New Report Reveals Prop 118 Could Run Out of Money Almost Immediately

A new report released by the nonpartisan Common Sense Institute (CSI) this week has found that Proposition 118, a ballot measure which would create a paid family and medical leave insurance program in Colorado, would likely require a higher payroll tax than projected to remain solvent.

If passed, Prop 118 would impose an initial .9% payroll tax on Colorado workers and businesses in order to fund up to 12 weeks of paid leave for eligible employees beginning in 2024. It would create a new state department, which would have the authority to raise the tax to 1.2% of wages if the program needs more funding.

CSI’s report, however, found that the 1.2% cap may not be enough to meet the demand of such the program, and that the proposal likely comes with significant direct and indirect costs. Compared to other states, Prop 118 would provide some of the most generous benefits in the country – including up to 90% wage replacement, which no other state currently offers. According to the report, the cost of the program could grow significantly in a short period of time, necessitating an increase in the payroll tax to up to 1.7% of wages in order to meet demand.

“While there are undoubtedly benefits to both workers and employers in offering paid leave related benefits, it is critical that voters recognize the potential costs, as those direct and indirect costs are likely why most employers don’t currently offer this level of benefit,” the report states.

The report also analyzed similar programs in other states to compare claims rates, which is the percentage of eligible workers who are anticipated to use the program each year. CSI found that the projected utilization rate of Prop 118 is much lower than other states, raising serious concerns about the cost of the program. The fiscal analysis for Prop 118 estimates a 3.53% claims rate with an average of 12 weeks of leave taken. Other states have seen utilization rates significantly higher than that, ranging from 4.08% to 7.10%, with the average length of leave taken ranging from 8 to 13 weeks.

According to CSI, if the program is more popular than anticipated, it runs the risk of quickly becoming insolvent. For example, if 6.2% of eligible individuals take leave (instead of the projected 3.53%), and the average length of leave is 9.5 weeks, the collections in the first year of the program will not be sufficient to cover the benefits and administrative costs. The legislature would need to step in, either increasing the “premium” (effectively a payroll tax), reducing benefits, or issuing bonds.

How will Prop 118 impact businesses?

CSI’s report found that the total premiums to be paid by the business community by 2025 could reach $1.34 billion under the current structure of the program. To put this in perspective, the corporate income tax net collections on businesses in 2019 was $655 million. This means that Prop 118 would effectively impose an increase in corporate income taxes of 204%.

While there is an option for employers to opt out of the program if they already offer paid family and medical leave to their employees, the process is complex and expensive. Not only do employers have to offer a plan that at least aligns 100% with the benefit levels and leave definitions in the state program, but they also would have to cover the cost “arising out of the administration of private plans.” This fee on businesses would be determined by the appointed head of the program and could be very costly. It also essentially serves as a punishment to employers who want to offer more generous plans to their employees than the state offers.

In addition, the structure of the program will hit some businesses harder than others.

“The one-size-fits-all policy could disproportionately impact small businesses, since they have small profit margins, compared to large firms,” CSI economist Lisa Strunk told Colorado Politics. “Some could lay off employees or cut hours, wages or benefits. Some may be forced to close entirely unable to afford cover the cost of an expensive government mandate.”

How will Prop 118 impact employees?

Under the program, participation is mandatory and all working Coloradans will be automatically enrolled in the program with very few exceptions (local governments can opt-out and federal government employees are exempt – state employees must participate).

While the program begins with a .9% payroll tax with a cap 1.2% in the future, the legislature will likely need to step in to provide additional funding for the program – potentially raising the tax to 1.7% to meet demand, according to the report. And while the cost is split 50/50 between employees and employers, these additional costs on businesses will necessarily need to be made up elsewhere and could be felt by employees directly or indirectly – from wage reductions to reduced benefits.

According to a report from the Family and Medical Leave Insurance Task Force, which was commissioned by the legislature last year to analyze different program structures:

“Economists generally agree that the costs of any payroll tax are ultimately born by the worker, even if the tax is initially paid by the employer. When a payroll tax is paid by employers, wages, wage growth and other benefits are affected so that workers ultimately pay for the tax.” (Family and Medical Leave Implementation: FAMLI Task Force Final Report, January 8, 2020)

With that in mind, the total tax burden for Colorado families is significant. For the average family with a household income of $92,520 (which is Colorado’s average annual household income according to U.S. Census Data), a .9% payroll tax would amount to a $4,163 tax burden over five years. At the cap of 1.2%, that tax burden increases to $5,551. With a potential 1.7% payroll tax indicated by the CSI report, the burden over 5 years would be $7,864.

While the program is well-intended, voters should be aware of the true cost of such an ambitious program – as well as the consequences if the program becomes financially insolvent.

Click here to view the synopsis and full report from the Common Sense Institute.