Michigan Didn’t Have to Cut Unemployment Benefits

Michigan this week cut the maximum length of state unemployment insurance (UI) benefits next year to 20 weeks.  Every other state provides at least 26 weeks, as has Michigan since the 1950s, but Michigan officials said they couldn’t afford to do that anymore.  They’re wrong.  Not only is the Michigan approach bad for workers and the economy, but it was shortsighted and unnecessary.  There’s a better way — and South Carolina offers a great example.

To be sure, the Michigan UI system is in bad shape due to poor policy choices followed by the Great Recession.  Michigan (like many other states) moved away from the traditional, commonsense way of financing unemployment insurance programs, which is to raise enough tax revenue in good times to pay for benefits in bad times.  Entering the recession, Michigan employers paid unemployment taxes at a rate just half what it was in 1985, and that rate applied only to workers’ first $9,000 in wages, the same wage base as in 1985 (unadjusted for inflation).

Largely due to the low taxes, the state held far too little in the trust fund that pays unemployment benefits.  The fund ran out of money in 2006, and Michigan had to start borrowing from the federal government to finance regular unemployment benefits, as the federal law establishing the UI system allows.

Then the state was hit especially hard by the recession:  unemployment topped 14 percent at one point and remains among the nation’s highest.  Michigan now owes the federal government nearly $4 billion in UI loans.  (Thirty-one other states have borrowed for this purpose and owe the federal government a total of nearly $47 billion.)

Still, punishing Michigan’s laid-off residents for the system’s insolvency is unfair —  it’s very hard to find a job in Michigan, and the job market is expected to improve only gradually.  Cutting UI benefits will also hurt the state’s economy.  By taking income from people who would spend it on necessities, Michigan will reduce consumer demand and weaken its economy, both in the near term and when unemployment rises in future recessions.

Instead, Michigan should begin rebuilding a forward-looking UI trust fund.  That means maintaining the program while implementing a multi-year strategy to prepare for the next recession as economic growth returns.

South Carolina has done just that.  Like Michigan, South Carolina was hit hard by the recession and still has an unemployment rate above 10 percent.  Also like Michigan, South Carolina’s UI trust fund is in debt, largely because it entered the recession with a very low taxable wage base (only the first $7,000 of workers’ wages).

But unlike Michigan, South Carolina didn’t cut benefits deeply for laid-off workers. Instead, it set up a flexible and thoughtful process that prepares the state for future recessions while limiting near-term tax hikes on employers.  A central feature of the bipartisan plan was a gradual doubling of the taxable wage base, from $7,000 to $14,000.

As we’ve proposed, Congress could help all states prepare for the next recession by enacting a comprehensive, national solution to the financing problems facing UI trust funds.  Our proposal:

• Creates a framework through which states can restore the long-term health of their systems.

• Allows employers to avoid the principal and interest payments that will be due on their federal loans over the next couple of years, while the economy is still weak.

• Prevents damaging cuts in UI eligibility and benefits for jobless workers.

Senate Majority Whip Dick Durbin and others recently introduced legislation (S. 386) that recommends a similar approach.  It would allow states to have part of their federal loans forgiven — saving employers in those states as much as $37 billion in federal unemployment taxes — in exchange for rebuilding their UI financing systems to prepare fully for the next recession.  It also would allow employers to entirely avoid federal tax increases and loan interest payments in the next two years, and would create new rewards (including a federal tax cut) for businesses in states that adequately fund their UI system.  And it wouldn’t increase federal deficits, since its tax cuts are offset in later years, when the economy will be stronger.

That’s the kind of far-sighted, thoughtful approach that’s desperately needed.  Michigan’s approach is just the opposite.