Maryland’s new minimum wage: Cure for income inequality or political posturing?

In case you haven’t heard:

Governor Martin O’Malley stated that his top priority of his final legislative session in office was to increase the state’s minimum wage. Maryland’s House of Delegates gave him his wish this month as they voted 87 – 47 to approve a minimum wage hike from $7.25 to $10.10 by 2018.

Implementation will begin January 1, 2015 and the staggered process was adopted to give businesses time to adjust. And some counties have previously passed their own legislation to have an even higher wage floor. Both Montgomery and Prince George’s counties’ mark will be set at $11.50 by 2017.

Some exceptions apply to the new law. Businesses would be able to pay a training wage – 85 percent of the minimum wage – to workers under 20 years of age for their first 6 months of services. Other businesses that would receive an exemption are seasonal amusement parks, and cafes and restaurants that have an annual income under $400K.

Not just an issue of money but politics

This isn’t just a local issue but one the President is championing on the national front. At the heart of the matter is good old-fashioned partisan fighting. The Right believes it’s defending free-markets and jobs as it opposes the legislation. The Left is championing the fight for income equality by demanding a higher wage.

Members of our House of Delegates had to deal with competing studies to predict what would happen to our state’s economy if the wage were increased.

The pro-business leaning Maryland Foundation for Research and Economic Education released a study that raising the minimum wage to $10 an hour would cost the state around 11,500 jobs and raise the price of consumer goods to cover wage expenses.

On the other side, economists from the Economic Policy Institute testified with Governor O’Malley that the above findings were flawed because they did not take into account the impact of a boost in the purchasing power of low wage earners.

Both studies presented to the state legislature appear to be more ideology than detailed problem solving.  Recent data shows that the answer lies somewhere in the middle.

The  Congressional Budget Office (CBO) released a  study Feb. 17  that showed the affects of what would happen nationally if the minimum wage was raised to the recommended $10.10.

By the year 2016, 16.5 million workers would receive an earnings boost, 900,000 people would lifted above the poverty line but total employment would be reduced by a half million workers.

Talk about a catch 22.

This was done on a national level but I believe that an authentic bi-partisan study of the economic impact of wage increases in Maryland would bring forth this same type of give and take.

What else could be done to specifically help low wage earners?

So what are we trying to do here? I have to think that if raising the minimum wage will cost some jobs – and probably raise some prices – I would want to explore if there are other options to closing the gap of income inequality without costing other low-income earners their jobs.

What many people have suggested is that we restructure the Earned Income Tax Credit (EITC).

The EITC was created back in the 1970s as a tax credit for those categorized as low-income Americans. The idea was to incentivize employment for these citizens over government assistance.

Both President Barack Obama and Warren Buffet have recently come out in favor of reforming the EITC.

It is truly beneficial for those households with children. A married couple with up to three kids grossing $52,427 can qualify for a maximum tax credit of $6,143. However, there is a substantially lower threshold for a household without children. A married couple is no longer eligible for EITC if they make more than $20,020 and their credit would max out at $496.

The IRS reported that the EITC helped lift 6.6million Americans out of poverty in 2011-which is the last year where all the data is available.

The Earned Income Tax Credit would go directly to the working poor and would not affect small business owners hiring or employment levels because it has nothing to do with what they would have to pay their workers.

EITC is a federal program but that doesn’t mean states or even cities cant get in on the act.

Twenty-four states, the District of Columbia, New York City, and our own Montgomery County, M.D. have created their own independent earned income tax credit based on the federal government’s program.

Take a look at New York City.

In 2013 the city expanded their EITC for low-income single workers that don’t have children – giving them the ability to claim up to $2,000 a year over three years with earnings up to $26,800.

NYC.gov says their research shows that “for single workers an enhanced Earned Income Tax Credit could potentially increase employment and incomes by as much as 12%”.

What I hope does not happen

We live in a very “Blue” state. The worst thing that can happen is that this Administration now sits on it’s laurels and claims that raising the minimum wage was the “Great Upliftment of 2014” were hundreds of thousands of Marylanders were given a livable wage.

What they need to address now is what happens when jobs are lost and/or high wages are passed on to consumers. Then it seems like this would all been done for nothing.

In all honesty, this fight for livable wages and income equality will need some sort of hybrid approach with both a restructuring of the EITC on a federal and local level and a minimum wage increase that will minimize the impact on small business employers.

Jason Jenkins

Jason spent eight years at T. Rowe Price serving in various roles from investment counseling to retirement planning. In 2005, he became Senior Security Analyst at Wells Fargo Corporate Trust in their Residential Mortgage-backed Securities division. He has contributed to several financial newsletters and the Motley Fool website while completing his thesis and Master’s Degree in Government from the Johns Hopkins University Advanced Academic Program. He resides in Baltimore.