Pavle Djokic

Department of Labor to Fast-Track New Federal Worker Classification Rule

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Posted by Pavle Djokic on Thursday, August 13th, 2020, 4:08 PM PERMALINK

In a brief and concise federal regulatory notice, the Department of Labor (DOL) has signaled that they are aiming to prioritize the protection of independent contractor rights for the remainder of President Trump’s first term.

The notice reads, “The Department of Labor is proposing a regulation for determining independent contractor status under the Fair Labor Standards Act.” While seeming rather innocuous at first glance, the move comes at a time when the right of independent contractors to engage in work free from government intervention is under assault at all levels of government.

Under the current guidelines, there is no single federally limiting labor test on determining whether or not someone is an independent contractor or defined as an employee. Instead, there are 6 questions of ‘economic realities’ based on various U.S. Supreme Court rulings.

At the heart of concerns over the mere guidelines over the employment standard is the subjective interpretation opportunities across various administrations. In 2015, the DOL under the Obama administration issued an interpretation of the Fair Labor Standards Act (FLSA) which broadened the ‘economic realities’ factors to classify more Americans as employees for the purpose of federal wage regulations. However, Labor Secretary Alexander Acosta withdrew the interpretation in 2017. Under a future administration, another DOL could reinterpret the FLSA and reimpose the expanded definition of employment that would harm independent contractors and freelancers across the country. Formal regulatory rulemaking could avoid potentially harmful interpretive guidance in the future.

With over 13.8 million independent contractors in the United States, the right of employers and workers to engage in flexible work agreements is increasingly important to the overall success of the economy. Codifying this flexibility under FLSA would limit the potentially negative and costly consequences of rigid definitions of employment.

While the prior Labor Secretary announced the plans for a flexible, worker protection rule back in 2018, the July 1 notice from the DOL means that the administration would need to take swift action to finalize the rule into law before the end of 2020. A source that spoke to Ben Penn from Bloomberg Law confirmed that it is in fact one of the White House’s top regulatory priorities this year.

The administration will seek to “wrap up the rulemaking in the final months of President Donald Trump’s term” because “if a worker classification rule were to be proposed but not finalized and Trump doesn’t get re-elected, a new administration would easily be able to kill the effort. Or new DOL leaders inheriting the incomplete rule could finalize it by interpreting the term ‘employee’ much more broadly than Republican regulators envisioned.”

The DOL has not yet revealed the specifics of the rule; however, it is likely to be modeled after state laws protecting independent contractors and businesses. Kentucky, Utah, and Indiana have passed laws that clarify workers who find work through websites or apps are independent contractors as long as the company does not control their schedule nor prohibit them from working for other companies. The simple criteria of the State laws allow workers and businesses in the gig economy to freely work without the restrictive binary definition of worker classification that many states adhere to.

While the proposed change to the FLSA to create an actual rule benefitting both independent contractors and businesses is a step in the right direction, it is far from a save-all approach for independent contractors across the country.

Outside of the expected legal challenges and roadblocks that could slow or halt progress in the next six months, even if the Trump administration can fast track the rule before the end of the year, the Congressional Review Act (CRA) could be used to retract the worker protection rule. The CRA could allow a potential Democrat-controlled Congress to review and overturn any Trump rules and regulations through the passage of a simple majority joint resolution in the House and Senate.

Furthermore, the rule does not address growing state efforts to criminalize independent contracting. Through the FLSA, the proposed change would only address the issue of federal wage and hour law, while contractors in states like California that have imposed increased regulation would see no change in protections against overzealous state lawmakers and regulators. This means that it may still be necessary for federal law codifying the protections of workforce flexibility across the country.

The DOL is yet to reveal their proposed rule, but any effort to protect the thriving independent contracting sector of the economy should be applauded.

Photo Credit: Matt Popovich

The Democratic Party’s Platform is an Assault on American Workers and Small Businesses

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Posted by Pavle Djokic on Tuesday, August 4th, 2020, 3:16 PM PERMALINK

In the recently released 2020 Democratic Platform, the party led by Joe Biden has made clear their intent to crack down on workforce flexibility and the small businesses that make up the backbone of the American economy. Ranging from a drastic minimum wage hike, to overturning state Right to Work laws, repealing the Tax Cuts and Jobs Act, and devastating small businesses and the independent contracting industry, a Biden presidency would promise to assail nearly all worker rights as we know them.

Among the first promises made by Democrats would be instituting a $15 per hour federal minimum wage. This would have a significant impact on lower income Americans who would be put out of work. In 2016, the Heritage Foundation concluded that raising the federal minimum wage to $15 would leave 7 million Americans out of a job, and the loss would be felt most in low cost-of-living areas. Fast food companies and grocery stores have already begun replacing workers with self-serve kiosks and check-out lines to cope with higher costs in cities and states that have mandated higher wages. As business across the country are struggling to survive the Covid-19 pandemic, forcing business to lay off even more workers due to increased labor costs will prolong any economic recovery.

Beyond arbitrarily mandating a national wage standard, the Democratic Platform goes further in harming workers through the central provision of passing the “Protecting the Right to Organize” (PRO) Act in Congress. The bill would effectively invalidate state right-to-work laws, and open the door for the forced unionization of millions of American workers.

Right to Work laws have been a major driving factor for private sector employment growth in the states that have passed the laws to protect worker freedom. In 2015, National Economic Research Associates published a report showing that states with Right to Work laws had private sector employment growth of 27% compared to 15% in states without them. If the PRO Act were to be signed into law, returning overseas manufacturing jobs to the United States would be rendered far more difficult with the forced nationalization of mandatory unionization that has a proven effect on employment growth. Compounded by the Covid-19 pandemic, which has affected businesses of all sizes, a Biden presidency would punish workers and employers with slower income growth and decreased manufacturing output across the country.

The Democrat Platform’s anti-worker provisions continue by violating the privacy of workers by eliminating the secret ballot in union elections. This Big Labor bailout would force employers to provide unions with contact information of their workers without the consent of these worker. These protections were put into place to avoid coerced unionization that can come as a result of harassment and intimidation by union thugs.

Ultimately, the two most damaging provisions of the PRO Act are the criminalization of independent contracting and codifying the joint employer standard. Through the PRO Act, the independent contracting industry that generates income for over 13 million Americans and comprises 8.5% of the national GDP would be dismantled. With a codified joint employer standard, 44% of private sector employees would be affected and cost more than $33 million a year for the franchise business sector.

Finally, the most egregious part of the Democratic Platform is their call to repeal the Tax Cuts and Jobs Act (TCJA), which would ultimately increase taxes for Americans at every tax bracket. American families earning a median income of $73,000 would be hit with a $2,000 annual tax hike, while single parent households making $41,000 would see a $1,300 tax hike. For 22 million Americans families that utilize the child tax credit, their deduction would decrease from $2000 to $1000, a $1,000 annual tax hike per child on every parent.

The effects of the TCJA were not limited to individuals, with small businesses seeing massive benefits in the wake of its passage as well. Joe Biden and the Democratic Party have long tried to conceal their agenda as impacting only “big businesses, ignoring the fact that 99.7% of businesses are small business and employ nearly 50% of the American labor force. Nearly all of these businesses are impacted by the Democratic Party’s anti-growth economic agenda.

Biden explicitly lied when he claimed, “Taxes on small businesses won't go up.” By repealing the TCJA he would eliminate the 20% small business deduction, increase the marginal income tax for all small businesses, and increase the corporate tax rate to 28%. Over 30 million entities in the United States that utilize the small-business deduction, and nearly 85% of all corporations have fewer than 20 employees.

The Republican-passed TCJA was a significant contributing factor that led to the phenomenal success of the American economy before the impact of Covid-19. That included a 50-year low unemployment rate, with record low rates for African-Americans, Latinos, and other key groups. Cost-savings provided by the TCJA allowed small businesses to better deploy capital, with direct effects on their employees. Some of those benefits included 26% of businesses increasing employee compensation and 16% hiring additional employees, according to a 2018 survey from by the National Federation of Independent Business. Many of those success stories can be found here.

The 850 recent deregulatory actions undertaken by the Trump Administration since Covid-19 struck the nation have also been key in helping the American economy stay afloat during the Covid-19 pandemic. Medical deregulation was vital in fighting the pandemic by allowing out-of-state healthcare professionals to provide service across state lines, cutting the red tape on PPE and ventilator production, and eliminating the defective CDC testing services by allowing private testing centers. The Biden campaign has not taken a position on whether he would make these important deregulatory actions permanent or repeal them if elected.

The Democratic Party Platform’s anti-worker provisions that explicitly call for raising taxes, increasing regulations, and destroying small businesses are a near guarantee that the millions of working-class Americans will continue to suffer even after the worst of the pandemic resides. The Platform of the party led by Joe Biden should concern independent contractors, freelancers, families, businesses, and entrepreneurs of all stripes.

Photo Credit: Gage Skidmore

Millions of Independent Contractors May Join the “Leave Us Alone” Coalition in 2020

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Posted by Pavle Djokic on Wednesday, June 24th, 2020, 5:06 PM PERMALINK

In the midst of a global pandemic that has caused economic shutdowns responsible for over 40 million Americans filing for unemployment, Joe Biden’s recent tweet supporting California’s “gig worker bill” received unexpected bipartisan backlash. This legislation, Assembly Bill 5 (AB 5), established a three-step “ABC” test to define and limit who was technically an employee versus an independent contractor.

In response, hundreds of independent contractors shot back with their stories of how they lost their jobs and income last year before Covid-19 was even a threat. Jennifer, a healthcare interpreter shared how AB 5 severely threatened her ability to freely translate and assist immigrants to access Medicare. Even though she voted for Joe Biden in the California primary election, she wrote that “my vote in November is conditioned on whether you change your position on this widely misunderstood law which affects 300+ professions.”

Jennifer was joined by hundreds of other independent contractors that lost their income-earning opportunities in California because of AB 5’s damaging anti-worker provisions. From freelance journalists to musicians and entertainment professionals, once Californians experienced the work flexibility limitations of AB 5, many finally understood just how damaging Democratic attacks on independent contractors really are.

AB 5 harms independent contractors by expanding a 2018 California Supreme Court decision that establishes a three-step ABC test forcing the reclassification of workers and limiting the hiring of independent contractors across the state. Despite being opposed by 71% of app-based drivers, for example, Governor Gavin Newsom (D-Calif.) signed the bill into law last year.

While most of the media attention around AB5 was its effect on the gig economy, the legislation had much broader implications for the rest of California’s thriving independent contracting workforce. Due to inconsistent and arbitrary exemptions for certain professions, up to 50% of Californian independent contractors are potentially impacted by AB 5.

From freelance writers and photographers to 70,000 owner-operator truckers to the vast majority of the California entertainment industry, hundreds of thousands of the two million Californian independent contractors may have directly been affected the bill’s limitations on work opportunities moving forward. Fewer than one in ten independent contractors support worker reclassification due to the numerous additional benefits that independent contracting provides, including flexibility of hours to autonomy of work. That may explain why that in the six months since going into effect, there have been nearly three dozen bills introduced to repeal, amend, or replace AB 5 along with numerous lawsuits against the state.

This effort isn’t limited to California, however. The effort to bring California’s anti-independent contractor crusade has gone national, with recent passage of the Protecting the Right to Organize (PRO) Act in Congress.

Supported by House Speaker Nancy Pelosi (D-Calif.) and presumptive Democratic Presidential nominee Joe Biden, the PRO Act has already passed the House of Representatives. Though currently dead at Senate Majority Leader Mitch McConnell’s desk, it remains a massive threat to American independent contractors should the balance of power shift in November. Provisions in the PRO Act include expanding California’s ABC test as a nationwide entrepreneurial limitation, invalidating state Right-To-Work laws, and removing the secret ballot from union elections.

Between 2001 and 2016, America’s independent contracting workforce grew by over 22% to 13.8 million workers according to IRS data. The independent contractors workforce represents up to 8.5% of the GDP. The actual number in 2020 may be much higher as well, due to the emergence of the a more diverse gig economy in the past four years.

Critical to the 2020 election, many individual swing states have seen above-average growth rates of independent contracting, according to the IRS. Of the fourteen targeted presidential swing states likely to make the difference in the upcoming election, Florida, Arizona, and Nevada are also the top three states that saw the highest degree of independent contracting growth in recent years. Florida and Arizona both saw approximately a 75-point rise, and Nevada experienced a 90-point increase.

In 2016, the growth amounted to nearly 1.2 million independent contractors working in Florida alone, putting the contingent at over 11% of the entire workforce in the Sunshine State. Similarly, in 2016 there were 300,000 Arizonan and 130,000 Nevadan independent contractors, equaling approximately 8.6% of their state’s workforces.

The unrivaled growth of independent contracting in these three important swing states may partially be attributed to the fact that all three strictly adhere to the federal flexible workforce guidelines established by the Department of Treasury. Across the nation, many states have taken their own measures by implementing their own restrictions on worker freedom, with not a single one of these states, including California, in the top ten states of independent contractor growth.

Just as hundreds of thousands of Californians had no idea their independent contracting jobs were going to be put at risk due to AB 5, millions of Americans in these three swing states alone may not yet be aware of Joe Biden’s stated opposition to the income-generating opportunity of independent contracting.

Outside of Biden’s strong support for AB 5 and the PRO Act, his administration would have the power to take other steps against worker freedoms. President Trump’s National Labor Relations Board and Department of Labor have both released memorandums supporting gig economy workers as independent contractors. Within days of taking office, Biden could potentially reverse these decisions and open the door for forced worker unionization and federal lawsuits against firms like Uber or Doordash.

The backlash Joe Biden received for his endorsement of AB 5 was justified and looking towards November, independent contractor voters should consider the consequences of a Biden presidency on their financial well-being. As Democrats across the country push for narrowly defined employment laws at the state and federal level, independent contractors may become the newest politically significant group of voters who just want the government to leave them alone.

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5 Reasons Why Preemption May be Necessary to Protect American Independent Contractors

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Posted by Pavle Djokic on Wednesday, June 10th, 2020, 11:53 AM PERMALINK

In recent days, stock markets have slowly begun to recover from the economic shutdowns brought about by Covid-19 across the country. These shutdowns resulted in more than 40 million Americans filing for unemployment benefits, indicating a slight disconnect between long term market optimism and immediate recovery progress. At the national level, the Trump administration has taken hundreds of deregulatory actions aimed at reducing government barriers to a V-shaped recovery. Unfortunately, Democrats are pushing for policies that will hinder the ability for many Americans to find work in a time they need it the most.

Among the more striking examples of the Democrat war against an economic recovery are their efforts to crack down on independent contractors. These flexible work agreements often allow individuals to retain autonomy on questions like working hours and the length and/or specific scope of work for one company. In July of 2017, the Internal Revenue Service reported that there were over 13.8 million such Americans working as independent contractors.

The most recent notable state change to the nature of these agreements began in California in 2019. Assembly Bill 5 (AB 5) instituted a stricter than ever three-stage worker classification test to prove that a worker is an independent contractor and not an employee. AB 5’s work restriction is known as the “ABC” test and goes beyond federal guidelines on independent contractor classifications.

Under the three-step ABC test, businesses must prove that a contractor is doing duties “outside the usual course of work of the hiring entity” and that “the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.” This significantly limits the ability of businesses to retain contractors who may operate within the scope of work sometimes performed by employees in similar circumstances. It’s an unnecessary distinction that prohibits most businesses from working with independent contractors.

More than 90 percent of California independent contractors opposed the ABC test reclassification before it was signed into law by Governor Gavin Newsom (D-Calif.).

In response to the Covid-19 pandemic, over 150 Ph.D. economists and political scientists have signed a letter calling Newsom to suspend the bill, stating “AB 5 is doing substantial, and avoidable, harm to the very people who now have the fewest resources and worst alternatives available to them.”

Meanwhile, Democrat plans to expand the ABC test as a nationwide entrepreneurial limitation is no secret. House Speaker Nancy Pelosi (D-Calif.) and presumptive Democrat nominee for President Joe Biden have been advocating for the Protecting the Right to Organize (PRO) Act. While the PRO Act finds itself dead at Senate Majority Leader Mitch McConnell’s desk, provisions in it include the adoption of California’s ABC test, invalidating state Right-To-Work laws, and removing the secret ballot from union elections.

These growing state and federal threats to worker freedom may warrant legislative preemption aimed at protecting small businesses and the millions of independent contractors who rely on workplace flexibility and mobility across the country.

Here are the top 5 reasons Congress should consider protecting independent contractors at the federal level:

1. Independent Contractors Exist Across All Industries and Professions

Advocates of limitations on independent contracting have argued that forcing more people into traditional employment agreements only negatively impacts select companies like Uber or Doordash. While destroying America’s gig economy has massive implications of its own, the reality is that millions of independent contractors outside of the gig economy will be directly affected by laws like California’s AB 5 or the PRO Act in Congress.

Hundreds of industries that utilize independent contractors in California have been forced to terminate the contracts because of stringent requirements imposed by AB 5. Among those impacted are healthcare professionals, janitors & housekeepers, health aids, language interpreters, tutors, freelance writers & photographers, truck drivers, and campaign workers.

Individuals working as traditional salaried employees seeking to monetize some of their in-demand labor skills or assets have been long been permitted to take on side-work to increase their income. Nearly 9 million such Americans in 2016 reported income from independent contracting in addition to their W-2 as reported by the IRS.

2. Independent Contracting Growth Has Largely Benefited Women

Since 2001, the number of workers with independent contracting income has grown by 22% and their work now represents over 8.5% of America’s GDP. Part of this rise can be attributed to independent contracting work appealing to Americans who need greater flexibility hours and autonomy of work which being a regular part- or full-time employee prohibits.

Over 50 percent of the independent contracting growth is attributed to women partaking in independent contracting work. From 2001-2016, the number of female independent contractors increased by 68 percent, compared to a 37 percent increase for men.

Much of this growth may be attributed to technological strides that make it easier for mothers who care for children at home to take on freelance work remotely. The available data shows that female independent contractors are more likely to have children than traditional employees. Flexibility in remote and independent contracting work has the additional benefit of removing the need to pay for expensive childcare or babysitters while caregivers generate household income.

The benefits of independent contractor flexibility aren’t limited to women who are currently raising children, however. In California, Monica, a 61-year-old cancer survivor, was one of many that lost her income due to AB 5. While she was previously able to work as an over-the-phone language interpreter, new classifications meant that she could no longer work without being hired as an employee. In Monica’s case, however, it was impossible to find a business willing and able to hire her without imposing limits on the necessary freedoms she needed to manage her medical condition.  

3. The Economic Costs of Upending Independent Contractors Could Kill Millions of Jobs and the American Covid-19 Recovery

As of 2016, there were 13.8 million Americans who reported earnings from independent contracting to the IRS. The appeal of independent contracting is not limited to workers but extends to business who can reduce labor costs by up to 20%. More importantly, businesses can pay workers to meet the on-demand needs of a changing social economy without burdening their ledgers without fixed and permanent costs.

Studies done by the American Action Forum reveal that if the ABC test was as a national standard, there would be an annual $3.6 to $12.1 billion in upwards cost pressure on employers. Businesses with four or fewer workers currently utilize the most independent contractors at 6.7 per employer on average. Any limits on the ability of firms to hire independent contractors will disproportionally harm small businesses who need to be able to adapt to changing business needs and economic conditions.

Upon the passing of AB 5, New York-based sports media network SB Nation made headlines with their decision to discontinue their use of more than 200 California freelancers and instead hire a much smaller team of full-time employees for sports coverage in the Golden State. As the media industry faces challenges with an estimated 7,200 workers losing their jobs in 2019 alone, forcing papers that employ contractors to write just a single column a week to hire writers as employees is simply unfeasible.

In the months since the passing of AB 5, many other industries have voiced their concerns for the impact of the bill. The California Trucking association has stated 70,000 owner-operator truckers will be put out of work and have filed a lawsuit against the state. The thriving California music industry has also spoken out, with an open letter written by representatives of the Music Artists’ Coalition, the Recording Industry Association of America, and the American Association of Independent Music calling for an exemption for the thousands of musicians, producers, engineers, and other workers in the industry.

The result of the inconsistent exemptions in AB 5 are clear, with numerous legal challenges levied against the state and nearly three dozen bills being introduced to the California Assembly to amend, repeal, or replace the law. As different industries fight for equal treatment and consistent exemptions under the law, workers are left to bear the brunt of stalled hiring and potential terminations in the effected industries.

The transient nature of many types of independent contracting further highlights the need for a federal standard on employment classification. Contradictory classifications of workers and contractors will limit the ability of individuals to seek income-generating opportunities across state lines.  More than making money, however, this can present significant problems in times such as now, with mitigation efforts still underway to stop the spread of Covid-19. Restrictions that were removed to allow health care professionals to cross state lines have been used with great success to treat Covid-19 patients and ensure hospitals were not overrun with cases in hot spot areas like New York.

Greater flexibility for employment opportunities will be more important going forwards than ever before. As the health risks of Covid-19 subside, the economic opportunities for current workers and future contractors will be more remote, mobile, and flexible. Across a diverse range of industries from truckers who deliver to different markets, I.T. professionals who operate remotely for on demand services, and landscape companies that offer their services to clients across the country, state-specific worker classification tests would be devastating for their opportunities.

As the country faces a pandemic that has left millions of Americans out of a job, it is the time to ensure that the barriers for worker and employer fluidity are kept at a minimum.

4. Federal Regulators Already Have Established A National Worker Classification

The idea that the federal government has a say in determining the status of worker classification is not new. Under the Trump administration, the National Labor Relations Board and Department of Labor have both taken the stance that independent contractors working for ride-sharing services are not employees. These rulings were based on federal guidelines determined by the Department of Treasury through various Supreme Court precedents on employment classification.  

However, for the millions of independent contractors in America, shifts in political appointments at various agencies and departments should not dictate the status of one’s income-generating opportunities. With the federal government having already established cohesive guidelines on classification, codifying the guidelines as law would not be akin to a new federal power.

If elected, Joe Biden has already signaled that his administration’s stance on the matter will be different than Donald Trump’s. In order to provide workforce stability and continuity, Congress should consider passing legislation protecting the right for people to seek flexible work, including independent contracting.

Federal preemption is currently in use across a wide range of industries. Federal Communications Commission regulations prevent individual states from regulating the internet. The Environmental Protection Agency and Department of Transportation set the federal standard on auto emissions and prevent state standards for cars. These clear and consistent standards allow for firms to operate across the country without having to deal with a patchwork of politically motivated regulations that would further burden entrepreneurship and private investment.

Arbitrary employee standard tests and guidelines for worker classification differ in almost every state of the country, with different implications for various professions. While in some states they simply serve the purpose of outlining qualifications for worker’s compensation and unemployment insurance, others go as far as wage and hour entitlements and withholding taxes. Federal legislation could permit states to define how state benefits are allocated while limiting the ability of businesses to hire employees or contractors based on arbitrary definitions that vary from jurisdiction to jurisdiction.

5. Independent Contracting Industries Are Crucial in Swing States

Not only is independent contracting a thriving sector of America’s economy, its growth has dominated in several crucial battleground states.

Looking forward to the 2020 election, three of the nation’s fourteen swing states were also the top three states that saw the most independent contractor growth from 2001-2016. Florida, Arizona, and Nevada all saw their share of workers as independent contractors increase by over 70%.

IRS data from 2016 reveals of the number of independent contractors in Florida at nearly 1.2 million people who enjoy the flexibility of contract work in the Sunshine State. Similarly, in 2016 there were 300,000 Arizonan and 130,000 Nevadan independent contractors. State or national efforts to reclassify the majority of independent contractors into employees could cost millions of jobs and billions in lost revenues to just these three states alone.

Adhering to federal guidelines on worker classifications have been a large factor in driving this growth and attracting both populations and revenue to their states. Protecting these states’ rights to maintain their current employment laws can prove to be a big political winner going forwards.

Photo Credit: US Department of State

New Highest-in-Nation California Vaping Tax Would Discourage Smokers from Quitting

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Posted by Pavle Djokic on Wednesday, May 27th, 2020, 3:27 PM PERMALINK

In his 2021 revised state budget, Governor Gavin Newsom (D-Calif.) recently proposed yet another new tax on electronic cigarettes and vapor products. Taking aim at low-income consumers, this tax would raise taxes on adults who are attempting to quit smoking at a time that most adults can least afford it. The proposed budget also includes significant limits on tax credits and deductions for businesses and employers, resulting in billions of dollars in new and higher taxes beginning on July 1.

Newsom’s $33 million higher tax on vaping would disproportionately hit low-income Californians. Data from the Health Education Council reveals that Californians making less than $25,000 are already twice as likely to smoke compared to those Californians making over $50,000 a year. Levying additional taxes on smokers who are trying to quit takes aim at those adults experiencing the greatest financial uncertainty and struggles in the midst of Covid-19.

This new tax on vaping would not be the first. In 2016, Californians were among the first in the nation to institute a statewide excise tax on nicotine vapor products. 59 percent of voters voted for the ballot initiative that raised the state cigarette tax and changed the definition of a tobacco product subject to taxes to include e-cigarettes. Today, 21 states have instituted similar taxes ranging from a tax of 5 cents per milliliter of liquid in North Carolina, Kansas, and Louisiana to a 95 percent wholesale tax in Minnesota. Governor Newsom’s new budget, however, would make California’s tax the highest in the nation by adding an additional layer of taxation to the sale of these products.

Differences between the structure of vaping taxes across the country vary based on the point in the supply chain where taxes are imposed and the part of the product that is taxed.  Wholesale value taxes are determined by the cost for retailers like vape shops to purchase a unit, while volume taxes are determined by the amount of liquid in a vaping device. California’s proposed budget would combine the two methods, adding both the current wholesale tax of 59% with a new $2 tax per 40 milligrams of nicotine per unit.

By creating a taxing pyramid in this way, e-cigarettes in California would actually be taxed at a higher rate than combustible cigarettes. Beginning in 2017, cigarettes were taxed at a rate of $2.87 per pack. Other tobacco products and e-cigarettes are subject to a variable equivalent tax which varies based on the price of cigarettes annually. A product like JUUL is currently taxed at a rate of 59% or $2.36 per JUUL pod. Under Newsom’s proposal, that tax would increase an additional $3.50, making the total tax on one JUUL pod product $5.86. For an adult smoker trying to transition from a Marlboro or American Spirits cigarette to a JUUL e-cigarette, the cost in taxes would be much higher to vape under the governor’s proposal.

Taxing e-cigarettes at a higher rate than cigarettes stands in stark contrast to the data suggesting that e-cigarettes are significantly less harmful than cigarettes for consumers. Both Public Health England and the Royal College of Physicians have concluded that e-cigarettes are at least 95% less harmful than cigarettes. As such, taxing them at a higher rate is reckless health policy.

For adult smokers seeking a less harmful nicotine alternative, e-cigarettes are demonstrably more effective as other quit tools. Research from the New England Journal of Medicine reveals that e-cigarettes are nearly twice as effective as the nicotine patch, lozenge, or gum at getting adult smokers to quit.

The negative consequences of increasing taxes on e-cigarettes have already been proven in the U.S. After Minnesota imposed a 95% wholesale tax on nicotine vapor products in 2013, the Bureau of Economic Research estimates that over 32,000 Minnesotans were discouraged from transitioning away from cigarettes as a result of the tax. Gavin Newsom’s new tax would clearly discourage Californians from quitting smoking.

For those adult vapers who refuse to go back to smoking, some may look to the black market for e-cigarettes. Newsom’s new vaping tax will push countless adults to seek out new products online, across state lines, or in unregulated markets that are not subject to state or federal regulatory scrutiny. The long history of tobacco smuggling shows that consumers regularly seek out less expensive options in these ways. Evidence from 2017 reveals that of all cigarettes smoked in California, nearly 45% were smuggled in from out of state to avoid high state excise taxes. Raising excise taxes on e-cigarettes will undoubtedly cause a similar reaction, reducing state revenues and increasing illicit trade in America’s biggest state.

Ironically, both the governor and state legislature acknowledge the risks of high excise taxes leading to black market sales. This year, Newsom embraced a reduction in the state taxes imposed on marijuana in California. The lead sponsor of a bill to reduce the excise tax on marijuana sales from 15 percent to 11 percent explained that the move would “reduce and shrink the unlicensed, illicit market” which is estimated to be 75 percent of the total state market. Two-thirds of the entire market is still black-market sales, despite the fact that marijuana has been legal for more than two years.

California lawmakers should reject efforts to raise taxes on nicotine e-cigarettes and vapor products. These regressive taxes target adult smokers trying to transition to less harmful products while pushing consumers to unregulated black markets. Decades of evidence suggests that consumers will almost always seek out less expensive options, depriving the state of even more tax revenue, while harming the legal businesses in the state who simply want to provide smokers with better options.

Photo Credit: Gage Skidmore

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Democrat Assault on Gig Economy Detrimental to Covid-19 Economic Recovery

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Posted by Pavle Djokic on Thursday, May 21st, 2020, 4:55 PM PERMALINK

In the nine weeks since shutdowns from the Covid-19 pandemic began, over one in five American workers have filed for unemployment. From the food services to domestic energy industry, economic shutdowns brought about by government decisions surrounding Covid-19 have negatively impacted nearly every sector of the economy. Yet, parts of the gig economy that provide income for 1.6 million Americans and are responsible for delivering food and supplies to vulnerable members of society have grown 14% from February to March.

Proposals to mitigate the current economic conditions have ranged from government-forgiven loan programs for businesses who keep employees on payroll to extremely generous unemployment benefits which are resulting in 63% of Americans on unemployment receiving more money by not working rather than going back to work. When it comes to maximizing a speedy return to the unprecedented pre-Covid economic prosperity, businesses and entrepreneurs will need maximum flexibility and limited government intervention.

The Trump administration has already taken hundreds of deregulatory actions aimed at getting the government out of the way as businesses navigate volatile conditions. Some in Congress and in the states, however, are pushing policies that would hinder the recover rather than make it possible. One such pursuit is the ongoing assault on the gig economy. These freelancing independent contractors perform tasks such as delivering groceries or passengers, writing code or news stories, and have significantly more flexibility than traditional employees. From Speaker Nancy Pelosi (D-Calif.) to presumptive Democrat nominee for President Joe Biden and California Governor Gavin Newsom, Democrats nationally are attempting to strictly define and restrict the nature of these new employment agreements in America.

Recent state efforts to reclassify independent contractors working within the gig economy began in California, when the legislature passed, and the governor signed Assembly Bill 5 in September of 2019. This legislation established an “ABC Test” that must be met in order for someone to be classified as an independent contractor, rather than an employee.

The two most difficult provisions of AB5’s ABC Test are to prove are that a worker “performs work that is outside the usual course of the company’s business” and that they are “engaged in an independently established trade, occupation, or business of the same nature as the work performed for the company.”

Simply put, for Uber to pay a California rideshare driver, they must transform their entire business model and give up the efficiencies and advantages that ridesharing offers both drivers and customers when compared to traditional taxicab services.

The ability for both drivers and riders to use digital ridesharing applications has resulted in drastically shorter wait times as consumers can compare both competitive pricing and times, while drivers have the ability to deny rides they see as unprofitable or inefficient. Furthermore, incentives based on the mutual rating of both parties have raised the bar of satisfaction that rideshare services provide compared to traditional taxi cabs.

While companies like Uber, Lyft, and Doordash have all pledged to fight the implementation of AB5 by putting the issue before voters this November, threats to the upstart industry don’t begin and end in California. At a national level, House Speaker Nancy Pelosi has pushed the Protecting the Right to Organize (PRO) Act through the House of Representatives. The PRO Act would adopt California’s “ABC Test” for independent contractors on a national scale. Joe Biden has also endorsed the PRO Act and signaled he would sign it into law if elected.

Barclays analysts have estimated following AB 5 reclassifications in California, Uber and Lyft are facing a cost increase of $3,625 per driver each year resulting in hundreds of millions in additional costs, driving already slim margins to near zero. The consequences of the Democrat effort to reclassify employment are not limited to employers, however.

Fewer than one in ten independent contractors want to be reclassified, namely due to the fact that working as an independent contractor allows for greater flexibility and control of hours as a side-job compared to employer mandated shifts. Furthermore, while regular IRA retirement contributions are capped, 1099 independent contractors can contribute nearly ten times what a regular IRA allows using a Solo 401(k) or SEP IRA.

With many Americans seeking to get back to work, the gig economy is one sector that has enormous potential to put money in the pockets of those struggling adults seeking immediate income-generating work that provides maximum flexibility.

As millions of Americans work to financially recover from the Covid-19 pandemic and potential recession, efforts including the PRO Act endorsed by Joe Biden have the potential to completely implode the flexible American gig economy.  Anti-gig economy efforts will not only result in worse unemployment figures but will deprive millions more of urban transportation and food delivery services that are more necessary today than ever before.

Photo Credit: Daniel Foster

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