Commentary

California Minimum Wage Hike Could Cost State Taxpayers Billions

By Hans Bader | April 12, 2016 | 11:28am EDT
In this Tuesday, July 21, 2015 file photo, workers hold a rally in Los Angeles in support of the Los Angeles County Board of Supervisors' proposed minimum wage ordinance. On Saturday, March 26, California legislators and labor unions reached an agreement that will take the state's minimum wage from 0 to 5 an hour. (AP Photo/Nick Ut)

California’s legislative analyst projects that the recent increase in the state’s minimum wage to $15 an hour will cost taxpayers $3.6 billion more a year in government pay alone.

But that’s just the tip of the iceberg in terms of the cost to state taxpayers. By wiping out countless jobs, it will also drive up state welfare costs. The American Action Forum estimates that the increase will cost California nearly 700,000 jobs. Adam Ozimek, an economist at Moody’s Analytics, calculates that 31,000 to 160,000 California manufacturing jobs will be lost. Moreover, among low-wage workers who manage to stay employed, it will increase the taxes they pay to the federal government, while reducing their earned income tax credits from it.

By wiping out jobs, and increasing the number of people on welfare, the minimum wage increase will achieve the perverse goal once advocated by California’s governor, Jerry Brown. In 1995, before becoming governor, he stated, “The conventional viewpoint says we need a jobs program and we need to cut welfare. Just the opposite! We need more welfare and fewer jobs.

Similarly, The Washington Post’s Lydia DePillis, a booster of the minimum wage increase, says that the “$15 minimum wage sweeping the nation might kill jobs – and that’s okay.” Governor Brown hinted at these job losses in signing the minimum wage hike into law, when he said, “Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense.”

Job losses from the minimum wage increase will reduce state tax revenue. Meanwhile, much of the benefit of the increase to low income workers who manage to keep jobs at the increased minimum wage will prove illusory due to increased federal taxes and reduced federal earned-income tax credits and food stamps. As Henry Schmid notes, “the tax implications of going from a $10- to a $15-an-hour minimum wage” are fiscally “very significant. For a family of four with both spouses making the minimum wage, their federal tax will increase from $4,106 to $7,219, payroll tax will increase from $2,579 to $3,869, their earned-income tax credit (EITC) will be reduced from $596 to zero ... and the $2,400 food-stamp credit will be lost. Of the $20,800 increase in income in going from $10 to $15 an hour, $7,778 will be diverted to the government, which doesn’t include loss of other income-dependent government welfare programs and added costs due to the resulting inflation. Over one third of the wage increase will flow to the [federal] government.”

The increased unemployment from minimum wage increases is largest for the young, unskilled, and less educated.

Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law.

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