Unemployment 101: Who pays for jobless benefits, anyway?Employers pay state and federal taxes to cover all those unemployment checks.
But with unemployment at 9 percent, those taxes aren't enough, leaving some states in dire straits. By Ron Scherer, Staff writer / February 9, 2011
The Obama administration is trying to change the way the unemployment insurance system is funded.
Republicans call it a "job-destroying? tax hike on business and a bailout for states that are overly generous
with their jobless benefits. Here are some fundamental questions and answers concerning how the
unemployment insurance system works.
What?s behind this battle?
At the moment, employers pay a state tax for each employee.
The money pays for all those state-issued unemployment checks ? the first 26 weeks of them, anyway.Employers also pay a per-employee federal tax, which funds administrative costs of implementing the system.
But because the unemployment rate ? now at 9 percent ? has remained relatively high for so long, 30 states
have exhausted their funds and have had to borrow $41 billion from Uncle Sam. The biggest borrowers are
California, Michigan, New York, Pennsylvania, and Illinois.
If Congress makes no changes in current law, states will start paying interest on these loans in September.
(They got a break from paying interest under the president?s tax stimulus bill, but that reprieve expired on Jan. 1.)
To fund those interest payments, states probably will add a "special assessment" on businesses within
their boundaries.
To pay the principal, federal taxes on employers will go up in borrowing states, under current law.
Those higher federal taxes will start hitting businesses this year and will stay higher until the loans
are paid off ? which will take more than a decade in many states, by some estimates.
?There are going to be tax increases on employers in states that have borrowed [to cover unemployment
benefits], unless something is done,? says Mike Leachman, assistant director of the State Fiscal Project
at the Center on Budget and Policy Priorities (CBPP) in Washington. ?That means taxes will be going up
both this year and next year, when the economy is still weak, and they could be at very high levels late
in the decade.?
How would the Obama proposal change this?The president's proposed budget is expected to include a two-year postponement of the special
"state assessment" tax hikes on business, plus a similar delay in any increase in federal unemployment
insurance taxes.
That's the carrot.
Here's the stick.
http://www.csmonitor.com/USA/Politics/2011/0209/Unemployment-101-Who-pays-for-jobless-benefits-anyway