The proposed solution to North Carolina’s unemployment insurance debt that was recently sent to Governor McCrory by the General Assembly is actually much worse for the state than the problem it purports to attack. Indeed, it will dismantle a program that has served this state well through the downturns of the last century and the recent economic transformation that has brought with it massive layoffs. It will do so by cutting benefits by more than 70% so that businesses won’t have to pay into a system intended to help them as much as workers who lose their jobs.
Better options exist. They require more equal contributions by workers and employers to ensure that the system remains a viable insurance program for the economy in the future.
Like most states, North Carolina had to borrow from the federal government to pay unemployment benefits during the Great Recession and the ensuing slow recovery. The federal government has begun collecting on the $2.5 billion debt by slowly increasing employers’ federal unemployment taxes by $21 per employee per year. This year that tax increase is $42, next year it will be $63 and so on.
The plan passed by the House last week that will be considered by the Senate on Tuesday will shorten the repayment schedule by three years from 2018 to 2015. In other words, by cutting benefits for all unemployed workers permanently, employers will see their temporary federal tax increases disappear within three years. On the other hand, North Carolina workers who lose their jobs will have to rely on an unemployment insurance program that is no longer able to temporarily replace a portion of lost wages.
The Legislative Office of Fiscal Research says that the bill will save over $1.5 billion by 2014. But $951 million will come from cutting benefits. The employer contribution to savings next year is the increase in federal unemployment taxes that is already scheduled to occur. State tax changes amount to just $7 million or 0.4% of the total savings in that year, a rounding error in the scheme of things.
Benefit cuts will continue to outweigh employers’ total federal and state tax costs by more than two-to-one until the debt is gone. Then the additional employer costs will disappear but the benefit cuts will be permanent.
And those permanent cuts mean that employers will be paying into the system at far lower levels than they would have under current law. The hope is that those lower contributions will be just the solution to the lack of job creation in our state’s slow recovery. Evidence and common-sense, however, tells us that unemployment taxes aren’t a significant factor in hiring or location decisions by business.
Federal and state unemployment insurance taxes represent just 24 cents out of the average total of $30 in hourly compensation costs incurred by businesses. And the automatic federal tax increases to repay the debt at their highest point in this repayment plan cost just four cents per hour per worker annually. There is no relationship between a state’s adoption of a low-tax unemployment insurance system and improved employment levels.
The reality is that an unemployment insurance system weakened by low employer contributions and no longer aligned to North Carolina’s unique economic conditions and wage structure will hamper, not help, job creation. Employers need consumers wanting to buy their goods and services. This temporary support keeps workers spending in their communities and engaged in a tough labor market benefiting business in the immediate and long-term.
To stay competitive, to show North Carolina is prudent in managing risk and thoughtful about resiliency in our economy, we should pay back the debt quickly and rebuild our unemployment insurance system. Options do exist to pay back the debt in the same timeframe as the current proposal but that would also keep an effective and temporary wage replacement function. It would mean employers contribute more in state unemployment insurance taxes. Given our ranking at 44th in average tax rate that doesn’t seem like a lot to ask, especially when the benefits aren’t just for workers alone but extend to businesses as well.
The bottom line: Our collective interest should be in rebuilding both the economy and the unemployment insurance system that protects it. The legislation on the Governor’s desk does nothing of the kind.
Sirota is the director of the North Carolina Budget and Tax Center.