometimes as large as the average Medicaid benefit. This benefit can reach more than $9,000 annually in many states. For a full-time, year-round worker making $15 an hour, this constitutes a tax on employers equivalent to 30% of that worker’s entire earnings.
Large taxes on small bases often lead to behavioral responses that erode the revenue gained from the tax. The large value of the tax incentivizes this avoidance behavior, and the small base allows substitution away from workers who trigger the tax. This means that EAFs would raise—at best—a highly uncertain amount of revenue and could well end up raising small amounts.
Sometimes, behavioral responses to taxes that reduce the revenue they raise are socially useful. For example, when cigarette taxes lead to reduced smoking or even when workers facing higher taxes are able to voluntarily substitute more leisure for work. But the behavioral response to EAFs that lowers the revenue gained from them also directly inflicts harm on low-wage workers.
There are better alternatives for the policy goals of EAFs
The recent pushes to use EAFs come from very good impulses: the desire to force employers to pay more and stop defecting on the social contract, and the desire to raise revenue so that states can buffer their residents from the terrible coming effects of the OBBB.
But there are better alternatives to achieve these goals. To raise wages, higher minimum wages are an obvious first step. A second step is policy changes that better enable willing workers to form unions and bargain collectively, even in the face of steep employer resistance. Policymaker inaction has largely destroyed the fundamental right of association in much of the U.S. labor market. Reversing this would, in the long run, solve many of the problems of employer behavior that EAFs are trying to target.
There are also better sources to raise reliable revenue to buffer residents from the OBBB’s steep cuts. If the desired target for these revenue increases is employers, higher corporate income taxes or higher employer-side payroll taxes (for all workers) could be used. Another revenue source specifically targeted at low-road employers could be increasing penalties for firms based on the number of their employees who are not covered by employer-sponsored health insurance through the workplace. This is not a huge tax base, but it is by definition larger than just employers with workers receiving Medicaid, as it would also include workers with no coverage at all. Further, this tax would incentivize the provision of ESI to more workers, a good thing in itself.
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