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The Obama administration has proposed to change the way unemployment insurance is financed to avoid tax increases on businesses that will otherwise occur automatically — but Republicans in Congress are resisting the plan because it allows for the possibility that states will collect more taxes overall from employers in the future.
Unemployment insurance benefits are generally financed by state taxes on employers while the administration of the program is financed by federal taxes on employers. The state tax revenue is saved in trust funds from which benefits are paid, but these had run dry in most states at the end of 2010, so states were allowed to borrow from the federal trust fund. States must eventually pay that money back with interest, but the economic recovery act enacted in 2009 gave states a break on the interest payments for almost two years.
The federal UI taxes on employers will increase automatically, under current law, in many states this year or next year to pay for the principal on those loans from the federal trust fund. On top of that, states must start paying the interest, and for this they often levy additional state taxes on employers. All of this is scheduled to occur at a time when economists agree that the recession is far from over.
The Obama administration’s plan would respond by delaying the automatic increase in federal UI taxes on employers and the due date for the interest payments from the states for two years. In 2014, the plan would more than double the tax base, from $7,000 of wages for each employee (which has not been adjusted since 1983) to $15,000. The rate of the federal tax would be reduced so that the federal tax would not be increased overall. The state taxes have the same base (at a minimum) as the federal tax, so the states could collect more revenue to shore up their programs if they did not change their tax rates.
The Center on Budget and Policy Priorities and the National Employment Law Project released a report Wednesday that spells out a very similar plan and explains its benefits.
Not for the first time, Republican leaders are putting themselves on record as preferring to allow a tax increase to take place rather than support a tax bill that is not exactly what they want.