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How the Incoming Administration and Congress Can Make the Most of the 5-Year Extension of the Paid Family and Medical Leave Tax Credit

Tucked into the 2020 year-end COVID-relief and spending package was a five-year extension of a business tax credit aimed at increasing access to paid family and medical leave to low-wage workers who are less likely to have employer provided benefits. With this extension there is an opportunity for the new Administration to promote businesses that utilize this tax credit and expand access to paid leave. Lawmakers should also use this time to examine the success of this policy by authorizing an in-depth examination of its impact.

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What is the Paid Family Leave Tax Credit?

Originally proposed by U.S. Senators Deb Fischer (R-NE) and Angus King (I-ME) and Representatives Mike Kelly (R-PA) and Terri Sewell (D-AL) as the Strong Families Act, the tax credit was enacted as a two-year pilot in the Tax Cuts and Jobs Act of 2017 (TCJA). The tax credit is available for businesses of all sizes that provide their employees with paid parental, family caregiving, and personal medical leave. To qualify, employers must provide at least two weeks of paid leave that compensates their employees with at least 50% of their regular earnings. The size of the tax credit depends on the generosity of the paid leave benefits, ranging from 12.5% of the cost of paid leave that replaces 50% of earnings to 25% of the cost of paid leave benefits replacing 100% of earnings. The credit is only available for leave taken by workers who have been employed for at least one year and who make less than $72,000 annually. At the end of 2019, the tax credit was extended for one additional year.

Why the 5-Year Extension is Important

Because the credit was launched as a short-term pilot program, there has been considerable uncertainty about its future, potentially discouraging businesses from using it. Businesses that are uncertain about the tax credit’s future would be less likely to introduce or expand benefits if they believe workers may soon lose them. Now that the program has now been extended for 5 years, through the end of 2025, employers can more confidently plan to utilize the credit to help provide paid family and medical leave.

Where to Go from Here

With the provision now in place for 5 years, the Biden Administration has a real opportunity to promote the tax credit and study its effectiveness in helping employers provide paid leave benefits. Specifically, the Departments of Treasury and Labor, in partnership with the Small Business Administration, should market the program and disseminate educational materials to companies, small business owners, and workers. The Administration should help employers understand which employees are eligible for coverage and how to request reimbursement from the IRS.

It is also important that the federal government takes the next 5 years to study the impact of the tax credit. We recommend that lawmakers authorize and appropriate funding for the Government Accountability Office to conduct an independent, in-depth study of the efficacy of this tax credit. In addition, the Department of Treasury should collect information and report annually on the take up and impact of the program. These studies would enable lawmakers and analysts to answer questions such as:

  • How many workers became eligible for paid family and medical leave through their employer as a result of the tax credit?
  • Describe the demographic characteristics of workers who became eligible for paid family and medical leave. Did the credit help expand paid leave for low-skill, low-wage workers who need these benefits the most?
  • Of the workers who became eligible, how often and for how long did they utilize their paid family and medical leave benefit?
  • How many employers who apply for the tax credit are providing a paid family and medical leave benefit for the first time?
  • How does the impact of the tax credit differ for companies in states with paid leave programs and those not in those states?
  • What are the federal budgetary implications of the tax credit and what would be the cost of a permanent or more broadly utilized program?

Analysis of these and other questions will be critical to understanding the impact of the tax credit on providing access to paid family leave.

Conclusion

The 5-year extension of the paid leave business tax credit is a positive step for expanding paid family and medical leave in the United States. While unanswered questions remain among economists and advocates regarding the tax credit as a policy vehicle for paid leave, promoting the credit and examining its impact will both expand paid family and medical leave in the near-term and empower lawmakers with the information needed to evaluate the efficacy of the program for the future.

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