Paid Leave Tax Credit Gains Momentum as Federal Mandate Stalls

Support for a little-known tax credit is gaining steam on Capitol Hill as a tool to expand paid leave access to more Americans while lawmakers remain divided over launching a permanent federal program.

Most employers can get as much as a 25% tax credit for providing their employees with paid leave, but that incentive is set to expire in 2025. Sens. Angus King (I-Maine) and Deb Fischer (R-Neb.) introduced a bill (S. 3680) this month that would make the credit permanent and more accessible to employers, particularly small businesses that want more certainty when setting up a costly benefit.

The measure comes in the wake of a House bipartisan paid leave working group releasing recommendations for legislation, including an expansion of the tax benefit as one of its core “pillars” that can clear Congress.

Advocates and lawmakers who support federal paid leave legislation say the concerted effort by members of both parties in both chambers to achieve compromise is evidence of momentum in the right direction.

In the short term, lawmakers are turning to incremental measures such as the employer tax credit because a comprehensive, federally run program still faces long odds on Capitol Hill.

It’s also an increasingly popular choice for lawmakers, particularly Republicans who oppose establishing a major new federal program.

Rep. Randy Feenstra, an Iowa Republican who sits on the tax-writing Ways and Means Committee, said in an interview he plans on introducing legislation similar to the Senate bill in the next few weeks.

“I don’t think we need to start another government program,” Fischer said in an interview. “We should have a way to help businesses be able to provide for their for their own employees, and to have it be a sustainable method going forward.”

Making It Permanent

Fischer said she started looking for a tax benefit for employers that provide paid leave over 10 years ago, and was able to include the Employer Tax Credit for Paid Family and Medical Leave in the Republican-backed tax law that was enacted in 2017.

The measure, launched as a two-year pilot program, allows employers to claim a 12.5% tax credit if they provide paid leave at 50% of workers’ wages, and a 25% tax credit for paid leave with 100% wage replacement.

Congress has renewed the credit twice, with the latest extension set to expire next year along with a swath of other tax breaks for individuals that were contained in the 2017 law.

But King and Fischer said that expiration date has hampered employers’ willingness to participate, since they may not want to start a costly paid program without assurance they can count on the tax benefit going forward.

“One of the problems with it being temporary is that employers have been reluctant to embrace it because they’re afraid it’ll be taken away, and then they’ll have to take away the benefit,” King said in an interview.

The American Institute of Certified Public Accountants endorses the King-Fischer approach, partly because it does make the tax credit permanent. Businesses interested in offering paid leave want certainty, said Kristin Esposito, AICPA’s Director for Tax Policy & Advocacy.

Eligibility Expansion

S. 3680 also would adapt to changes to the paid leave landscape that have occurred over the nearly six years since the tax credit was enacted.

For example, it would expand the number of employers eligible for the credit in two ways, said Christa H. Bierma, a former Treasury official now at EY’s national tax benefits and compensation group.

First, under the current law employers are disqualified if they’re mandated by one state to provide paid leave but not in another state where they do business. The bill would allow those employers to qualify for the credit if they provide paid leave in those states where it’s not required.

Another issue is that employers must offer the program to employees who work less than 20 hours a week, even if they work only a few hours. The new legislation would allow employers to have a 20-hour threshold to qualify for the leave.

Also, since the credit’s creation, several states— including Florida, Texas, and Virginia—have passed laws authorizing insurance companies to sell a paid family leave product. The bill would also allow businesses that pay for paid leave insurance to benefit from the tax credit under the same terms as those that directly provide paid leave.

The provision—which lawmakers say would also increase access to the credit—gained praise from the insurance industry.

“The tax credit offers a means for large and small employers to provide their workers with an insurance benefit to cover their paid family and medical leave when needed,” American Council of Life Insurers CEO Susan Neely said in a statement following the bill’s introduction. “It also makes it easier for employers to qualify for the credit which will help expand access to more people.”

Price Tag Problems

But the expansion of employer eligibility to the paid leave tax credit could raise the benefit’s cost, Bierma said.

If the bill is too costly to be added to a future tax package, lawmakers may again set an expiration date, change the wage replacement rates that are taken into account, or lower the threshold for qualifying employees, she said.

“I think some form of it is likely to pass, but whether it passes in the current form, it really does depend on the price tag,” Bierma said.

The Joint Committee on Taxation hasn’t yet scored the legislation. The most recent estimate from JCT found that the extension of the credit through 2025 would reduce federal revenues by an additional $3.8 billion between fiscal years 2021 and 2030, according to a Congressional Research Service report.

The cost of the credit has declined over time, though, most likely the result of more states establishing their own paid leave programs, the report said.

The best chance for an expanded credit to be enacted is likely in 2025, when much of the 2017 tax law—including the paid leave credit—expires, and lawmakers will be jockeying for a host of tax priorities to become law.

Many employers interested in providing paid leave aren’t even aware of the tax benefit, said Ben Gitis, associate director for economic policy at the Bipartisan Policy Center, which endorsed the bill. None of the small businesses in a focus group organized by the BPC knew about the tax credit, he said.

The bill has a provision to expand awareness and education about the credit’s existence and how to use it which should help incentivizing businesses to provide paid leave, Gitis added.

Yet some advocates say that may not be enough, saying the tax credit’s voluntary nature does little to push employers to expand benefits.

“This approach has not substantially expanded access and even with proposed changes is not a solution to our need for a comprehensive and universal paid leave program with the proven results our communities deserve,” Dawn Huckelbridge, executive director of the Paid Leave for All Campaign, said in a statement on the bill.

—With assistance from Chris Marr.