Sunday, May 29, 2011

Arizona's "business death penalty" law

This past week, the US Supreme Court upheld in a 5-3 decision (Justice Kagan recused herself) Arizona's law allowing the state to impose a "death penalty" on businesses who hire illegal aliens (or undocumented workers or whichever label you would prefer).  The law allows the state to revoke a firm's business license after a second offense of knowingly hiring illegal aliens.  Now that the state can proceed with enforcement, one has to wonder if they will in fact do so, or if they simply hope the threat is sufficient to achieve their goals.

If we assume that the business also employs legal workers, then such a revocation is bound to cost the state of Arizona some money.  The legal workers will be eligible for unemployment insurance benefits since, to use the magic phrase, they have become unemployed through no fault of their own.  Some may be eligible for Medicaid and other benefits paid for by the state.  Arizona has a terrible state general fund budget mess right now, with little prospect that things will get much better in the near future.  Will the fact that revoking a business license will cost the state in that fashion act to deter the state from actually exercising its authority?

There will be pressure for the state to exercise its authority in an uneven fashion.  Shutting down a car wash is a relatively minor inconvenience for consumers: there are many car washes and most are small independent operations so the effects are small.  Shutting down an Albertson's or Safeway, on the other hand has much larger effects and a much greater impact on consumers.  The state may well be more reluctant to impose the death penalty on a Safeway than on an independent car wash.  Would an implicit policy that rendered large firms immune from the death penalty threat be discriminatory?  Enough so that the state winds up in court again?

Illegal workers are concentrated at the low end of the employment spectrum.  This suggests that businesses might tend to avoid having any workers at that level if they can avoid it.  The new law would seem to encourage a business to, for example, hire a janitorial firm and not its own janitorial staff.  Large businesses have done that sort of outsourcing for a long time; smaller firms may now find the practice more attractive as a means of risk avoidance.  And a very small business, that has been paying part-time cleaners off the books, faces a difficult choice: risk losing the license to operate versus the costs of bringing those workers into the official employment system.

The law also mandates the use of the E-Verify system operated by the federal Department of Homeland Security.  According to the E-Verify web site, "more than 238,000 employers" are enrolled in the system.  Arizona alone has an estimated 150,000 employers who will now have to participate.  Anyone who has dealt with a software system that experiences unanticipated rapid growth knows that the growth all by itself is likely to uncover a variety of problems.  If even a handful of other states enact similar laws, Arizona may find that it has to deal with unexpected difficulties in implementation as E-Verify fails in unexpected ways.

I suspect that very few firms will have their licenses revoked.  Not because they will stop hiring illegal workers, but because the consequences to the state of trying to enforce the law create problems that Arizona's state government won't want to face.

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