Payroll Parity: Government Containment That Boosts Private Jobs

There are some weak signs here and there that the Wyoming economy may be recovering. These signs are nothing to write home about: according to annual data from the Bureau of Labor Statistics (BLS), the private sector had a modest 5,400 more employees in July of 2012 compared to July of 2010. This 2.4-percent increase is nevertheless an increase, and as such it needs careful attention and protection from intrusive policies.

While we should appreciate even weak signs of a recovery, we should also be vigilant about threats to it. Among the worst that could happen is that our state legislators take the recovery as a sign that they can raise our taxes. This would be bad: estimates using the Wyoming Liberty Group’s own economic model of the state’s economy show that even a one-penny increase in the state sales tax could cost Wyoming 3,000 private sector jobs.

We have good reasons to be worried about higher taxes. Our government has a sordid record of growing big:

  • In 2011 there were 309 state and local government employees per 1,000 private employees in Wyoming, the highest rate in the country;

  • Wyoming has the worst school-district employee imbalance of all states, with only 43 percent of employees being instructional staff.

Things don’t look much better when it comes to employee compensation. As a percentage of private-sector employee compensation, the total earnings of state and local government employees went up sharply between 2008 and 2010:

  • In 2010 private-sector workers earned $11.2 billion in employee compensation, a 6.7 percent reduction over 2008;

  • In 2010 state and local government workers earned $3.3 billion in employee compensation, a 10.7 percent increase over 2008.

Per-employee compensation increased more than four times faster in government than in the private sector.

To put this in perspective, suppose that private employees had to pay for government worker compensation in the form of an income tax. In 2008 that tax rate would have been 25.2 percent; in 2010 it would have been 29.8 percent.i

Clearly, we do not need a bigger government. We need a smaller government. Long-term we need structural reforms that end government programs, but we also need a short-term strategy.

One idea is a so called payroll parity rule. It says, plain and simple, that:

  • The total number of state and local government workers cannot exceed a fixed ratio to private sector workers in Wyoming;

  • Per-employee compensation in state and local government cannot increase faster than the compensation per employee in the private sector.

If we had put this rule in place in 2007, we would have capped the number of state and local government employees at a ratio of 270 per 1,000 private employees. Over four years, to 2011, this cap would have capped the number of state and local government employees to 57,300, a full 8,400 fewer than the actual number.

The two parts of the payroll parity rule would have yielded a substantial saving for Wyoming taxpayers. Assuming again that 2007 were its “starting year”, it would have saved taxpayers $301.4 million in 2011.

This amount is approximately equal to the total cost of residential, local property taxes in Wyoming. It is also equal to one third of what the state collects in sales taxes each year. If we assume that the state legislature would return the savings to taxpayers in the form of a sales tax cut, we would have seen a substantial growth spurt in private-sector activity:

  • Our private sector would produce two new private-sector jobs for every job that government eliminated; and

  • The higher private-sector activity would produce so much more tax revenues that the state would actually recapture one third of the sales tax reduction in higher tax collections.

In other words: if government balanced its reduction of employees with a corresponding tax cut – thus maintaining a balanced budget both at the state and the local level – then government would actually end up with a budget surplus.

This is of course a purely economic experiment, which does not consider legal and contractual aspects of government employment. Nevertheless, the economic benefits of the payroll parity rule are compelling enough to merit further studies of the idea from other angles.

i Due to a higher rate of part time employment in government, the percentage is lower for compensation than it is for actual employees. This has to do largely with the seasonal nature of some government work. Adjusted for differences in part-time employment, state and local government workers make 35-45 percent more than private employees in Wyoming.
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