Most states have taken out federal loans to help pay for the surge in unemployment insurance (UI) benefits caused by the sharply higher unemployment of the past few years, and the first round of interest payments on those loans comes due today. Because the UI system is funded through business taxes, states are financing these payments mostly by raising the taxes paid by employers. These tax increases, combined with additional employer tax increases required to cover the first loan principal payments due in January, are ill-advised at this time given the continued weak state of the economy.
The President has proposed a set of UI reforms that would avoid these tax increases on employers while the economy remains fragile and also accomplish something even more important — helping states build stronger UI systems for the future. As we’ve explained, without reform most state UI trust funds will face the next recession still in debt from the current downturn or just barely solvent. Either way, they’ll be in no shape to respond effectively to another surge in unemployment.
The President’s plan would:
- Establish a moratorium on UI loan interest and principal payments for the next two years, saving businesses billions of dollars in higher taxes at a time when the economy is weak.
- Raise the amount of a worker’s wages subject to the federal UI tax (which has remained frozen at $7,000 for nearly three decades), while lowering the federal tax rate (so there is no net federal UI tax increase) and allowing states to lower their UI tax rates. This approach of broadening the base (which would apply to state UI tax bases, as well) while reducing the tax rate is similar to what a wide range of analysts have recommended for other kinds of tax reform.
- Beginning in 2014, when the economy is on better footing, increase the currently slow pace at which states must repay the loan principal, so that states repay the loans more quickly and hence can move more quickly to replenish their depleted state UI trust funds. This will make it more likely that states are better prepared for the next recession and won’t need to borrow as heavily, if not more heavily, from the federal government at that time.
The congressional “supercommittee” on deficit reduction should give the President’s proposal serious consideration. It would help the economy in the near term and help restore the health of the nation’s UI system — a key stabilizer for reducing the depth of future recessions. It also would reduce the deficit over the next ten years by $34 billion, according to the Congressional Budget Office. Congress could strengthen the plan by adding provisions in a UI reform bill already before Congress that would give states more incentives to reform their UI financing systems, prepare adequately for future recessions, and maintain UI benefit levels.