The new minimum wage law could increase state revenue as more money paid to employees turns into more disposable income and more tax dollars collected from workers and employers.
“It’s not just about the minimum wage going up. It is all the things that are computed off of that,” said Ralph Albert Thomas, CEO and executive director of the New Jersey Society of CPAs. “The FICA, Social Security, Medicaid, New Jersey unemployment disability income. … That stuff will all have an impact, and employees will be paying more state and federal income tax as their income increases,” Thomas added.
Starting July 1, the minimum wage for most workers will increase from $8.85 to $10 an hour, and then to $11 an hour on Jan. 1, 2020, and an additional $1 every year until it reaches $15 an hour in 2024.
Between now and Jan. 1, 2021, tipped workers will see their base pay gradually increase from $2.13 to $5.13 an hour. Seasonal workers, those working solely between May 1 and Sept. 30, and businesses with fewer than six employees will see their wage increase at a slower rate, reaching $15 an hour by 2026.
Where the money goes
The residents who would reap immediate benefits from the minimum wage increase — those earning under $15 an hour — would likely pay the state income tax rate of 1.4 percent, which applies to those earning up to $20,000 a year, or 1.75 percent rate, which applies to residents earning between $20,000 and $35,000 a year.
Nationwide, employees pay 6.20 percent of their paycheck for Social Security and 1.45 percent for Medicare, both of which the employer matches.
“It increases not just what you have to pay to the employee, but what you have to pay in federal taxes,” said Brian Silikovitz, partner and chair of the tax group, at Lowenstein Sandler LLP. “Now, of course the employer will get an income tax deduction for wages but obviously that doesn’t make up for everything.”
Most small businesses would be counted as “pass-through businesses” under the new federal tax law, whereby the owner pays an individual rate of around 37 percent. But the tax law includes a pass-through tax deduction of 20 percent on net business income, which would bring the federal rate down to roughly 29.6 percent, Silikovitz said.
In addition to the state income tax, employees will have to pay 0.19 percent in state disability tax, 0.43 percent in state unemployment insurance tax and 0.09 percent on the state family leave insurance tax.
Thomas noted that revenue for businesses might go down as a result of the minimum wage increase, meaning those businesses could ultimately pay less on their taxes.
“It’s going to be hard for New Jersey employers to hire somebody new at the minimum wage when people who have five or 10 years are earning $15,” said Paula Ferreira, a partner at accounting firm Mazars USA LLP. “So [the employer is] going to have to give employees a higher salary to motivate them.”
Thomas called that dynamic the “elevator effect.” To compensate, large employers might switch to automation and small businesses will reduce the hours of many of the employees.
He added that he was surprised to learn the small business definition only applies to businesses with fewer than six employees. Small businesses, he said, would usually have up to 50 employees.
Maintaining the safety net
Ferreira suggested that increased tax revenue could ultimately mean more money available for the state’s safety net programs, such as unemployment and disability.
But the effects on the beneficiaries of those programs are unclear. Both proponents and opponents of the minimum wage law worried that the increase could mean recipients of the state’s safety net services could be boosted out of their eligibility for those programs.
To that end, the most recent version of the bill, which Murphy signed, calls for an 11-member task force that will examine how the wage affects the state’s low-income and disadvantaged residents who rely on those services. The task force will release annual reports on those effects, and the changes the state could make to those programs to mitigate them.
“We want to make sure that the state is bumping up the thresholds as we increase salaries for people until they can really get a more livable wage, when we get to $15,” said Renee Koubiadis, director of the Anti-Poverty Network of New Jersey.
Eligibility is determined based on the federal poverty level of a multiple or percentage of that level.
For 2019, the yearly FPL salary is $12,490 for a family of one, according to recent data from the U.S. Department of Health and Human Services. The FPL is $16,910 for a family of two, $21,330 for a family of three, $25,750 for a family of four, $30,170 for a family of five, $34,590 for a family of six, $39,010 for a family of seven and $43,430 for a family of eight.
One program, New Jersey Family Care, includes publicly funded health insurance programs such as the Children’s Health Insurance Program (CHIP) and the expanded Medicare and Medicaid services. Eligibility for children under 18 is anyone earning up to 355 percent of the FPL, and an income up to 138 percent of the FPL for parents and caretaker relatives.
Another program, the state’s low income home energy assistance program (LIHEAP) requires recipients to earn no more than 200 percent of the FPL. The New Jersey Supplemental Nutrition Assistance Program, more commonly known as food stamps, require the recipients to earn no more than 185 percent of the FPL.
“Lawmakers would have to increase those thresholds as the minimum wage is going up gradually, to make sure that we’re not harming families before they get to that $15 minimum wage,” Koubiadis said.
Scott Novak, of counsel at the law firm Post Polak, suggested that the overall minimum wage increase might not necessarily be harmful to workers.
“Again, the age-old question, you have to make more to pay more, so it’s not such a bad thing if people are earning a little more money and paying a little more in tax,” Novak said.
“I think they’ll notice a positive difference because the taxes are not going to be so burdensome, particularly at those levels that the tax withholdings will overcome the amount of the increase, so I think they’ll notice more of an increase in their pay,” Novak added. “It’s a happy increase, for lack of a better word … for those who are earning minimum wage.”
Many state Republicans, after Murphy’s signature of the minimum wage increase, have criticized the law.
Sen. Declan O’Scanlon, R-13th District, ranking member of the Senate Budget and Appropriations Committee, said the bill was “disastrous” and would have “widespread negative impacts for New Jersey,” such as a high rate of job loss among small businesses.
And Assemblyman Hal Wirths, R-24th District, criticized Democratic lawmakers for not including an off-ramp for employers so that they would not have to pay the automatic increases in the event of an economic downturn.
“While it ignores economic realities like the inevitability of a recession … there is no way small businesses will be able to handle the increased labor costs,” Wirths said Feb. 4 in a statement.
Business groups, such as the New Jersey Business and Industry Association, said the wage increase will make the state more unaffordable.
“Job creators have told us that this action will increase their labor costs both in the short and long term; impacting the slim profit margins they already face given their need to contend with the highest taxes and worst business climate in the nation,” NJBIA President and CEO Michele Siekerka said in a Feb. 4 statement.