BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 10 (Alejo) - Minimum Wage Amended: June 19, 2013 Policy Vote: L&IR 3-1 Urgency: No Mandate: No Hearing Date: August 12, 2013 Consultant: Robert Ingenito This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 10 would increase the state's minimum wage from its current rate of $8.00 per hour to $10.00 per hour over a five-year period. Fiscal Impact: The Department of Industrial Relations (DIR) would incur costs of about $400,000 (General Fund) to issue new Minimum Wage Orders to approximately 815,000 employers in the state each time the minimum wage is adjusted pursuant to this bill. According to the State Controller's Office (SCO), state government employs approximately 4,500 minimum wage workers, mostly student assistants and seasonal employees. Based on a 40-hour work week, this bill would result in increased salary costs of $585,000 in 2013-14, rising to $16.3 million in 2017-18 (General Fund and various special funds). Payroll taxes would increase by $1.2 million in 2017-18 upon full implementation of the wage increase. Additionally, there would likely be increased state budget costs for workers currently paid between $8.01 per hour and $10.00, the extent to which is unknown. Finally, the bill would result in cost pressures to increase wages for state employees who make more than $10.00 per hour. See the Staff Comments for a general discussion of the impact of this measure to the economy and revenues. Background: The California minimum wage was established at $0.16 per hour in 1916. The California minimum wage was $0.33 per hour AB 10 (Alejo) Page 1 when the federal minimum wage of $0.25 per hour was created in 1938. The California minimum wage has been increased 25 times since its inception, and has been $8.00 per hour since 2008. Because of increases in the overall cost of living, when the minimum wage is unchanged for several years, its purchasing power declines. Proposed Law: This bill would increase the state minimum wage as follows: $8.25 per hour, beginning January 1, 2014. $8.75 per hour, beginning January 1, 2015. $9.25 per hour, beginning January 1, 2016. $9.50 per hour, beginning January 1, 2017. $10.00 per hour, beginning January 1, 2018. Related Legislation: AB 1439 (Alejo) of 2012 would have increased the minimum wage to $8.50 per hour and provided for the automatic adjustment of the wage each year by the rate of inflation as measured by the California Consumer Price Index for all Urban Consumers. The bill was held in the Assembly Appropriations Committee. AB 196 (Alejo) of 2011 would have increased the minimum wage to $8.50 per hour and provided for the automatic adjustment of the wage each year by the rate of inflation as measured by the California Consumer Price Index for all Urban Consumers. The bill was held in the Assembly Labor and Employment Committee. AB 1835 (Lieber), Chapter 230, Statutes of 2006, increased the minimum wage to $7.50 per hour effective January 1, 2007, and to $8.00 per hour, effective January 1, 2008. Staff Comments: This measure would raise California's minimum wage by 25 percent by 2018. Much of the fiscal impact of this measure would be related to its various effects on the economy, including changes in employment, prices, and profits. For example: Most employees earning less than the proposed minimum wage would earn more. They would also spend more on goods and services, thereby generating certain increases in economic activity. AB 10 (Alejo) Page 2 At the same time, however, employers would face higher wage costs, which they would either absorb in the form of lower profits or attempt to offset through a variety of means. For instance, they may attempt to shift or "pass along" the costs of the higher wages to consumers by raising prices of the goods and services they sell. Alternatively, some employers may offset the costs of the increase in wages by automating, hiring fewer workers (or reducing workers' hours), or limiting fringe benefits. Some businesses that are not able to shift the effects of the higher minimum wage may reduce economic activity in California. This would most likely occur in industries that have a large share of expenses for low-wage workers or that are subject to competition from other states and other countries. The measure would have varying impacts on state and local revenues. For instance, a reduction in business activity, employment, and income in California would result in lower income tax revenues. These declines could be offset, however, by increased spending on goods subject to the sales tax. Higher sales taxes would occur if businesses raised prices of taxed goods in response to the increase in the minimum wage, and this increase is not offset by reduced quantities of goods sold. Sales taxes could also increase if those receiving the higher minimum wage spent a relatively high portion of their new earnings on goods subject to the sales tax. The net impact on state and local revenues is unknown. State and local governments provide various public services -- primarily in the health and welfare area -- that use low-wage, private sector employees. The increase in the minimum wage would directly raise these costs by an unknown amount. Families with limited income currently qualify for public assistance in California, with benefit levels generally being phased out as a recipient's income rises. By raising the earnings of some public assistance recipients, this measure would result in reduced state costs. These savings, primarily in the Medi-Cal and CalWORKs programs, are unknown. On the other hand, the measure's impact on business activity would increase public assistance payments to some people who lose their jobs. AB 10 (Alejo) Page 3 These costs would partially offset the public assistance savings noted above. The higher minimum wage would increase state and local government costs in other ways. For instance, to the extent that the measure results in a slight increase in inflation-as many studies suggest happens-the public sector could incur added costs for expenses indexed for inflation, such as building leases and welfare payments.