There is a reason the Indiana Chamber advocated in the 2010 legislative session for a two-year delay in the state’s unemployment insurance tax increase. That’s because two major things needs to happen — and both will take time. One is a comprehensive look at the state system; that means reviewing eligibility and benefit levels in addition to simply raising the tab for employers. Second is that Congress needs to craft a national solution to the billions that are being borrowed by numerous states, ones that do not have the capability to pay back the loans or the interest.
Indiana lawmakers did grant a one-year delay, saving employee jobs as employers could ill afford the $400 million tax increase. Little progress, however, has been made on the two elements to the long-term solution. Thus, another delay will certainly be on the agenda come January.
Stateline.org, in a story yesterday, details the dollars involved nationally and the need for Congress to act.
More than 30 states have borrowed nearly $40 billion. Some of the current totals:
- California, $7.5 billion
- Michigan, $3.8 billion
- New York, $3.2 billion
- Pennsylvania, $3.0 billion
- North Carolina, $2.4 billion
- Ohio, $2.3 billion
- Illinois, $2.2 billion
- Others topping $1 billion are Indiana ($1.7), New Jersey, Florida, Texas and Wisconsin
According to the story:
It adds up to more borrowing for the programs than ever before, and it’s likely to balloon by year’s end. If interest rates projected at around 4 to 5 percent were added to that total amount, it would force states to pay an additional $1.6 to $2 billion currently unaccounted for. And that’s not the only additional fee that could be imposed. For every year the loans aren’t paid back, employers will lose at least 0.3 percent from the federal credit. That could mean that an employer’s tax rate of 1.1 percent would inflate to 1.4 percent.
Doug Holmes, the president of UWC Strategies, a business-oriented consulting firm, says 25 of the 31 states borrowing federal dollars will be unable to pay off their loans in time unless Congress acts soon to revise the rules. But this may be an inopportune time for Congress to try to renew the interest-rate moratorium, says Mike Katz, of the National Association of State Workforce Agencies (NASWA). Nothing is likely to be considered before the election, and if Republicans make substantial gains, as is expected, a new stimulus is very unlikely.
Michigan, a state that has a federal unemployment insurance debt close to $4 billion, provides a striking example. During the last recession in 2002, state lawmakers raised weekly benefits by about 20 percent. Policies like this led the state to unemployment insurance insolvency in 2006, three years before the surge of borrowing among other states began. Because of this, Michigan has already felt the federal penalties that most states are now fearing.
The closest that states have ever come to this level of borrowing happened in 1983, when the recessions of the mid-1970s and early 1980s added up to a collective unemployment insurance debt of $28 billion (the number is adjusted to 2007 dollars). During the first few years of the 1980s, Congress passed a series of reforms that aided the ability of states to pay off the loans.
By 1990, all the outstanding debt was paid off, but much of that was aided by a prosperous economic rebound throughout the mid- to late ’80s. “If we’re going to recover from this period, we need to get lucky,” says NASWA Executive Director Rich Hobbie. “That is a steep hill to climb.”