Last week, Senator Marco Rubio (R-FL) introduced the Economic Mobility for Productive Livelihoods and Expanding Opportunity (EMPLEO) Act aimed at raising after-tax pay for low-wage workers in Puerto Rico, while reducing employer costs. He’d perform this seemingly impossible task by reducing the minimum wage while increasing—and redesigning in important ways—a refundable tax credit.
The plan could bring more Puerto Ricans into the above-ground economy. But more important, it could test an idea Rubio has kicked around before – providing refundable tax credits throughout the year, rather than only when workers file their returns each spring.
Today, low-income families in most of the United States benefit from two wage support policies: the minimum wage and targeted income tax credits. The minimum wage serves as a floor on wages for most workers. The earned income tax credit (EITC) and child tax credit (CTC) mostly subsidize workers with children in low-income families, though some low-income workers without children receive relatively small EITC benefits.
Puerto Ricans do benefit from the minimum wage but because they do not pay federal income tax, they receive no benefits from the EITC and only partial benefits from the CTC. (Families with at least three children can calculate their CTC based on payroll taxes owed, rather than earnings – the base for most families’ CTC calculations.) Rubio would change both these policies. He’d help employers by reducing the minimum wage and assist workers by providing refundable tax credits that would more than offset any lost wages.
Rubio’s bill would cut the minimum wage from the current federal minimum of $7.25 to as little as $5.00 per hour, but only for employers that agree to administer a refundable payroll tax credit. Rubio hopes the change would encourage employers to hire more workers and move their businesses out of the underground economy. This, in turn, would mean workers would start paying payroll taxes and get Social Security credits – something that would put them on the path to qualifying for Social Security benefits in the future. Workers whose pre-credit wages dropped would receive Social Security credits based on these reduced wages.
All hourly workers would qualify for a refundable credit equal to one half the difference between their wage rate and $10 per hour. Employers would distribute the credit through the payroll tax in each regular paycheck. For example, a worker earning $5.00 per hour would receive a refundable credit of $2.50, raising his or her net wage to $7.50. A worker earning $9.00 per hour would get a subsidy of 50 cents per hour.
The program would not cover everyone. Employers would have to agree to participate. And self-employed workers could not participate since their wages are difficult to document. Some high-income families that include a low-wage worker, such as a child or spouse, also would be eligible. While this feature could direct a fair amount of money to high-income families on the mainland, it would be a smaller problem in Puerto Rico, because the island has relatively few high-income families. In 2015, Census calculated a median household income of $19,530 and 46.1 percent of the island’s population lived in poverty.
The most interesting aspect of this plan is that it would test the concept of delivering a refundable credit through the payroll tax. No mechanism currently exists to do this. The proposal would have employers pay employees the credit out of the payroll taxes they would otherwise send to the federal government. If a company withheld more payroll taxes than it owed in wage subsidies, the company would see no difference in their bottom line. If the credits were expected to exceed payroll taxes withheld, IRS would disburse the wage subsidy to companies at the start of the quarter for companies to then disburse to employees in an attempt to not affect the company’s bottom line. In some cases, a company would have to front the money and wait for IRS reimbursement. That could be tricky. But if the IRS and Puerto Rican employers could figure this out, we’d have a new way to disburse tax credits that could really help low-income workers.
