A $15 Minimum Wage Increases the Deficit for Good Reasons


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President Joe Biden has called on Congress to pass a gradual increase in the federal minimum wage to $15/hr by 2025, in conjunction with a new round of COVID-19 relief. Senate Democrats intend to use budget reconciliation to pass the relief package with a simple majority. Senators can only use reconciliation when they are voting on items with substantial effects on the federal budget. The Raise the Wage Act of 2021 meets that criteria, so it can be passed with the stimulus package under Senate rules.

The Congressional Budget Office (CBO), the agency that produces cost estimates for almost all bills that get past a committee, published a report on February 8 that confirms that a $15/hour minimum wage would have significant effects on the budget. Specifically, the report found that, if the minimum wage proposal were enacted, federal outlays would increase by $74 billion over the next decade while federal revenues would increase by $20 billion.

This report should help Senator Bernie Sanders, chair of the Senate Budget Committee, who promised to persuade colleagues that the Raise the Wage Act would comply with reconciliation rules.

Under those rules, a provision is ineligible for reconciliation if it “does not produce a change in outlays or revenue” or “if it produces changes in outlays or revenues which are merely incidental to the non-budgetary components of the provision.” The Raise the Wage Act clearly does produce a change in outlays or revenue, leaving only the question of whether that change is “merely incidental to the non-budgetary components of the provision.” Prior parliamentarians have declined to use this bit of text to disqualify provisions that allowed drilling in the Arctic National Wildlife Refuge and provisions that imposed work requirements on benefit receipt. If the budgetary effects of those changes are not “merely incidental,” then neither are the budgetary effects of a minimum wage hike.

Although the CBO report brings good news on the reconciliation front, many have interpreted it as bringing bad news on the budgetary front. The CBO says that the proposal would add $54 billion to the deficit over the next ten years.

Before diving into the particulars of the CBO score, we should put the CBO’s aggregate number into perspective: they estimate that a $15/hour minimum wage would add just $5.4 billion a year to the deficit. This is a drop in the bucket compared to the Trump tax cuts in 2017 or the trillions of dollars of coronavirus relief that was appropriated last year.

When we do look into the particulars, we see that the drivers of this increase in the deficit are overwhelmingly good.

For example, CBO finds that a $15/hour minimum wage entails that “labor income would increase while capital income would decrease.” Payroll tax revenue would increase, but income tax revenue would decrease as more income “would also shift toward lower-income people and away from higher-income people.” Labor is disproportionately taxed more than capital, but minimum wage workers will still be paying lower tax rates than wealthy business owners. Tax revenue decreases because income inequality lessens.

For another example, CBO find that a minimum wage hike would significantly increase the wages of home care and nursing home workers. Healthcare providers would in turn ask for higher reimbursement rates from Medicaid, which would require greater federal spending. Home care workers make on average less than $12/hour, and 24 percent of home care workers live in households below the poverty line. In addition to being good for these low-paid workers, it is also beneficial to the elderly and disabled people they take care of because paying long-term care workers a good wage will attract more people to the job, attenuating staff shortages and reducing turnover. With more staff and a lower turnover rate, “care recipients would receive more consistent and reliable care,” according to a recent study from UMass Boston cited in HealthAffairs.

Reducing income inequality and ensuring that care workers receive a fair wage have been longstanding goals of progressives around the country. The fact that the minimum wage achieves these things is a mark in its favor even if it increases the budget deficit.