ALBANY – The teenager making $7.25 per hour assembling Quarter Pounders at McDonald’s will be getting a 75-cents-an-hour raise in January as a result of the new state budget’s minimum-wage deal.
Certainly for your child and also for McDonald’s, a company that saw $1.4 billion in net income in the most recent financial quarter. That is because McDonald’s won’t have to pay a penny of that raise.
Instead, New York taxpayers will foot the tab.
In what national tax experts say is a first in the United States, New York taxpayers, not employers, will cover the higher payroll costs associated with raising the minimum wage to $8 for a select group of employees – teenagers between 16 and 19 years old.
And if the teens already are making $8 an hour, the state will even pay the 75-cents-an-hour difference beginning Jan. 1.
In addition, the state will continue covering a partial share of the increase – up to $1.35 per hour per eligible employee – when the wage reaches $9 per hour in January 2016 and right on through 2018.
The development has critics accusing budget negotiators of a cynical trade in order to get reluctant Republicans to buy into a minimum-wage hike. Some are also questioning the wisdom of a business bailout that could prompt some companies to hire an 18-year-old over someone who is 21 or 30, or even a senior citizen, whose wage won’t be partially subsidized.
The subsidy will add up. If the teen is working full time, the annual subsidy could be worth as much as $2,800 per worker come 2016.
“I’ve never heard of this one. We think it’s particularly outrageous,” said Paul Sonn, legal co-director of the National Employment Law Project in Washington, an advocacy group for low-income workers. “It was really a quid quo pro without a policy justification for it.”
Then there’s this twist: The dangled subsidy will get paid only if the employer pays the exact minimum wage at the time, not a penny more. That represents a built-in disincentive for employers to give teens a pay raise for good performance, the critics say.
Besides the age requirement, a covered employee also must be a student. But the bill does not define student, leaving one legislator to suggest large companies could set up in-house, part-time training schools so an 18- or 19-year-old high school graduate could still be considered a student.
“It’s so poorly conceived that it’s going to be a needless drain on public resources. But probably the most damaging effect is that it has this perverse hiring and wage payment incentives so you only get the credit if you hire a teen instead of an adult and you only get the credit if you pay exactly the minimum wage,” said James Parrot, deputy director and chief economist at the labor-backed Fiscal Policy Institute.
“It’s the first time I’ve ever seen an incentive to keep wages down,” added Parrott, who estimates 80 percent of those affected by the minimum-wage increase are 20 and older.
Strangely enough, even business groups whose members will benefit weren’t taking pride of authorship for this idea.
“It’s certainly not the approach we had asked for,” said Kenneth Pokalsky, head of government affairs at the Business Council of New York State. “I don’t know how this got on the table.”
Unlike some tax credits, the minimum-wage subsidy has no limits on how much the state will pay out annually. And unlike many tax credits, there is no targeting, such as only for small businesses or those located in economically distressed areas.
How much this will cost is anyone’s guess.
The State Senate, where apparently the idea was born, could not provide an estimate on the number of teen workers whose higher wage could be subsidized by the state.
But Scott Reif, a spokesman for Senate co-leader Dean Skelos said there would be no cost to the state until 2015, when the credit will be worth about $24 million to businesses and then grow to $45 million by the following year.
The Cuomo administration estimates there are about 250,000 student youth workers; about 30 percent earn the minimum wage or less.
Officials say the five-year program will cost the state about $201 million, and will be reduced if the federal government raises the national minimum wage during the period.
But some critics say the costs will end up far higher because the state is basing the estimates on past teen employment wage levels without state subsidies that will encourage more teen hiring at the minimum wage level.
Meanwhile, business lobbyists say the minimum-wage hike will cost New York companies at least $1 billion a year in higher payroll costs.
“I’m fairly certain there isn’t a billion dollars’ worth of tax credits in the budget, so it doesn’t pan out in the end. We haven’t neutralized the impact,” said Sampson of Unshackle Upstate.
The Senate passed the measure early Wednesday morning, and the Assembly will pass it today when it convenes to take up the 2013 budget.
The idea of the credit, according to Skelos, is to provide an “important safeguard to protect businesses associated with the wage increase.”
For the past year, Skelos had argued that a minimum-wage increase would be a job-killer, forcing employers on tight margins to lay off workers. The Long Island Republican backed the idea of a lower wage for teens than the full and higher rate but was rebuffed in talks with Democrats.
In a year when the state’s finances are still shaky, critics wonder how the state can justify the tax break.
Even business groups, whose members will benefit from the credit and who fought the minimum-wage hike, said they didn’t ask for the tax break and are concerned the state did not spend more time on a long-needed major job creation effort.
Not all are unhappy.
Credit will help
One employer with a large teenage workforce said he was looking at $100,000 in extra payroll costs with the wage hike. The tax credit will help.
Keith Anderson, whose eight Anderson’s Frozen Custard restaurants employ more than 150 young workers in Western New York, said he understands the logic behind the wage hike.
“You want people to survive on what they make,” he said. “It just doesn’t apply to young kids. They don’t need to pay rent. They don’t need to pay bills.”
Anderson said he gives teen workers raises as they gain more skills. Under this new law, he can continue to do that, but he won’t get the tax credit if he breaks the minimum-wage ceiling.
“We have good kids, and we pay them more so they don’t go somewhere else. If I had to pay them $9 an hour, I’d fire them. But at $7.25, OK, I’ll work with you and get you going,” he said.
Matching other states
When the first phase of the minimum-wage hike kicks in at $8 an hour in January, it will reach a level already attained or exceeded by California, Connecticut, the District of Columbia, Illinois, Maine, Massachusetts, Nevada, Oregon, Vermont and Washington, according to the National Conference of State Legislatures in Denver.
Mike Durant, state director of the National Federation of Independent Business, worries the new credit might involve too much paperwork for some his small-business members without human resources or accounting divisions. And those are the very companies that should be able to get such a tax break if this is the law, he said.
The tax credit’s flaws are not lost on Durant, who believes state officials would have better served the economy, especially upstate, by helping to cut state-imposed business costs and regulatory red tape.
“I think people will call in to question whether (the wage hike) is an appropriate use of taxpayer dollars,” Sampson said.
News reporter Charlie Specht contributed to this story.