Obama Proposes Relief to States Overburdened by Debt
Policy + Politics

Obama Proposes Relief to States Overburdened by Debt

States driven into debt by the soaring cost of unemployment benefits would get immediate relief from the Obama administration under a new plan that would also make it easier to repay those debts by raising taxes on employers.

The proposal, to be included in the budget request that President Obama will send to Congress next week, is aimed at easing the financial burden weighing down dozens of state governments in the wake of the recent recession.

It also would help employers in the short run, because they face the prospect of an immediate tax increase in many states without federal assistance. And it could help avoid calls for the federal government to forgive the loans to the states at a time when Washington is struggling with its own record budget deficits.

"Ultimately, the states are going to need to repay their debtsn and we're not going to want to bail them out," said an administration source familiar with the discussions. The source described the plan on condition of anonymity because the budget has not been released.

While the proposal would reduce revenues to the federal government in the short term, it would improve the budget picture over the long term as states repaid their debts, according to administration estimates. Only 13 states are expected to repay the money over the next decade under the current system, but the source who described the plan said as many as 28 states would be expected to repay if the Obama proposal were adopted by Congress.

States are grappling with a collective budget deficit of $175 billion through 2013, even after several years of tax hikes and spending cuts. State revenues are projected to remain depressed for several more years, as the U.S. economy slowly recovers.

Among the biggest factors in states' financial woes is the uphill struggle to put enough people back to work. The U.S. unemployment rate has been above nine percent for nearly two years, since May 2009, forcing millions of Americans to turn to the government for assistance. As the ranks of the jobless swelled, more than 30 states ran through the trust funds that help cover the cost of state unemployment benefits, which provide support for 26 weeks. With tax collections failing to keep pace with the cost of the program, 30 states have been forced to borrow money from the federal government and now owe an unprecedented $42 billion.

Read more at The Washington Post.