Where does the money come from? Who is the “ultimate payer” for social programs. The answer is simple, it is all of us.
This is easy to see in the context of government. No government has money, and few government programs “make” money. There are exceptions, where government charges a fee for some service rendered. It is possible that the agency might break even on those “user fees” and thus not cost the taxpayers anything. But in most constructs, the government delivers services or goods using tax dollars, collected through broader income, excise, sales and other taxation processes. Thus, all taxpayers pay for government services, whether they personally use them or not.
There are those who contend that therefore government might not be as efficient as we might like. If there is a lack of efficiency, we sometimes hear calls for greater revenue (more taxes) to fund the cost of service delivery. It is rare that effort is invested instead into finding a methodology for cutting the costs of delivery, so that the service might be delivered more efficiently and within the existing revenue stream. The data from the Office of Personnel Management suggest that federal government employment fluctuates, but is not apparently decreasing. Some contend that the price of federal employees is actually increasing, but many state employees have not seen pay increases in recent decades.
Is there waste? According to one report, the “federal government made about $125 billion in improper payments in 2014 alone.” Some estimate that about 122 million Americans pay income taxes. So that $125 billion costs each taxpayer over $1,000 each year. The story on the report citing the $125 billion says that one government agency claimed the waste is rampant because government lacks the funds or personnel to police spending. In 1984 doublespeak, this is essentially, “we spend so much because you don’t give us enough; if you gave us more, we would spend less.”
Whether it is income tax withheld from a paycheck or sales tax that is collected when purchases are made, many forms of taxation are apparent to the payer. This is not always true, there are examples such as excise tax on gasoline that is embedded in the price at the pump. Most drivers realize that a tax is being collected, but it is harder to notice the amount. According to Bankrate, taxes comprise about $.48 on each gallon of fuel. At the beginning of 2016, that price per gallon nationally averaged under $2.00 and the tax rate was thus close to 25%. The amount of tax does not print on the receipt at the pump the way sales tax may display.
Workers’ compensation in some ways is like that excise tax. Each business must charge for its services, or it will go out of business. All of the “inputs” must be accounted for. This includes the raw materials, the equipment, the labor, the location, and more. For example, a simple lemonade stand on the corner will require lemons, sugar, water, and ice. Then there will be equipment like a pitcher/container, a table, a spoon to mix, and perhaps a sign: “Lemonade $.25.” Someone has to make the lemonade and then sit at the table to pour it for customers and collect the money. For some period, the owners might use the corner free, but more likely will have to lease or buy a location for this business.
This is all fairly obvious. You cannot have a lemonade stand without lemonade (consumers may be gullible, but they are not that gullible).
Then the government gets involved in the business. They may be concerned with how the stand is disposing of lemonade production waste (the EPA), or whether its table is the right height (OSHA), or whether it properly pays the person pouring the lemonade (FLSA), or whether it clearly and effectively labels the contents of the lemonade (FDA). Of course, as the business grows, there may be more, such as providing leave for employees (FMLA), assuring that there is equal access (ADA), making sure there is no discrimination (EEOC), and mandating that the lemonade stand provide employee health insurance to the workers (ACA). And this is just the federal regulation.
The city or county may require the lemonade stand to have a business license. There may be periodic inspections by police agencies such as the health inspector or the fire inspector. Some regulation may be focused on safety, and some on generation of revenue.
What does regulation cost? That is a difficult question. One estimate says that “that in 2009 federal regulation cost businesses and consumers $1.75 trillion, or nearly 12% of America’s 2009 GDP.” GDP is "gross domestic product." The report compares that $1.75 trillion to businesses profit. It says that “in the same year, corporate pre-tax profits for all businesses totaled about $1.46 trillion.” The cost of compliance with regulation was more than the pre-tax profit. Regulation arguably adds significantly to the cost of doing business. I have been unable to find any representations of what workers' compensation adds to American consumer prices.
Of course, business does not pay the cost of this regulation, the consumer does. That is why we cannot buy the the glass of lemonade for $.25, it is $1.25. The business has to charge its customers more, so that it can cover the business expenses, then the regulatory expenses, and still operate at a profit.
Profit is not a “dirty word.” Despite the willingness and perhaps eagerness of some to embrace socialism today, the reason people risk their capital (to buy the location, the table, the supplies, and to hire the labor to produce and sell lemonade) is that there is a return, profit, on that investment. If the stand owner will not make any profit, what is the motivation to make this investment and produce lemonade?
Like other government regulation, workers’ compensation adds to the cost of a product. Some might argue that including this as a regulation is disingenuous, workers compensation is insurance. That is true. But government usually does not require the stand owner to buy premises insurance (if not purchased, and fire burns the stand the owner is at risk for that loss). But for about 100 years, state laws have required most businesses to purchase workers’ compensation insurance in most states. It is a mandatory coverage under the law (depending on the size of the employer in some instances). Thus, it is a mandatory expense obusiness, just like that business license, etc.
Thus, as we hear about the cost of benefits for workers’ compensation we are hearing about the cost of goods and services that we consume. Or, in the public sector, when we hear about the cost of workers’ compensation coverage for city truck drivers, policemen, bus drivers, mechanics and more, we are hearing about the cost of a city running its operations. To fund that, much like the business, the city must generate revenue. Just as the business raises its prices to cover expenses, the city can raise its prices (taxes) to cover its expenses.
Economists refer to a construct called “comparative advantage.” If you are better at something than your competitors, you have an advantage. For example, many will pay to see Shaquille O’Neal or Lebron James play basketball. No one is foolish enough to pay to see me play. They have a comparative advantage due to their skill. Another example of comparative advantage might mean that someone is better at building houses than I am, and thus that person can build better or quicker, and her or his efficiency allows profit that my lack of skills and efficiency does not. They have a comparative advantage over me, and their skill produces sales or reduces cost.
In the same manner, cheaters have a comparative advantage. If someone steals the lemons and sugar for their lemonade stand, their expenses are lower and they can sell cheaper than a competitor while still maintaining the desired profit. Similarly, if a company can effectively lie about how many employees it has, it may avoid workers' compensation. The company might hire "independent contractors," instead of employees. That is not to say that there are not legitimate independent contractors, there are. But there are also those who manipulate and contort to falsely use this designation to avoid workers' compensation laws.
Businesses may similarly avoid other government regulation. If a business can avoid costs of inputs, that enhances its profitability. This is being seen now as companies resist scheduling workers for more than 29 hours per week to avoid the federal mandate of providing them health insurance, and thus the costs associated with the ACA. Similarly, some businesses claim to be incentivized to keep their employee count below various levels to avoid the costs of compliance with the ADA, the FMLA, the ADEA and more.
While perhaps all would agree that the thief who steals the lemons and sugar is acting wrongly, many feel that obeying the letter of the law, and thus avoiding government regulation and associated expense, is appropriate. They say this is a choice, a choice that the government has provided in defining who must comply with these laws, and thus pay the associated expense. But intentionally mislabelling workers, misrepresenting the number of employees, understating employee payroll to reduce workers' compensation premiums, and other fraud is simply criminal.
As an aside, there are also some issues of injury legitimacy, with some people accused of inappropriately engaging in behavior to take benefits they are not entitled to legitimately. This will remain true regardless of whether the benefits sought are workers' compensation or government support and welfare. These bad actors are as troublesome as those who would steal lemons or misstate payroll to avoid premiums.
Workers’ compensation injuries involve costs. Most businesses cover the potential loss from a workplace injury by purchasing insurance. The cost of that insurance may be competitive in some states (different carriers charge different rates, as we see in automobile insurance ads that permeate television, you know, Flo, Lady Liberty, Mayhem and more). Or the cost may be fixed by state law or regulation so that a given employer’s workers’ compensation premium will be virtually identical regardless of from which carrier it is purchased.
However the premium cost is calculated, that expense must be factored into the overall cost of doing business, which ultimately effects the cost of the lemonade that we buy. Lower workers’ compensation costs mean cheaper products and services, and as the costs increase so do the prices.
Cheaters participate in the labor market but avoid the expense of workers’ compensation. They lie about volumes of employees, pay cash under-the-table to avoid purchasing workers’ compensation or to minimize what they purchase. These cheaters can thereby achieve an advantage, deliver goods or services less expensively, and employers who follow the law and provide workers’ compensation coverage for their workers struggle to compete, and perhaps lose work or sales to these cheaters.
Critics of state law "reform" decry a "race to the bottom" in workers' compensation. They see state efforts at controlling workers' compensation costs as inappropriate and pine for federal intervention. Through federalization, they hope that states could be equalized in terms of their application of workers' compensation definitions and benefits. They perceive that this would prevent any state from having a comparative advantage over its neighbors or competitors in terms of the cost of workers' compensation. The cries for federalization are far from unanimous however.
So, what is society's interest? Would anyone argue that providing prompt and quality medical care for work injuries is not an appropriate goal? Would anyone argue that timely payment of sufficient wage replacement is inappropriate for those legitimately unable to earn following a work accident? Should the cost of these not be built into the price of the products and the services we each consume? Within that construct, should states attempt to define and restrict, or impose cost controls like fee schedules, drug formularies, and maximum compensation rates?
Understanding that we are all the ultimate payers, that is every cost of worker injury affects us all, what should be our societal goals? Could everyone agree that accident and illness prevention at work is worthy? Could agreement be reached that predictability and clarity, that is knowing reasonably clearly what is or is not compensable under workers' compensation, is beneficial? Can we resolve the question of whether return to work is something that should be encouraged following such an accident or illness? Should those decisions be made in the states or in Washington D.C,?
There is much to discuss in workers' compensation, and since everyone pays the prices, shouldn't everyone express their thoughts?