Inconsistent laws surrounding same-sex marriages are costing private US employers and employees up to $1.3 billion per year. For employers the largest burden comes from administration and compliance, for employees the largest burden is higher tax rates and limitation on benefits in states enjoyed by their married opposite sex citizens.
In the report titled (‘The Cost of Inconsistency’) Mercer, in collaboration with Freedom to Marry and Out & Equal, assesses the economic impact of inconsistent marriage laws in the United States. The authors find that for American businesses, unaligned laws impose a significant economic burden — specifically a $1.3 billion annual cost. The burden is based on two key factors.
Administrative and compliance requirements
Firstly, because marriage confers a host of legal and social privileges, the irregular landscape across 50 states creates a “bevy of administrative and compliance requirements for employers”, and as a result employers need to establish and maintain multiple benefits policies and HR-systems that apply to same-sex couples who live under the patchwork quilt. The consultants analysed the burden per state, and conclude that the cost to businesses in administrating the equality laws and bringing their businesses up to compliance, can be onerous.
In Florida for instance, on average a business of 2,500 employees pays $96,000 in compliance and equalising benefits to that of opposite sex couples, is enough to employ two average FTE. The total cost for all companies in Florida for administration and compliance in 2014 is $59.9 million. Even in states that permit same sex marriage, costs can still be prohibitive, California will need to pay $69.8 million in 2014, and from 2014-2018 it will pose a $396.5 million dollar burden.
A second element of the burden is taxation. When benefits are offered to same-sex couples who live in states without freedom to marry, the value of these benefits generates a tax penalty for employers and employees. In essence, the value of the additional benefits is treated as ordinary income, triggering added payroll and income taxes*. According to the advisors, the national tax burden amounts to $27.5 million 2014, down from a peak $93 million in 2012, reflecting the impact of the Windsor decision**. The largest portion of the tax cost is generated by employment in mid-sized companies, and employees bear more than two-thirds of the overall burden.
Adding both elements provides a gloomy picture on the costs of inconsistent marriage laws. Last year the total cost of administration and tax was $1.3 billion, and in the period 2014-2018, the total for all states will be a staggering $6.6 billion.
Due to the large differences between states, the total burden differs per region. California, New York and Texas – states with a freedom to marry – face the highest total cost, while 16 states are estimated to carry a burden of less than $15 million. In general, the tax burden to employers and employees is disproportionately concentrated in non-freedom to marry states, and the administrative and compliance burden more evenly distributed and highest in freedom to marry states.
Based on the analysis Mercer, Freedom to Marry and Out & Equal have a clear message: alignment is required. “The economic analysis is compelling. Inconsistent national policy penalizes the private sector, especially mid-sized and large businesses. The message we draw from this analysis is that national freedom to marry will save the private sector billions in unnecessary costs and taxes. And with 59% of Americans standing behind the right for same-sex couples to marry, the social case is too is compelling.”
* This taxation applies both to couples who were married in another state (who must pay a state tax penalty) and to those couples that are not able to travel elsewhere to exercise the right of marriage (who pay both a state and federal penalty).
** With the June 2013 ruling in the United States vs. Windsor, the US Supreme Court struck down Section 3 of the Defence of Marriage Act, which had legislated discriminatory treatment of married same-sex couples by the federal government. The Windsor ruling dramatically reduced this burden, as the federal government no longer taxes benefit costs for same-sex employees. However, in states without the freedom to marry, the value of those benefits is still treated as incremental income for state tax purposes.