WSJ Article Is Missing The Other Half Of Obama's Proposal

Blog ››› ››› MIKE BURNS

A February 8 Wall Street Journal article reported on President Obama's proposal to broaden unemployment taxes, but completely ignored the other piece of the plan, which prevents states and the federal government from hitting businesses with higher unemployment taxes in the next couple of years as the economy recovers from the recession.

The Journal reported that the Obama administration proposes "raising the amount of wages on which companies must pay unemployment taxes to $15,000" from the "$7,000 in place since 1983" to replenish unemployment funds -- a change that would not take place until 2014. But the article failed to note that the plan also includes a moratorium in 2011 and 2012 on states increasing unemployment taxes and halts increases in the federal unemployment tax.

Here's how the Journal described the Obama administration's proposal, which will reportedly be included in its budget request to Congress next week:

The proposal would aim to restock strained state unemployment-insurance trust funds by raising the amount of wages on which companies must pay unemployment taxes to $15,000, more than double the $7,000 in place since 1983.

The plan, which would take effect in 2014, could increase payroll taxes by as much as $100 billion over a decade, according to a person involved in its construction.

By proposing to enlarge the pool of wages subject to unemployment taxes, the White House appears to be offering states a more politically palatable way to raise revenues than to boost tax rates.

States could keep the tax rates they have, or even lower them somewhat, and still raise considerably more revenue than they are raising now.

The unemployment insurance program is a joint federal-state program. The federal unemployment insurance tax rate of 6.2% on the new, larger base would be reduced, so that the U.S. would be taking in no more revenue than it does under the current system, a person familiar with the plan said.

To avoid hitting businesses with a tax increase during the economic recovery, the proposal would delay the new rules until 2014. The plan is expected to be included in Mr. Obama's budget proposal for fiscal 2012, to be released Monday.

The proposed increase of taxable wages is certainly a notable aspect of Obama's plan, but the article's description ignores other measures that will provide immediate benefits to businesses.

ABC's Jake Tapper reported yesterday, "For 2011 and 2012, as part of this proposal, the Obama administration would require a moratorium on states raising taxes to pay for unemployment insurance, and would allow states to avoid paying interest on their unemployment insurance debt."

And The Washington Post reported that the plan "would suspend automatic hikes in the federal unemployment tax scheduled to hit employers in nearly half of the states by the end of next year."

The Center on Budget and Policy Priorities provides some background information on the unemployment insurance tax system:

Currently, states levy taxes on employers to finance regular UI benefits for unemployed workers, generally up to 26 weeks. The federal government also levies a UI tax on employers, under the Federal Unemployment Tax Act (FUTA), to finance the administration of state UI programs. Since state UI trust funds may run dry when unemployment remains high for long periods, states can borrow from the federal UI trust fund and repay these loans in later years from employer taxes. If a state does not fully repay its loan within two years, the federal government is required to recoup it by raising federal UI taxes on employers in the state.

At the moment, 30 states have exhausted their UI trust funds in the face of high unemployment and are borrowing from the federal government. Total outstanding loans, which reached an estimated $41 billion at the end of 2010, will climb to a record $65 billion in 2013, the U.S. Labor Department projects.

To repay the principal on these loans, federal UI taxes on employers will increase automatically in a number of states this year or in early 2012 and rise to very high levels over the next few years. Employers in borrowing states will pay $5 billion to $7 billion in higher federal UI taxes before the end of 2013, and $16 billion to $24 billion in higher federal UI taxes over the next five years. Employers will continue to pay these high federal UI taxes until the loan principal is paid off.

These automatic tax increases will not cover the interest due on these loans. Interest payments must be made separately, and are due in September of each year that a state is borrowing. To make these interest payments, states often enact special assessments on employers. So, in addition to paying higher federal UI taxes in the years ahead, employers also will face higher state UI taxes starting this year, as states enact special assessments to pay interest due on their loans by September 2011. States will pay $1.4 billion in interest in federal fiscal year 2011 and another $2.2 billion in 2012, the Labor Department projects.

These near-term tax increases will occur even though the economy will not likely regain its pre-recession strength for several years, and even though federal policymakers cut business taxes in December to encourage investment and hiring. Meanwhile, with states facing large loan repayments and interest costs over the next several years, state policymakers will face considerable pressure to substantially cut UI eligibility and benefits, as states did the last time trust funds were severely depleted. As it is, only about a third of jobless workers receive state UI benefits, and large cuts on the benefit side would undermine the UI system's ability to avert a collapse in jobless families' purchasing power and help the economy during recessions.

Posted In
Economy, Budget, Jobs, Wages, & Unemployment, Taxes
Network/Outlet
Wall Street Journal
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