DEED says Minnesota paid leave program could need 25% higher payroll tax than first proposed

DEED Commissioner Matt Varilek, right, updated the House Workforce Development Finance and Policy Committee on the new paid family and medical leave program on April 24, 2024. Photo by Michelle Griffith/Minnesota Reformer.

Minnesota’s new paid family and medical leave program would require a 25% higher payroll tax when it launches in 2026 than originally anticipated if a bill under consideration at the Legislature becomes law, an assistant commissioner with the Department of Employment and Economic Development told lawmakers on Monday.* 

Evan Rowe of DEED said during a House Ways and Means Committee hearing that the agency will seek a payroll tax of 0.88% for the state’s new paid leave program — split between workers and employers — rather than the 0.7% that was originally discussed last year, if the bill becomes law. Rowe told the committee that the new payroll tax rate comes from an updated actuarial analysis conducted by Milliman.

The state’s paid leave program guarantees Minnesota workers can take 12 weeks of paid family leave and 12 weeks of paid medical leave per year, capped at 20 weeks in a single year.

DEED requested that Milliman, which had conducted an actuarial analysis of the paid leave program last year, conduct another analysis on the cost of the various changes lawmakers were considering this session. Milliman in a February letter to DEED wrote that it proposes a .88% payroll tax in the first year because “there is greater uncertainty when the program begins, and additional margin seems prudent when benefits become effective.”

House fiscal staff on Monday estimated the 0.88% payroll tax will bring in over $300 million in revenue for the paid leave fund compared to the 0.7% rate. In the first year, they estimated the state will distribute over $1.6 billion in benefits through the paid leave program. 

Employees will pay up to half of the payroll tax — 0.44% of their taxable wages in the first year, rather than the previous 0.35% — but an employer can assume some of their employee’s costs. Last year’s paid leave law instructs DEED to adjust tax rates using a formula based on the previous year’s costs, with a cap of up to 1.2%.

On Monday, Democratic-Farmer-Labor House members in committee approved changes to the paid leave bill that would adopt a seven-day waiting period for all medical claims, with payment distributed to employees retroactively. For example, if someone broke their hip, they would take leave under the program with the first week unpaid, but the program would pay them for the first week of leave at a later date.

New parents who want to bond with their children would get paid the first week, not retroactively.

DEED in a statement said a 0.88% payroll tax would be necessary if the retroactive payment proposal became law.

DFL lawmakers this session have been considering options to make the program cheaper, including making the first week of leave unpaid unless a worker could show they had less than 80 hours of paid time off saved up. This proposal has created controversy among supporters of the program.

The Senate bill currently has the PTO proposal, but Sen. Alice Mann, DFL-Edina, told the Reformer on Monday that she plans to adopt the House’s retroactive benefits language and get rid of the PTO requirement. 

Mann said that with the House’s language the paid leave program will have 12 weeks of paid leave, which was the intent from the beginning. The senator also said she was opposed to the PTO proposal, but DEED and Gov. Tim Walz’s administration were pushing an unpaid week to cut costs.

“They wanted to make sure we kept the premium (payroll tax) as low as possible, and they thought the best way to do that was to do an unpaid week,” Mann said. 

Regarding the 0.88% payroll tax, Mann said the 0.7% number discussed last year was based on a Department of Labor study.

“The premium is based on the economy. It’s based on how many people take leave. It’s based on the state’s average wage. So it will fluctuate from year to year, and that’s expected and that’s why we have a (payroll tax) cap in the bill.”

The Senate and House are expected to take up the paid leave changes this week.

Correction: This story has been updated to reflect that the tax increase would be needed if the bill becomes law. 

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