Saturday, November 5, 2011

The High Cost of Government-Mandated Discrimination: DOMA and the Regulatory State

Conservatives frequently talk about the cost of regulations. For instance, Freedomworks, a well-known conservative organization, published a piece called The Hidden Cost of Regulation. It said: “Complying with regulations is not cheap,” noting that regulations aren’t paid for by just corporations, but by “the entire economy.” It notes that consumers pay higher prices as well, due to these regulations, and that they “act as a drag on economic growth.”

Allow me to add two other points Freedomworks did not mention, but which I believe they would agree with. 1) Motives of the regulators do not change costs imposed by the regulations. That is, costs are not lower if the motives of regulators are good. 2) Costs are not changed if regulations are imposed by one political party rather than the other. In other words, the cost of Republican-imposed regulations would be just the same if Democrats had been the guilty party.

With this in mind, let us turn to a set of regulations Republicans put into place, with the claimed motive of “protecting the family:” The Defense of Marriage Act (DOMA).

On the surface, DOMA doesn’t appear to create new regulations. It says: “In determining the means of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.” It sounds simple, but then some of the worst results come out of the simplest of regulations.

Until DOMA, for the entirety of American history, marriage was defined at the state level. Over the last couple of centuries the federal government and the states have woven a web of rules and regulations around the marriage contract. Until DOMA the federal government accepted state-recognized marriages as valid on the federal level. Now there are federal regulations that don’t correspond with the laws in 10 states and the District of Columbia.

Federal regulations control everything from health insurance options to pension plans when it comes to employees. Absent DOMA, an employer in states with marriage equality could treat all married employees the same way. With DOMA, they are forced to establish a dual system of employment where one set of employees is treated one way, and a second set another way, when it comes to federally regulated issues such as taxation and pensions. But, on the state level, employers treat employees identically. Having to comply with DOMA, imposes direct regulatory costs on employers.

Don’t take my word for it: consider an amicus brief filed in the case of Massachusetts vs. United States Department of Health and Human Services currently before the US Court of Appeals, First Circuit. A group of 70 corporations, trade organizations and non-profits signed the amicus, including Aetna, Levi Straus, Blue Cross Blue Shield of Massachusetts, CBS, Microsoft, Chubb Corporation, Google, Starbucks, Xerox, Time Warner Cable, the Greater Boston Chamber of Commerce, Retailers Association of Massachusetts and twelve law firms.

In the amicus, they lay out precisely what negative impact DOMA regulations have on their ability to do business. They note that the law forces them to impose a “dual regime” for legally married employees: one set of rules for those with opposite-sex spouses and another set for those with same-sex spouses. This requirement “put us, as employers and enterprises, to unnecessary cost and administrative complexity, and regardless of our business or professional judgment forces us to discriminate against a class of lawfully-married employees, upon whose welfare and morale our own success in part depends.

The brief notes that the 10th Amendment “protects certain state powers from federal intrusion” and that states have the “power to regulate marriage.” Historically employers “look to state law to determine which employees were married for purposes of administering workplace benefits.” But DOMA intrudes with federal regulations on some legal marriages that are different from the norm. The amici note: “Absent DOMA, employers could treat all employees married under the law of any state in a consistent way. Our burden arises because federal law intrudes to conflict with state law, forcing the employer to create two groups of married employees, and to treat one group different from another.”

The amici noted that 86% of full-time employees have health benefits through their workplace and 74% have an employer-provided retirement plan” that “are a direct contributor to employee loyalty.” Under DOMA requirements, they have to “investigate the gender of the spouses of our lawfully-married employees and then to single out those employees with a same-sex spouse.” They are required to tax health-benefits of spouses of gay employees, but not those for the spouses of straight employees. Forcing the company to treat employees in a discriminatory manner harms good will between employer and employee and—when it comes to pension benefits—requires them to ignore the same-sex spouse of an employee who dies—something employers do NOT wish to do.

When employers try to compensate gay employees for the higher taxes they must pay, it requires them to pay those employees more than similar straight employees, just so things even out when the paycheck is cut. Social Security and unemployment taxes based on the income of employees. There is no method for calculating these taxes for health benefits given to an employee’s same-sex partner. Yet, they are obligated to pay the taxes without knowing how to calculate them. They complain, “The I.R.S. declines to provide official guidance, and instead puts the burden (and risk of error) on the employer.” This is how it is with simple regulations such as DOMA

Another method by which employees cover health care of spouses is that an “employer may allow a married employee to reduce his taxable income by paying, on a pre-tax basis, the cost of coverage for a different-sex spouse, but not for a same-sex spouse.” This means that W-2 forms for married gay employees have to be calculated differently than those of married straight employees, with gay employees “on average” paying an extra $1,069 more in federal taxes” than that of similarly situated straight employees.

Companies also are required to treat gay employees differently when it comes to a family crisis. Federal law permits employees “up to 12 work weeks of unpaid, protected leave to care” for a sick or injured spouse. “In emergencies, she may use a pre-retirement ‘hardship distribution’ from her 401(k) plan to pay his medical expenses. While the distribution is taxable, the employee will be exempted from certain penalties that would otherwise apply.” However, if the employee is in a legal same-sex marriage they will be penalized if they use funds from the 401(k) plan to pay medical care for their spouse. In other words, the federal government will punish gay people for caring for their partners during times of need. 
Trying to achieve some level of fairness, some employers extend similar rights to employees with same-sex spouses but they have to create these workarounds “entirely at the employer’s direct cost.” Without the employer footing the bill, “the employee will lack the flexibility—enjoyed by her colleague with a different-sex spouse—to care for a same-sex spouse in times of crisis or illness.”

But, even the workarounds may not work. Given the complexity of regulations in numerous fields, a workaround that appears legitimate may accidentally be in violation of other regulations. “Workaround may attract attention from regulators or cause tension with shareholders or investors, all of which consumes time, resources and goodwill. However enlightened and necessary, such voluntary policies perpetuate a caste system among married employees, resting on unhelpful distinctions inimical to teamwork and by extension, to the success of the enterprise.”

Larger companies also “recruit certain highly qualified scientists, business executives and scholars” who are foreign nationals or attempt to transfer employees from overseas offices to domestic employment. DOMA treats opposite-sex spouses of these employees very differently than it does same-sex spouses. Same-sex spouses are not considered married at all. “A recruited or transferred foreign national married to a same-sex spouse must either leave the spouse behind or secure an independent visa status for the spouse (at personal expense and effort), and thereafter live with the risk of the expiration or rescission of that visa.” In practical terms, it will be almost impossible for them to bring their spouse with them. The amici note “this is a considerable impediment to attracting foreign nationals.” They also say this “subjects the foreign national, and accordingly the employer, to special taxation problems” as well. 

Employers are also required to spend extra money to treat gay married employees differently than straight employees are treated. Federal laws ensure “that an opposite-sex spouse may receive a portion of his spouse’s benefit unless he expressly waives that form, and most retirement plans must provide opposite-sex spouses with special rights to the participant spouse’s benefit if the participant dies while still employed.” The only way to do this for married gay employees is to create new workarounds that still don’t have the same protections and benefits because of unequal taxes imposed on gay couples.
The amici complain that DOMA intrusion into marriage means they “treat employees with same-sex spouses as (1) single for the purpose of federal tax withholding, payroll taxes, and workplace benefits that turn, as most do, on marital status, and (2) married for all other purposes under state law. This requires amici in effect to maintain two sets of books—one for married employees with same-sex spouses, another for married employees with different-sex spouses. The double entries ripple through human resources, payroll, and benefits administration.”

This means their financial recording keeping systems must be “capable of separately tracking married employees by reference to the gender of the spouse. Confusion abounds, and even sophisticate employers struggle.” They give the example of Yale University that didn’t realize it had to withhold higher taxes from married gay employees than it withheld from married straight employees.  This meant they had to take double deductions from employees the next year after their failure to comply with the different rules DOMA imposed was discovered.

The unnecessary complexity introduced by DOMA has “spawned an industry of costly compliance specialists” and employers “pay vendors to reprogram benefits and payroll systems, to add coding to reconcile different tax and benefit treatments, to reconfigure at every benefit and coverage level, and to revisit all of the modifications with every change in tax or ERISA laws for potential DOMA impact. Attorneys and ERISA advisers must be consulted. Human resources, benefits and payroll personnel must be trained and retrained as tax or ERISA laws change.” Of course, they must be adjusted to reflect two methods of calculating all these costs, with a status for gay employees that while separate, is not equal.  The employers say that the “complexity and uncertainty saps critical time, and energy from the human resources and benefits administration function.”

Of course, as bad as this is for the large corporations, “the burden on the small employer is especially onerous.”
  They can’t afford specialists and are not likely to have entire departments dedicated to dealing with the dual set of regulations required by DOMA. This leads to a new, especially destructive aspect of DOMA: “Such burdens, standing along, might chill a smaller employer from employing an otherwise qualified employee because she happens to be married to a same-sex spouse.”

The dual set of books required under DOMA in regards to the many federally regulated issue of taxes, health benefits and pensions, means that the cost of hiring someone who is gay is considerably higher than the cost of hiring someone who is heterosexual. A small business that has no married, gay employees doesn’t face all the regulatory costs of DOMA. The moment they hire their first gay employee they either have to deal with them being married, or the possibility that they may marry, and that hits them with massive costs to adjust their finances to reflect the unequal status of gay employees. In other words, the state imposes what amounts to massive fines on employers who do NOT intentionally discriminate against gay people. By selectively raising the cost of employing gay people, the state is encouraging employers to actively discriminate.

 In small businesses, where finances are tight, the costs of hiring a gay person, over hiring a straight person, may be so significantly different, that it could mean marginal small companies go out of business. This traps some employers between state law and federal regulations. State laws may punish them if they discriminate on the basis of sexual orientation while federal regulations will impose massive costs on them if they don’t discriminate.

This is no different than if the Republicans who pushed DOMA had directly stated that all employers will be fined for hiring gay employees. The insidious effects are not different in any meaningful way. 
The final complaint of the employers is that DOMA literally “conscripts” them “to become the face of… discrimination.” It is the employer who must treat one employee differently than another” while simultaneously obeying laws that forbid them to discriminate. “We must do all of this in states that prohibit workplace discrimination on the basis of sexual orientation and demand equal treatment of all married individuals. This conscription has harmful consequences.”

 They note that this means they must engage in conduct that otherwise would be illegal in Massachusetts. “DOMA forces the employer to determine, at its own risk, where DOMA supersedes state law and where state law continues to protect the employee.” Not getting it right opens them up to legal problems. 

But these employers also note that DOMA requires them to violate their own codes of conduct. It forces them to be “the unwilling agent of federally-required disparate treatment of lawfully-married employees.” This disparate treatment “fosters workplace distress, and practical experience teaches that workplace distress increases the risk of the employer’s having to respond, at its own expenses, to claims of the aggrieved.”

It is the employer, not the federal government, who “becomes the fact of DOMA’s discriminatory treatment, and is placed in the role of intrusive inquisitor, imputer of taxable income, withholder of benefits. The employer is thus forced by DOMA to participate in the injury of its own workforce morale.”
The amici point out that 94% of Fortune 500 companies “provide nondiscrimination protection for their gay and lesbian employees.” They argue these principles “spring from hard experience. Our enterprises are engaged in national and international competition—for talent, customers, and business. That competition demands teamwork, and teamwork thrives when the enterprise minimizes distracting differences, and focuses on a common mission. DOMA’s core mandate—that we single out some of our married colleagues, and treat them as a lesser class—upsets this imperative.” 

They state that their “principles are not platitudes,” but “our agenda for success: born of corporate experience, tested in laboratory, factory, and office, attuned to competition. Our principles reflect, in the truest sense, our business judgment. By force of law, DOMA would rescind that judgment, and direct that we renounces these principles, or betray them.”

DOMA forces employers to act in discriminatory ways, and in a manner that their own business judgment tells them is unproductive and counter to good business sense. These are companies that do not wish to discriminate against gay employees yet are forced to do so by federal law. DOMA doesn’t just force the companies to act against their own moral principles. It also harms gay people by making them more expensive to employ requiring employers to act against their own rational self-interest by harming good employees.

Freedomworks wrote: “Continued overregulation will only drag the economy down. On the other hand, pursuing a policy of deregulation, would free up the economy to grow and prosper.” I couldn’t agree more and an easy place to start is repeal of DOMA, an unnecessary regulation that intrudes on the powers of the states. Returning to the federalist approach that was pursued in regards to marriage for over two centuries is a deregulation that long overdue. So, what are the Republicans doing about DOMA? Instead of deregulating they are wasting millions of dollars in tax funds trying to defend a law that violates the 10th Amendment, that imposes massive costs on private employers, that destroys jobs, that encourages discriminatory behavior and which violates the basic principles on which this country was founded.


  1. Thank you for putting into words thoughts that I have had concerning DOMA. When it come to paying my federal taxes, I have an upwards-adjusted income of about $7,000 because my same-sex husband is covered under my medical insurance (unlike the opposite-sex married folks that get it gratis).

  2. To be precise, no one gets medical insurance gratis, that is free. Someone always pays. The difference is that gay couples are punished for getting the insurance by paying higher taxes. What is particularly annoying is that to get health insurance for your husband you have to pay a third party (the government) a second time, after paying for the insurance either directly or through "benefits"—meaning reduced wages. All scarce goods, like health insurance, cost something to someone. But you shouldn't be taxed on that good when straight couples are not so taxed.