Are employer tax credits the best way to deliver paid leave?

In a CNN op-ed yesterday, Senators Deb Fischer (R-NE) and Angus King (I-ME) announced a proposal to encourage employers to provide paid leave to their workers. This proposal stands in contrast to the Family And Medical Insurance Leave Act introduced by Sen. Kristen Gillibrand (D-NY) and Rep. Rosa DeLauro (D-CT), which would establish a federal trust fund into which employers and employees would pay to cover paid leave in the future.

Clearly, paid leave is gaining traction on Capitol Hill, and for good reason. Workplace flexibility can help reduce the gender pay gap and help parents balance work and parenting, which helps future human capital development. The United States is one of the few developed countries that lacks a national paid leave program. The proposal from Sens. Fischer and King seeks to address this problem by offering tax credits to employers that offer paid leave to workers. The ends of the program are laudable, but the means of providing the benefit may prove ineffective.

Employer-side tax credits have been used in the past, but primarily for purposes other than spurring the extension of employee benefits. For the most part, they’ve been used to increase employment among targeted groups of workers. The Work Opportunity Tax Credit, for example, provides a tax credit to employers that hire certain workers, such as recipients of supplemental nutrition assistance and people with disabilities.

But the track record of these credits are mixed. The use of these programs are fairly limited, according to reports from the Urban Institute and Congressional Research Service. Surveys show most employers are not aware of these programs. But when employers do opt to use these tax credits, the workers who are hired tend to see their earnings increase rapidly compared to similar workers whose employers did not use the credits. That said, this finding could be due to sample selection because firms that use the credit may have already wanted to hire these workers.

Either way, there is one example of a tax credit that tries to provide benefits. The Affordable Care Act provides a tax credit to small employers to encourage them to provide health insurance. But a Treasury Department study of that tax credit has found limited take up, a finding echoed in a study by the Government Accountability Office, the non-partisan investigative arm of Congress. According to GAO, the tax credit was too small to spur adoption and the process to actually claim the credit was onerous.

This health insurance tax credit, however, is only four years old, so future evaluations may find the program is more effective. But the evidence as of now is not positive.

But does it make sense for employers to be the ones providing paid leave? Paid-leave policies may require the creation of a trust fund or insurance pool—where employees and possibly employers pay in over time and then workers can draw from it when they need to take time off. The reason: some employers might not be large enough to safely smooth that risk compared to larger companies, many of which already offer some forms of paid leave. And ideally workers should be able to take earned leave from one job to the next, which they can’t do with an employer-provided program.

The proposal from Sens. Fischer and King is similar to our system of employer-sponsored health insurance, with its well-known flaws. The trust fund in the FAMILY act would be government-run, allowing for greater risk-sharing and portability. States such as California, New Jersey and Rhode Island are moving forward with paid-leave programs that use a government trust fund to pay out the benefits.

With an issue as important as workplace flexibility, it’s encouraging to see as many proposals as possible. Sens. Fischer and King are doing a great service by highlighting a policy solution. Understanding which method is the most effective and efficient is a critically important policy and research question for the years ahead.