Legislating for dollars Posted by: mcq
on Thursday, January 19, 2006
Washington isn't the only place where influence is peddled nor are Republicans the only targets of the peddlers. State legislatures, as well as local governments, are increasingly (or some might argue more visibly) under pressure to bring in more dollars in terms of tax revenues, but, with voters against tax increases, made to find unique ways to do so.
Thus, as in Maryland, we see the alliance of Democrats and unions to target a specific business. Maryland, listening to the unions who have been singularly unsuccessful if unionizing Wal-Mart, has chosen another route to force the retailer to comply with union demands. It has legislated compliance by making Wal-Mart the only business in Maryland required to pay 8% of its payroll toward health care or it must give the difference to the state.
The legislation targets retailers with 10,000 or more employees. There is only one retailer who fits that requirement. George Will provides some facts.
Organized labor, having mightily tried and miserably failed to unionize even one of Wal-Mart's 3,250 American stores, has turned to organizing state legislators. Maryland was a natural place to begin because it has lopsided Democratic majorities in both houses of its legislature.
Labor's allies include the ``progressives'' who have made Wal-Mart the left's devil du jour. Wal-Mart's supposed sin is this: One way it holds down prices (when it enters a market, retail prices decline 5 percent to 8 percent; nationally, it saves consumers $16 billion annually) is by not being a welfare state. That is, by not offering higher wages and benefits than the labor market requires. Labor's other allies are Wal-Mart's unionized competitors, such as, in Maryland, Giant Food, a grocery chain. These allies are engaging in what economists call rent-seeking — using government to impose disadvantages on competitors with whom they are competing and losing.
Now in a capitalist system, or a free market system if you will, government doesn't ally itself with rent-seekers, thus the reason the word "free" is in front of the word "market". The problems are worked out within the market itself among competitors. However when you have a mixed economy, such as we have, then you see opportunists and rent-seekers attempting to use government to thwart the advantages of competitors such as you see here.
Wal-Mart's enemies say Maryland is justified in expropriating some of the company's revenues because the company's pay and medical benefits are insufficient to prevent some employees from being eligible for Medicaid.
The problems of a welfare state. Milton Friedman once said that we'd care little about immigration, legal or otherwise, if we didn't have a welfare state (and assuming it wasn't a national security issue). But most people don't want those who haven't contributed to the system benefiting from it. That's the crux of Maryland's argument. It is a bogus argument (Wal-Mart pays taxes which support such as system) and it is being very selectively applied for a reason. Anyone who believes that Wal-Mart is the only retailer in that state who has some employees eligible for Medicaid might be interested in some land I have for sale east of the Florida Keys. The reason comes down to the inability of the unions and the rent-seekers to compete with the Wal-Mart business model, so they've enlisted the state (which stands to benefit monetarily from the alliance) to do their work for them.
Eighty-six percent of Wal-Mart employees have health insurance, more than half through the company, which offers 18 plans, one with $11 monthly premiums and another with $3 co-payments. Wal-Mart employees are only slightly more likely to collect Medicaid than the average among the nation's large retailers, who hire many entry-level and part-time workers. In the last 12 months, Wal-Mart, the largest private employer in the nation and in 25 states, estimates it has paid its 1.3 million employees $4.7 billion in benefits. That sum is almost half as large as the company's profits, which last fiscal year were $10.3 billion — just 3.6 percent — on revenues of $285 billion. Wal-Mart earns just $6,000 per employee, one-third below the national average. Anyway, Wal-Mart's pay and benefits are sufficient to attract hordes of job applicants whenever it opens a new American store, which it does once every three days.
The fact that people choose to work at Wal-Mart, in fact compete to work there, says the model and pay-scale are more than acceptable to a goodly portion of the working public. As Will points out they are "sufficient" to attract "hordes of job applicants" to every new store. Wal-Mart is obviously doing something right.
However, given this legislative fiat, here's a point the rent-seekers miss:
Maryland's new law is, The Washington Post says, ``a legislative mugging masquerading as an act of benevolent social engineering.'' And the mugging of profitable businesses may be just beginning. The threshold of 10,000 employees can be lowered by knocking off a zero. Then two. The 8 percent requirement can be raised. It might be raised in Maryland, if, as is possible, Wal-Mart's current policies almost reach it.
And, if successful, it could be applied a increasingly lower and lower thresholds of employment at a higher precentage at the whim of the legislature. Of course another possiblity is the Wal-Mart decides to cut stores and employees to get below the 10,000 threshold ... or more.
This is part of the tawdry drama of state politics as governments grasp for novel sources of money. Forty-eight states are to varying degrees dependent on revenues from gambling. Forty-six states are addicted to their cut, to be paid out over decades, from the $246 billion coerced from the tobacco industry by using the specious argument that smoking costs their governments huge sums. As a result, 46 states have a stake in the long-term profitability of tobacco companies.
We talk about incentives for corruption in Congress, but we never consider the incentives for corruption provided by Congress at a lower level. This goes back to Dale's smaller and less intrusive government argument. A smaller government, restricted in its ability to intrude into our lives and the economy wouldn't have a stake in the long-term profitablity of tobacco companies all the while trying to pile more dollars in Medicaid programs. Neither are within what I consider the legitimate pervue of government.
Maryland's grasping for Wal-Mart's revenues opens a new chapter in the degeneracy of state governments that are eager to spend more money than they have the nerve to collect straightforwardly in taxes. Fortunately, as labor unions and allied rent-seekers in 30 or so other states contemplate mimicking Maryland, Wal-Mart can contemplate an advantage of federalism.
States engage in ``entrepreneurial federalism,'' competing to be especially attractive to businesses. A Wal-Mart distribution center, creating at least 800 jobs, that has been planned for Maryland could be located instead in more hospitable Delaware.
Of course, we've seen the degeneracy Will talks about really become evident in local governments since the Kelo decision. Land grab outrages are a dime a dozen these days. But make no mistake, this is just as outrageous as displacing 6,000 in Florida to give the land to a private developer so the tax base can be increased. The good news, in this particular scenario, is that Wal-Mart has the ability and the will to make Maryland and others regret such legislation. The sad part of that is to do so, it will probably effect the lives of many of it's present employees within that state, and that's a pity. But when the pink slip comes, and when the store in the neighborhood closes, ex-employees and consumers can thank the Maryland legislature. Hopefully their thanks will come in the form of a vote against those in the legislature who perpetrated this absurd law.
You ruin what might otherwise have been a good point by spreading this myth.
It has legislated compliance by making Wal-Mart the only business in Maryland required to pay 8% of its payroll toward health care or it must give the difference to the state.
It’s easy enough to verify that Wal-Mart is not the only company with 10K employees in Maryland - others include Northrop Grumman, Giant Foods and Johns Hopkins - and thus is not the only one subject to this law. What they are is the only company subject to it and not already in compliance.
Also, if I’m going to lower myself to your level of pretentious quibbling, his facts are wrong in the main part—of the several, only Giant is any kind of retailer and then even potentially subject to the law.
DeMarco said the bill did not aim solely at Wal-Mart. Johns Hopkins University, Giant Food and defense contractor Northop Grumman Corp. have enough employees to fall under the bill’s requirements. But all meet the 8 percent threshold for for-profit employers or the 6 percent mandated for nonprofits.
Look, I agree with McQ’s argument, and this doesn’t diminish the legitimacy. But there’s no harm in getting the facts straight, is there Tom?
What’s the best way to address the fact that 786,000 Maryland residents are without health insurance? Pass a bill that targets the 17,000 who suffer from chronic employment. With their oppressively regular paychecks and access to health benefits, these desperately jobful citizens were clearly crying out for help.
And Maryland Democrats were crying out for an issue in the upcoming governor’s race.
It seems to me that this controversy, if we can call it that, is really much less than meets the eye. From Will’s article:
...Maryland has said Wal-Mart must spend 8 percent of its payroll on health care, or must give the difference to the state.
So, let me get this straight. Wal-Mart (AND Northrop-Grumman and Giant Foods, e.g.) must devote 8% of their payrolls, not their revenue streams, profits, etc. to employee healthcare. Okay, fine. If I were a MD regional financial officer for these companies I would simply readjust the company-contribution/employee-contribution or salary/benefit $ value ratios for medical benefits until I reach that magical 8%. In all of this I have not changed the total dollar value of employee compensation by a cent! I have merely rearranged some spreadsheet columns to keep the new state regulatory bureaucracy happy.
The whole state-mandated (bad pun alert) "benefit" exists on paper only; no real employees, customers, corp. executives or shareholders were affected in this initiative.
As I understand it, healthcare dollars are not an explicit part of payroll. In other words, if they spend 1,000,000 on payroll (salaries, wages and taxes primarily) then they must spend a minimum of 80,000 for health care coverage, meaning they must spend 1,080,000 combined.
Given this, there is no magic accounting that will have no net effect. Someone is going to lose out. Either fewer hires, a change in the wage/benefit proportion (i.e. less cash in the pockets of employees), or lower earnings will result.
Finally, even if it was true that this could be managed with accounting, the fundamental violation of that notion that independent entities should be able to voluntarily engage in transactions (employees and employers) is appalling and should be loudly denounced.
OK, I have some questions, and these are not facetious or sarcastic questions. I’m genuinely hoping to learn from people who know more than I do.fo
One of the things I learned from taking education courses (until my bullcrap meter broke and I dropped out of the Teacher Education Program) was that the Special Ed program mandates that 12% of students be helped by its provisions. And in every year since its inception, EXACTLY 12% of students have been helped. Not 11.99999%, not 12.00001%, 12.00000%. You’d think there would be some statistical fluctuation in the number of students needing help, but when the government got involved and designated a percentage, statistical variations somehow vanished.
So my first question is, if 8% of payroll is the minimum mandated amount for a particular company, why would a company want to spend 8.000001% of its payroll on health care? And would this be likely to affect the other large employers in Maryland that already pay more than 8% of their payrolls for health care? Would it give them an incentive to cut back their health care expenditures?
My second question is, I noticed that there seems to be a provision in the law that if a company doesn’t meet the 8% quota, they can pay the difference into the state Medicaid fund. Wouldn’t this create an incentive for companies to just pay the entire 8% into the fund, and not even offer health care? Or are there laws that require them to offer health care?
healthcare dollars are not an explicit part of payroll.
This is partially true. When funding manpower requisitions employers cite "direct" costs (salary, bonus, e.g.) and "indirect" (benefits, training, equipment). From an overall cost standpoint, however, these two numbers are fungible as they are both categorized as human resources expense. In your example above, yes, a $1,000,000 payroll (direct) may trigger a $80,000 medical benefit (indirect). OTOH, what is stopping the employer from simply moving $40,000 from the payroll column to the medical benefit column? In this instance the payroll side is reduced to $960,000 which now only requires a $76,800 health benefit, or a net additional expense of $36,800? Some sort of cash benefit for deductibles, copays, non-prescription benefits, etc. would fit nicely to supplant the $40,000 in wage and salary reductions.
If we assume that the company wants to hold total human resources expenses to the current level of $1,040,000 – a completely reasonable assumption – there is no free lunch.
Because only 40k of this total is for healthcare, the law says they have to cough up another 40k. Thus they solve for a payroll amount (payroll + (.08)* payroll = 1,040,000) that provides for the 8% mandatory spending while holding total costs the same. This nets $962,962 for payroll and $77,037 for healthcare. Now each person is taking home less in cash and more in healthcare benefits. This is the scenario you are discussing, correct?
So yes, from an accounting perspective the company is paying out no more, but employees have been forced to trade a more desirable item (cash) for a less desirable item (health care benefits). The voluntary argreement between the two parties has been overruled. If the company needs to keep the cash payment the same in order to attract and retain their workforce, they have to spend more than the total HR expenses which impacts profits and competitiveness. So yes, you can shuffle the money around, but there are real tradeoffs that affect the employees the most.
from an accounting perspective the company is paying out no more, but employees have been forced to trade a more desirable item (cash) for a less desirable item (health care benefits). The voluntary argreement between the two parties has been overruled.
Bingo! You win a cigar! It is indeed the peons...er, workers getting it in the @$$ instead of the big, bad corporation. File one more under unintended (but not unforseen) consequences.
Sorry, Dale, for borrowing your turn of phrase here. :-D
Since Pouge hasn’t gotten back to us, what I’m implying with my question to hime is that these others he lists ARE in fact union shops... and that thereby the only real result in the short term would be government imposed healthcare at WalMart, since the Unions couldn’t get in there as they had elsewhere.
This would seem to defeat the argument that the legislation in question wasn’t targeting Walmart specifically.