States Borrow Heavily to Meet Huge Demand for Unemployment Benefits

Experts say that most states will have to increase taxes on employers in order to repay $35 billion in federal loans

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The Fiscal Times
March 10, 2010

Faced with the toughest and most prolonged recession since the Depression, state governments have had to borrow $35 billion during the last two years to keep their unemployment insurance programs afloat. Job losses exact a dramatic toll on workers as well as state coffers. But the fallout doesn’t end there.

Experts say that most states will have no choice but to increase taxes on employers in order to repay their federal loans, as they have in the past. As the cost of doing business increases, hiring new workers decreases. And hard-hit industries such as construction and manufacturing typically pay even higher unemployment insurance taxes because they lay off workers more frequently.

Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments, said the economic drag comes at a time when states also need to kick-start their economies with investments in education, infrastructure and welfare programs. "It's an unholy alliance of some pretty serious expenditures," he said.

Every state has had to borrow from the federal unemployment trust fund to keep their programs going, in amounts ranging from California's $7.9 billion and Michigan's $3.6 billion to Vermont's $9 million and New Hampshire’s $7 million, according to Department of Labor data.  Moreover, they are steadily going deeper into the hole.

Dolores Esser, head of the Virginia Employment Commission, told a state legislative committee early this year  that the state's debt may peak at $1.15 billion. Employer taxes will have to more than double, she said, to cover the continuing higher cost of benefits and restore Virginia’s fund to solvency.

The average tax per employee, which was just under $100 a year in 2008 and 2009, will be about $162 this year and reach $237 in 2012, Esser said. But that would not be the only added burden on the state.

She said total interest payments from 2011 to 2013 would amount to about $29.8 million, and that the money could not come from the tax-supported trust fund or the federal grants that pay administrative expenses. In other words, Virginia, which like most states is already trying to close a large budget gap, would have to come up with the funds elsewhere.

States are responsible for regular unemployment benefits, which in most states run for 26 weeks — 30 weeks in a few — and for half the cost of extended benefits triggered when joblessness is high. The federal government, which also levies a small unemployment insurance tax on employers, normally pays the other half — though currently it is paying the full cost of extended benefits.

According to Labor Department figures,  14.5 million people received $119 billion in state and federal unemployment insurance benefits in fiscal 2009. This year 16.3 million beneficiaries are expected to get $157 billion.

That includes the Emergency Unemployment Compensation program enacted in 2008 to deal with soaring long-term unemployment. It offered up to 53 additional weeks of benefits paid for entirely by the federal government. The EUC program was set to expire this spring, but the Senate voted this week to extend it through the end of the year, paying benefits to about 5 million workers whose other benefits have expired, at a cost of about $38 billion.

On top of that, any beneficiary who has been getting a check has had an extra $25 added to it — another recession related payment that might be extended.

Most Senate Republicans have opposed extension of the expiring jobless benefits. Last week, Sen. John Kyl, R-Ariz., complained that "continuing to pay people unemployment compensation is a disincentive for them to seek new work. I am sure most of them would like work and probably have tried to seek it, but you can't argue it is a job enhancer."

covered the Federal Reserve and the economy for 25 years at the Washington Post before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.