Who is the biggest beneficiary of a minimum wage boost?
Vermont passed new minimum wage legislation (Act 176) in 2014. With the federal minimum wage set at $7.50/hour, Vermont’s minimum wage was $10.50/hour as of January 1, 2018. The Vermont minimum wage increases annually by the Consumer Price Index, subject to a 5% cap. It is now $10.78/hour.
There remains a fair amount of political pressure to increase the minimum wage in Vermont to $15.00/hour. There are very real philosophical, economic and commercial issues related to any increase in the minimum wage. This article will not tackle any of these issues. Instead, The Informed Vermonter will take a detailed look at the impact an increase in the minimum wage would have on after-tax incomes and access to health care programs.
According to the Vermont Department of Labor, 10% of Vermont’s work force earned less than $21,746 per year in 2016. With the minimum wage now at $10.78/hour, a person working 40 hours a week for 50 weeks earns $21,560. Accordingly, it looks like about 10%, or some 30,000 Vermonters, would be affected by any change in the minimum wage. Given the large number of people, careful consideration should be given to the knock-on affect of increased minimum wages on taxes and existing government programs.
This article will try to assess the impact of an increase in the minimum wage to $15.00/hour on the wage earner.
There are, of course, an almost unlimited number of situations and combinations that would affect the financial condition of minimum wage earners in Vermont. To keep things simple, all the minimum wage earners that this article refers to are assumed to work 40 hours per week for 50 weeks per year with no other employee benefits. Also, there are no other sources of income, such as interest or dividends. Last, this article will look at only three basic family units, as follows:
- Single Person: Now earns $21,560 per year, which would increase to $30,000 per year with a $15.00/hour minimum wage.
- Single Parent: Same salary profile as the Single Person, but with one dependent child.
- Family of Four: Same salary profile as the Single Person, but with two working parents and two dependent children.
The Informed Vermonter has estimated both the federal and Vermont state tax liabilities assuming that all the family units are taking the maximum standard deductions available.
Taxes and After-Tax Income
An increase in the minimum wage from $10.78 to $15.00 would increase the annual wages of the working adults in our family units from $21,560 to $30,000. Given federal and state tax codes, not all of this money would accrue to the benefit of the wage earner.
The Single Person would experience an increase in both federal and state taxes. With the minimum wage increased to $15.00/hour, the Single Person would have their combined federal and state income tax bill increase from $1,341 to $2,638. Instead of hourly wages growing from $10.78 to 15.00, actual after-tax wages would grow from $10.11 to $13.68. Basically, $1,297 of the wage boost goes to the government as higher taxes.
The Single Parent is eligible for both the Earned Income Tax Credit and Child Tax Credit with the minimum wage set at $10.78/hour and receives refundable tax credits as a result. For the Single Parent, an increase in the minimum wage to $15.00/hour would reduce annual refundable tax credits from $5,202 to $3,073, representing a tax cost of $2,129.
The Family of Four is also eligible for both the Earned Income and Child Tax Credits. An increase in the minimum wage to $15.00 would result in moving from a net tax credit recipient of $2,367 to a net tax payer of $1,052, a $3,419 increase representing about 20% of the combined pay increase of the two parents.
The federal government and Vermont also have tax credits for eligible childcare costs. These are tied to income levels. Unlike the Child Tax Credit, which is partially refundable, childcare tax credits are not refundable. The value of these credits would decline with an increase in the minimum wage. However, most minimum wage earners would have no meaningful tax liability to offset with childcare credits.
It is likely that many minimum wage earners are renters and all would be eligible for Vermont’s rent rebate program. The rebate is based on the difference between actual rent paid and “Allowable Rent” based on income levels. An increase in the minimum wage to $15.00/hour would increase both the income and the portion of income considered “Allowable”. So, rent rebates will decrease with an increase in the minimum wage.
In summary, the existing US and Vermont State tax codes will take a big bite out of the gross pay increases associated with an increase in the minimum wage. However, in all the cases examined above, everyone’s net after-tax pay does increase so hard working minimum wage earners would be better off.
There are, unfortunately, factors other than taxes to consider.
With increased wages come increased health insurance costs. Here is what happens to our assumed family units above, based on the Vermont Health Connect Plan Comparison Tool 2019.
Single Person: At $10.78 hour, Single Person qualifies for a $550 monthly premium subsidy resulting in a monthly out of pocket cost in the $50-$70 per month range and a maximum out of pocket medical cost of $1,250 to $2,000, depending the actual plan being used. At $15.00/hour, the monthly subsidy decreases to $453/month, the monthly out of pocket increases to $150 to $200 and the capped out of pocket medical cost grows to $3,000 to $5,000. In summary, cash premium costs increase by $1,200 to $1,500 per year and the at-risk annual deductible increases by $1,750 to $3,000. Maximum annual health care costs increase by $3,000 to $4,500, representing 35% to 50% of the minimum wage increase.
Single Parent: At $10.78 per hour, Single Parent and child both qualify for free health care. At $15.00/hour, the adult no longer qualifies for free Medicaid. Instead, coverage comes with a monthly premium subsidy of $517 resulting in a plan with $80-$125/month out of pocket costs and a capped medical expense deductible in the $1,200 to $1,500 range. The total annual cost of Single Parent’s adult health care coverage has increased from zero to $2,200 to $ 3,000.
Family of Four: At $10.78 per hour, Family of Four has free coverage for the children and qualifies for a subsidy of $1,111 for the two adults. The monthly out of pocket cost is in the $85 to $150 range with a capped medical expense deductible in the $3,000 to $4,500 range. At $15.00/hour, the children continue to qualify of free coverage, but the subsidies for the adults decrease to $920/month, the out of pocket premium goes to $275-$350 and the maximum medical deductible increases to the $6,500 to $10,000 range, depending on the specific plan being purchased.
The table below summarizes the costs incurred by workers by way of in increase in the minimum wage.
Where The Money Goes ($/year)
|Single Person||Single Parent||Family of Four|
|Gross Wage Increase||8,440||8,440||16,880|
|Increased Tax or Reduced Refundable Tax Credits||(1,297)||(2,129)||(3,419)|
|Increase in Monthly Health Insurance Premiums||(1,200)||(1,200)||(2,500)|
|Increase in Maximum Health Care Deductible||(1,500)||(1,500)||(3,500)|
|Total Increased Costs||(3,997)||(4,829)||(9,419)|
|Costs as % Total Wage Increase||47%||57%||56%|
|Net Wage Increase||4,443||3,611||7,461|
Big Beneficiary: It looks like a big slice of any increase in Vermont’s minimum wage will accrue to the state and federal government. The increase in taxes (or reduction in tax credits) flow mostly to the federal government and the reduction in Medicaid subsidies is shared 60/40 between the federal and state government. The reduction in rent rebates, which is not included in the above analysis, would accrue entirely to the state government.
Its Hard To Get Ahead: An increase in the minimum wage to $15.00/hour looks like a $4.22/hour raise. After increased tax and health insurance costs, it’s more like a range of $1.80/hour to $2.20/hour. The hard working Vermonter is better off, but not by so much.