Insanity in Connecticut: A New $1 per Hour Tax on Low Wages

By Christopher J. O'Connell

The state of Connecticut may be embarking on new territory as they seem to be pushing a rather creative way to extract revenue from for-profit businesses. The state legislature of Connecticut has proposed what’s commonly referred to as SB1044. Muddled in the labyrinth known as legal terminology, we find this gem of a sentence in the bill itself:

Any covered employer that employs, or whose franchisee employs, any employee (1) who was listed on such covered employer’s or such franchisee’s payroll for at least ninety calendar days prior to the completion of the most recent calendar quarter, and (2) whose wages paid by such covered employer, or such covered employer’s franchisee, during such quarter were less than or equal to fifteen dollars per hour, shall pay a fee to the Labor Commissioner for each such employee. Such fee shall be assessed quarterly and shall be equal to one dollar for each hour such employee worked for such covered employer during the previous quarter. Such fee shall not accrue until January 1, 2016.

“Covered employers” apparently includes for-profit businesses that include 500 or more employees, because of course the legislators don’t want to be seen as hurting small businesses. But the fact that they even created the 500-employee minimum is a de facto admission that the firms that are affected by this bill will feel at least somenegative impact.

The Down Side of Mandated Wages

What are these negative impacts? Obviously, the bill seeks to impose higher wages — or at least to punish employers that pay wages deemed to be too low — by raising the cost to the employer (via a state-imposed fee) of retaining an employee below the target wage of $15/hour.

Will this benefit employees? In Human Action, Mises had this to say about wages:

What the employer buys on the labor market and what he gets in exchange for the wages paid is always a definite performance which he appraises according to its market price. … In weighing the pros and cons of the hiring of workers, the employer does not ask himself what the worker gets as take-home wages. The only relevant question for him is: What is the total price I have to expend for securing the services of this worker?

We immediately see that the Connecticut proposal will have the effect of raising the cost of hiring an employee while adding no additional benefit for the employer. Thus, we can conclude that a mandated increase in wages will eliminate jobs from the workplace because fewer workers will be able to offer services that are greater in value than the cost of employing them.

A Tax on Low-Wage Employees?

But this bill is no ordinary minimum wage law, because in many cases, the extra cost to the employer will not necessarily go to the employee. In many cases, the new mandate simply acts as a tax on low-wage employees.

How would this work exactly? To put it simply, certain employers would be mandated to raise wages to $15/hour for those employees who currently earn less than that. Or, the employer can pay a penalty of one dollar per hour, per employee. Let’s say a worker earns the minimum wage in Connecticut which happens to be $9.15/hour. The employer could keep the wage at $9.15 and pay the penalty which would effectively mean the employer’s cost is now $10.15/hr. The employer presumably would choose this price to $15/hour.

Naturally, the employer could choose to fire this employee if the employer figures the marginal productivity of this worker is not worth $10.15/hr. If the employer decided to keep this minimum wage employee and pay the per hour tax, however, that extra dollar goes not to the employee, but to the government. Even if the employee earned, say, $12/hour, we’re faced with a similar problem. The employer can pay the extra dollar fine making their effective cost $13/hour or decide it’s not worth the hassle. If the pre-existing wage is closer to $15/hour (i.e., $14.50/hour) of course some employees may find that their wages would increase to $15/hour.

The Real Goal Is Government Revenue

What makes this bill especially peculiar can be found in the bill’s title: “An Act Concerning the Recoupment of State Costs Attributable to Low Wage Employees.”

In other words, lawmakers are pushing this bill as a way to recoup the costs of subsidizing employees who are paid wages but still qualify for public assistance programs. Of course Wal-Mart is at center stage for the advocates of this bill. Nina Liss-Schultz writes:

Walmart in particular has become a target for lawmakers looking to raise wages, as the company has gained national attention for its low wages. The corporation, which employs 1.5 million people across the country, has about 825,000 employees who make less than $25,000 annually … [and] the company’s employees make up 18 percent of the Supplemental Nutrition Assistance Program (commonly referred to as SNAP or food stamp) market, according to a 2014 report by Americans for Tax Fairness. … Walmart, even after the wage increases, remains a burden on taxpayers. Taxpayers spend $6.2 billion every year on public assistance for Walmart employees who make too little money to make ends meet, according to one estimate.

Lawmakers for the state of Connecticut want you to hop on their merry-go-round of logic. Because money is expropriated from taxpayers and handed to low wage employees, we must then expropriate funds from law abiding firms to “recoup” some of those costs. The money taken from Wal-Mart and similar firms is not given to the taxpayers, of course, but is retained by the state.

The funds taken from firms via this legislation would then be spent toward state programs for the elderly and children and on programs like the Office of Early Childhood. So, we take money from employers that would have been spent on wages, and the state spends it on government programs instead. Many workers lose their jobs, but a few get lucky and see their wages bumped up to a “living wage.” Those who become unemployed can then go on public assistance. It’s win-win for the state, and if that strategy doesn’t win votes and get the politicians behind it re-elected, I don’t know what will.

The above originally appeared at Mises.org.