New Federal Proposal Could Help States Avoid Unemployment Fund Pitfalls

Thursday, October 6, 2011 at 6:58 PM by

President Obama has proposed several big changes to the nation’s unemployment benefits system. Some of the changes would give states additional flexibility in to providing incentives for workers to return to employment as quickly as possible. Obama has also proposed making changes to how the unemployment benefits system is financed, changes that could be felt by Wisconsin employers and workers.

First, some background on the condition of Wisconsin’s unemployment system. During the recession, Wisconsin borrowed money from the federal government (as did most other states) for the purpose of providing benefits for unemployed workers. Currently, Wisconsin owes $1.2 billion to the federal government, a significant amount. In comparison, Minnesota owes less than $300 million.

Two factors forced Wisconsin’s Unemployment Trust Fund into the red and spurred the borrowing from the federal government. First, the number of jobless workers claiming unemployment benefits has climbed with the recession, helping drain the fund. But a second, less obvious, factor contributed to the need to borrow as well: the failure to adequately finance the fund when economic times were good. An earlier Wisconsin Budget Project post explains why the balance in Wisconsin’s Unemployment Trust Fund dwindled even during the fat years of the mid-2000s.

The federal Recovery Act imposed a temporary moratorium on the need for Wisconsin and other states to repay borrowed funds. That moratorium has expired and Wisconsin is charging large employers a special assessment to cover the $45 million interest payment that is due to the federal government. (A company with a taxable payroll of $500,000 would owe about $1,100 for the special assessment.)

Back to President Obama’s proposal: He wants to implement a new, two-year moratorium on interest and principal payments for states that have borrowed for unemployment benefits. This would mean that Wisconsin businesses would be able to avoid paying special assessments until down the road, when the economy would have presumably gained ground. Once the moratorium expires, the President has proposed a quicker repayment schedule, to make sure states are back in the black sooner.

Obama is also proposing that the federal government expand the taxable wage base for unemployment taxes, and lower the tax rate. This revenue-neutral proposal would reduce the regressivity of the federal unemployment tax.

Unemployment benefits provide a crucial lifeline to struggling jobless workers, and boost the state’s economy when that money is spent. (The Wisconsin Budget Project recently published a fact sheet with details on the economic importance of unemployment benefits.) Governor Walker and Legislature have worked to reduce unemployment benefits and have shown a reluctance to accept federal dollars for long-term jobless workers.  Given that the state unemployment rate is hovering just under 8 percent, and the pace of job creation remains anemic, we would be wise to strengthen the unemployment insurance system, rather than weakening it. The President’s proposal is a solid first step in this direction.

Tamarine Cornelius

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