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F I S C A L I M P A C T R E P O R T

SPONSOR Ingle

ORIGINAL DATE

LAST UPDATED

2/5/06

2/6/06 HB

SHORT TITLE

RAISE MINIMUM WAGE & INSURANCE TAX

CREDITS

SB 746

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(110,000.0)

(220,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Conflicts with SB 345, SB 606, SB 544 (Employer Sponsored Health Credits

Conflicts with HB 258, SB 449, SB 462 (Minimum Wage)

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY06

FY07

FY08 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

148.5

408.1

556.6 Recurring General Fund:

Office of Courts

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

IRS Statistics of Income (IRSSI)

Responses Received From

NM Department of Labor (NMDOL)

Department of Corrections (DOC)

State Personnel Office (SPO)

Human Services Division (HSD)

Office of the Courts (OC)

Taxation and Revenue Department (TRD)

Senate Bill 746 – Page

2

SUMMARY

Synopsis of Bill

Senate Bill 746 phases in a minimum wage over several years and provides employers an income

tax credit for providing insurance. The wage is increased to $6.00 per hour January 1, 2007; in-

creased to $6.50 per hour on January 1, 2008; $7.00 per hour January 1, 2009; and $7.50 per

hour after January 1, 2010. An employer may pay a training wage to employees for their first six

months of work. That wage is $5.15 per hour in 2007, $6.00 per hour in 2008, $6.50 per hour in

2009 and $7.00 in 2010 and subsequent years. The wage rate for tipped employees, if their tips

are counted as part of their wages, must be equivalent to the minimum wage. There is a prohibi-

tion on local governments enacting a wage higher than the minimum and language the keeps any

local government who has already enacted a higher minimum wage (i.e., City of Santa Fe) from

raising it beyond $9.50 per hour.

The employer-sponsored health insurance credit is for 50 percent of the amount of the employer

premium for providing health insurance to employees.

FISCAL IMPLICATIONS

Minimum Wage:

Fiscal impacts for the minimum wage are difficult to determine. On the one hand, employees

who receive an increase because they have wages that are less than the proposed wage will gen-

erate more income tax revenue and more gross receipts tax revenue as they spend their extra in-

come. Also, if they previously qualified for benefits targeting low income workers, than those

benefits may decline lowing the state’s appropriations. On the other hand, if employers feel they

have to reduce their workforce, then those employees who are laid off will be paying less tax due

to their reduced income and likely need more publicly provided benefits. In the next section

there is more detail on the economic effects of increasing the minimum wage.

The Administrative Office of the Courts reports that the jurors are paid the state minimum wage

for service. Increasing the minimum wage will increase the payments to jurors by $148.5 thou-

sand in FY07 and $408.6 thousand in FY08.

HSD reports that their clients will most likely benefit from the increase in the wage. Even though

food stamp recipients may see a decline in their benefit, the reduction in benefits will be more

than matched by the increase in earnings.

Employer-sponsored Health Insurance Credit:

There are approximately 55,000 businesses in New. Using a calculator provided by TRD, the

population expected to be covered is 450,000.

Average family health insurance costs $9,299 per year per family, $6,401 for a couple and

$3,361 for a single. Using these assumptions, a 50% credit on the employer’s portion of the in-

surance premium, which ranges from 73 percent to 80 percent, is expected to reduce personal

income tax revenues by $1.2 billion per year. However, the credit is not refundable and so is

limited to actual liability.

TRD maximum tax liability to be approximately $220 million per year using ratios derived from

Senate Bill 746 – Page

3

IRS Statistics of Income for personal and corporate income tax returns and a 5 percent effective

tax rate. In FY06, the impact would be half of this amount assuming the tax year is evenly di-

vided amongst fiscal years.

SIGNIFICANT ISSUES

1. Employment Impacts. As Table 1 shows, the bill will affect approximately 5,400 businesses,

or 11 percent of all businesses, and several tens of thousands of employees. The table shows

96,065 employees working in these industries but not all of them will be affected as many are

already at or above the proposed wage. Most of the industries are service and retail trade related,

which are typically low-wage, low-skill industries. These industries are significantly below the

statewide average of $14.52 per hour.

Table 1: Occupations with at least 10 percent of employees at less than $7.50 per hour

Occupation

Employment

Mean

Wage

Hourly

Wage 10

th

Percentile

Hourly

Wage 25

th

Percentile

Hourly

Wage (50

th

Percentile)

Food preparation and serving re-

lated occupations

72410 $7.36 $5.57

$5.97

$6.64

Farming, fishing, and forestry occu-

pations

4130 7.40

5.60

5.95

6.54

Building and grounds cleaning and

maintenance occupations

29710 8.79

5.85

6.69

8.08

Personal care and service occupa-

tions

23150 9.01

6.07

7.16

8.80

Sales and related occupations

77390 12.47

6.02

7.14

9.50

Healthcare support occupations

20310 10.26

7.03

7.95

9.56

Transportation and material moving

occupations

45050 13.14

6.31

7.92

10.98

Arts, design, entertainment, sports,

and media occupations

6740 17.08

6.61

9.46

14.56

Office and administrative support

occupations

120510 12.29

7.16

8.89

11.32

Production occupations

31960 13.37

6.9

8.53

11.36

Source: LFC analysis of NMDOL Data

The current law exempts many types of employees including state and local employees and high

school students. This bill does not revise the definition of employee so those exemptions remain

in tact. Even though these exemptions exist, there is considerable evidence that once a minimum

wage is established, employers find it difficult to either find qualified employees to work for less

than the minimum or divide their workforce between exempt and non exempt employees (ie,

paying high school students less than other employees simply because they are exempt).

2. NMDOL Statistics on Directly Affected Workers

•

Number of workers: 123,000 (13.5 percent of the workforce)

•

43.5 percent male, 56.5 percent female

•

34.6 percent white, 49.7 percent Hispanic

•

82.4 percent older than 20 years

•

59.7 percent work more than 35 hours per week

Senate Bill 746 – Page

4

•

49.3 percent in retail trade or leisure and hospitality

•

58.3 percent in a sale/service occupation

Percent of Workforce Below $7.50

13.5%

12.2%

16.4%

0.0% 5.0% 10.0% 15.0% 20.0%

New Mexico

Metro Areas

Rural Areas

3. Economic Theory. The impact of raising the minimum wage on employment is a hotly con-

tested issue amongst economists. Conventional theory states that an artificial floor for any price

is a market distortion and so will lead to an imbalance in the market, in this case dis-

employment. Most economists believe that increases in the minimum wage cause unemploy-

ment amongst some groups, particularly low skilled and younger workers. At issue, then, is not

whether there is unemployment but how significant is the unemployment that is caused by the

wage increase and how is it offset by other positive impacts. The key to the argument is the elas-

ticity of the demand for labor. In other words, how employers respond to changes in the wage.

At very low wage levels near the federal minimum, there is evidence that employment is not sig-

nificantly impacted by small changes in the wage.

The market wage is where supply of labor equals demand for labor and the market clears. If the

market wage is higher than the minimum, the effects of the minimum wage will be on the mar-

gins and therefore not likely to be significant. If the natural wage is lower than the minimum

wage, supply of labor will exceed demand for labor and unemployment will result. The average

wage, which is a rough proxy for the natural wage, in most industries is significantly above the

current minimum wage and the proposed wage and so there will be little to no employment im-

pact.

One way to assess the real impact of a minimum wage is to look back on previous minimum

wage hikes to see if there were significant impacts on employment. In 1997, for example, the

federal minimum wage was increased to $5.15 but the economy was at the beginning of a boom

where all levels of workers, including low skilled and unskilled, enjoyed employment and wage

gains. Studies of the 90-91 federal minimum wage increase found no measurable impacts on

employment. One of the arguments is that by the time political pressure mounts to actually in-

crease the minimum wage, the economy has largely moved on without the legislation and the

new minimum wage is merely increased to the new floor wage rather than increasing the floor

wage.

One concern of businesses that pay wages around the proposed minimum wage is that when a

new floor is set by raising the minimum wage, current employees’ wages who are paid at or near

that new level will need an increase. This will increase the costs to business even more than just

the hiring of new people at the new wage. A University of California-Berkeley Institute of In-

dustrial Relations study in September 2005 on their minimum wage indicated that the impact on

Senate Bill 746 – Page

5

business was similar for the indirect impact of wage increase for employees currently at or near

their minimum wage. However, they also indicate that the combined impact is estimated to in-

crease business operations costs by 1.3 percent.

4. Real Minimum Wage. The real minimum wage, shown in Figure 1 as the solid line, is lower

in 2005 than it has been since the 40s. Adjusted for inflation using the CPI-W index from the

Bureau of Labor Statistics, the real minimum wage has averaged $6.50 since 1938, significantly

higher than the current federal minimum wage of $5.15. Figure 2 shows the real and nominal

average private sector hourly wage. Here the real wage has been fairly consistent over time.

Figure 1: Real and Nominal Minimum Wage

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Nominal $

December 2004$

Source: BLS; Real Wage adjus ted by CPI-W

Figure 2: Real and Nominal Average Private Hourly Wage

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Nominal $

December 2004$

Source: BLS; Real Wage adjus ted by CPI-W

5. Employer-sponsored health coverage. Nationally, health insurance premiums grew tremen-

dously over the last decade and though the rate of growth has slowed in the last two years, it re-

mains near 10 percent. That compares with inflation at approximately 3 percent and the econ-

omy which is also growing at about 3 percent. As the premiums increase, the number of em-

ployers offering health insurance decreases. According to the Kaiser Family Foundation, which

tracks a host of health related issues, the percentage of employers offering health insurance has

dropped from 69 percent to 60 percent in the last few years.

Senate Bill 746 – Page

6

In NM, affordable health insurance is more of a problem than nationally. The burden of provid-

ing health care access has shifted from the employer to the government, particularly for children

whose parents cannot get health insurance at work. States have recently been trying to reverse

that and one way is to offer tax incentives that encourage employers to provide access to health

insurance. However, the cost of health insurance is still an insurmountable obstacle for many

smaller businesses and if they provide it they have to pass on a significant share of the premium

to the employee.

PERFORMANCE ISSUES

The Administrative Office of the Courts reports that some of their performance measurements

may be affected if the increased wage interferes with their ability to conduct jury trials effec-

tively.

ADMINISTRATIVE ISSUES

The Administrative Office of the Courts indicates that the Jury and Witness Fee Fund is not suf-

ficient to absorb the increase in payments to jurors and will seek supplemental funding for the

fund.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Tipped Employees

2007 2008 2008

Local Pre-

emption Minimum Tips/Month

Other

HB258/HBICS $6.75 $7.50 $7.50 Yes $ 2.13 $ 30.00

Exemptions for

certain employees;

Training wage;

Inflation adjust-

ment;

SB449/aSCORC 5.75 6.00 6.15 Yes 2.13 30.00 Training Wage

SB462

7.50 7.50 7.50

No 3.10 30.00 Busines Credit

SB746

6.00 6.50 7.00 Yes 2.13 30.00

Training Wage and

health insurance

credit

NF/nt