Democrats had been holding out hope that they could pass a major minimum wage increase as part of the major coronavirus relief bill now working its way through Congress. But the all-important Senate parliamentarian dashed those ambitions on Thursday night when she ruled that the hike was not permitted under the rules of budget reconciliation, the byzantine legislative procedure Democrats are using to avoid a filibuster.
Now they’re resorting to a somewhat strained fallback plan: Lawmakers are promising to pass a tax hike on large companies that fail to pay their employees a living wage, thus forcing them to increase pay. A senior Democratic staffer told me that the bill was still being written and that key details are very much still up in the air. But Senate Finance Committee Chairman Ron Wyden explained its gist in a statement on Friday. His proposal would “impose a 5 percent penalty on a big corporations’ total payroll if any workers earn less than a certain amount.” At the same time, it would offer smaller businesses new tax breaks as an incentive to raise wages.
In short, Democrats are now talking about a Walmart tax and a mom-and-pop bonus. Big businesses get a stick; small businesses get some carrots.
It won’t be possible to fully judge this specific proposal until Democrats release a more complete version. However, there are many reasons to be concerned about the basic idea. At best, enacting a minimum wage hike through the tax code would be a kludgey workaround. But when aimed narrowly at large companies, creating such a policy might actually be worse in some senses than doing nothing for the moment and continuing to fight for a normal minimum wage hike.
For those who have a long memory for short-lived pieces of stunt legislation, the new proposal might sound somewhat reminiscent of the old Stop BEZOS Act. Introduced by Sen. Bernie Sanders back in 2018, the bill would have forced companies to reimburse the government for the cost if their employees used social safety net programs like Medicaid or food assistance. The notion was that the taxpayers shouldn’t have to subsidize poverty wages at massive, profitable corporations like Amazon. The bill had obvious design flaws—among them, it almost certainly would have discouraged companies from hiring workers like single parents who might turn to the welfare state for help. But most people involved with the idea seemed to recognize that it was basically a messaging vehicle meant to exert public pressure on Jeff Bezos for his company’s treatment of warehouse workers. In that respect, it was successful: Amazon later lifted its minimum wage to $15 an hour and is now strongly advocating for a national increase to that level. But it’s not clear anybody ever actually wanted the bill to become law.
The tax Democrats are now contemplating seems like it would be a step up from Stop BEZOS—but not by much.
The first, most obvious problem is that any policy aimed mostly at large companies would do little to help the vast army of low-wage workers like waiters, motel maids, and nursing-home caretakers employed by small businesses. Fast food franchises are some of the country’s most important employers of minimum-wage labor, but because they’re owned independently, they’d presumably escape any tax that targets major corporations. (A Democratic Senate Finance aide confirmed for me that “while conversations are ongoing, franchises would generally not be covered given their lower annual receipts”). This is no small oversight. In 2019, more than half of Americans who made less than $15 per hour worked at firms with fewer than 500 employees, and more than one-third were at ones with fewer than 25, according to an analysis of census data that Evercore ISI economist Ernie Tedeschi ran at my request. (Those numbers exclude the self-employed, though including them doesn’t change the picture much). Sure, wailing on Walmart might make for good politics. But it turns out that a minimum wage hike that doesn’t reach America’s KFC franchises and nail salons is not going to be much of a minimum wage hike. And by the way, Walmart already pays $11 an hour minimum.
Again, it’s not that Wyden completely ignores this issue. He does include those carrots to encourage small businesses to increase pay—but they look a bit too small to make much difference. In his statement, the senator said he would provide small businesses that raise wages “an income tax credit equal to 25 percent of wages, up to $10,000 per year per employer.” To put that in perspective, $10,000 is less than it would cost to increase a single, full-time worker’s pay from $7.25 to $13 an hour. That’s not going to cause a local Chamber of Commerce type who owns a handful of McDonald’s in Mississippi to suddenly jack up pay for his staff. Also, how will this subsidy work in states that have already passed higher minimum wages? Is the federal government going to subsidize the pay of Wendy’s workers in Texas, but not in New York or California?
Another concern: If only large companies are forced to increase wages, it could lead even more of them to outsource jobs to small outside contractors, who would be permitted to pay their employees less. More companies would make like Silicon Valley’s giants and hire contractors to man their cafeterias and clean their hallways, doubling down on the trend toward what Brandeis economist David Weil has called “the fissured workplace.“ Wyden suggests his bill would try to prevent this sort of outsourcing. “If a profitable mega corporation like Walmart fires a store’s security guard and replaces him with a contractor who makes far less, my proposal would still require that Walmart pays a penalty,” his statement said. The Finance Committee aide elaborated to me that the tax would cover “all on-site workers” in order “to prevent companies from outsourcing their labor.” But it’s unclear exactly how that provision would be enforced at this point, especially given how strained for resources the Internal Revenue Service currently is. The agency can barely manage to audit tax cheats these days; We’re now going to ask it to police our labor laws, too?
There is an obvious, sensible solution to some of these issues: Democrats shouldn’t just aim the new tax at big businesses. Instead, they should apply it to all businesses, just like they would a real minimum wage. It’s unclear why lawmakers aren’t going with that approach in the first place. Perhaps they’re afraid of being held politically responsible for increasing taxes on small businesses during a pandemic. But if so, that would be absurd; in the end, we’re talking about a minimum wage increase through a slightly different mechanism. The people who would be pissed about the tax would have been pissed about a normal wage hike. (When I asked the Senate Finance aide about this, I was told: “An incentive for the smallest of small businesses and penalty for mega-corporations is the approach that we believe could gain political support, raise the wages of the largest number of workers, and comply with the rules.”)
Right now, these are just the obvious issues surrounding the Wyden plan. It’s also possible there will be problems nobody is anticipating yet. As a number of economists have already pointed out, we’re talking about a brand new, untested tax scheme that could be difficult to enforce. It seems like these circumstances are ripe for unintended consequences.
Instead of rushing forward with something half-baked, Democrats might simply be better off waiting a bit. They could try to negotiate with Republicans to raise the actual minimum wage to something below $15. (Mitt Romney and Tom Cotton recently proposed a $10 minimum in return for concessions on immigration, which seemed a bit laughable but might at least be a starting point for negotiations). They could carefully design a comprehensive tax that applies to all businesses, like a real minimum wage. Or leadership could force a showdown with moderate members over the filibuster, and make them to choose between the 60-vote rule and a policy that’s wildly popular with voters.
What Democrats have now is a hastily thrown together idea that might not even help many of the fast food workers who kickstarted the entire Fight for $15 movement. I’m sure many lawmakers might see it as just a temporary placeholder, something they can pass quickly just to show they are doing something for the working class. But it seems like there’s a real danger that members of Congress would pass a proposal like this and then take it as an excuse to let the minimum wage fall off their agenda for the rest of the Biden administration, knowing that they at least forced Walmart to pay its associates a bit more. Better for Democrats to pause and take a breather now, so they can fight for a real minimum wage hike down the line.
Correction Feb. 27, 2021: This post originally misstated that just under half of all Americans who earn less than $15 an hour worked at firms with fewer than 500 employees, and just under a third worked at ones with fewer than 25. The correct figures are 55 percent and 37 percent, respectively. The graph has also been updated to reflect the correction as well.