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Introduction

As more state governments face projected budget shortfalls in an uncertain economy, spending cuts are under serious consideration. At the same time, elected officials are also looking to take concrete steps, such as enacting tax cuts, to help stimulate economic activity.

A reduction in the "government employee union tax" – the premium charged to taxpayers for covering the inflated salaries and benefits of organized public employees – should be an attractive solution for state leaders seeking to balance budgets and/or provide tax cuts. 

The High Cost of Public Employee Unions

Unquestionably, state public sector workers tend to make more than their private sector counterparts. In 2007, state government employees had median weekly earnings of $772, while private sector workers brought home a median weekly wage of $666.[1] From 2000 to 2007, public sector workers enjoyed a 16 percent jump in compensation, while private sector employees received an 11 percent increase.[2]

Much of this gap can be explained by the generous increases guaranteed through collective bargaining. The state government workforce is far more likely to be unionized: 30.4 percent of state workers are members of unions compared with 7.5 percent in the private sector. In 2007, unionized state employees commanded median earnings of $865, versus $731 for non-unionized state workers.[3]

Potential Savings to Taxpayers and State Budgets

The Center for Union Facts has calculated the additional revenue necessary to cover these inflated levels of compensation, and they've dubbed this cost the "government employee union tax." NTU combined additional data and calculations to produce the following table, which shows how much lower state income tax collections could be if public employee wages were comparable to similar private-sector positions, along with the per-household income tax savings and aggregate state budget savings that could be realized with the elimination of the "government employee union tax."

Table 1. Potential Savings from Elimination of State Government Employee Union Tax
(based on 2005 data)

 Sources: NTU calculations compiled from Center for Union Facts,[4] Tax Foundation,[5] and U.S. Census[6] data.

Interestingly, many states where budget deficits and tax burdens are worst also have some of the biggest public-private sector compensation gaps. California, Illinois, Michigan, New Jersey, and New York, for example, all report union tax rates near or above 30 percent, and all have faced chronic budget-balancing problems. Others close to or over the 30 percent mark, such as Connecticut, Hawaii, Rhode Island, and Vermont, impose heavy taxes on their citizens. In fact, according to Tax Foundation data, the average "union tax" in the 10 states with the highest 2005 state and local tax burdens (as a percentage of income)[7] was 26.4 percent, compared to an average of 17.6 percent for those not in the top 10. (Nine states without broad-based income taxes were excluded from the chart above).  

Conclusion

A compensation realignment between government jobs and private sector positions is long overdue. While some government programs are more important than others, no expenditure should be considered "untouchable," especially in tough economic times. States that are reexamining their balance sheets should consider compensation freezes or market-based salary re-evaluations.

The political clout of public sector unions and the nature of some labor contracts will undoubtedly discourage some officials from making market-based adjustments of state employee compensation levels, but balanced budget requirements may force their hand. Taxpayers shouldn't be forced to carry the burden of a "government employee union tax" in an up or a down economy.

 Notes