Taxes, Benefit Cuts, Federal Money Eyed for States’ Jobless Aid

State efforts to foot the bill for sky-high unemployment benefits paid out over the past year highlight a tension over who should bear that cost—employers, workers, or the U.S. government.

Ohio may reduce the length of worker benefits, Massachusetts is weighing billions in bonds, and Florida is looking at tapping new taxes for online sales. Other states want to funnel federal aid into depleted benefit coffers, and still more proposals abound.

But policymakers are facing pushback as they consider options to shore up depleted unemployment trust funds and repay federal loans. States have borrowed $54 billion from the U.S. Treasury since last March, after spending nearly all of the $75 billion they held in trust funds at the beginning of 2020.

Businesses oppose unemployment tax increases. Worker advocates oppose cuts in benefits or other methods of shifting the burden to individuals. And the latest federal relief legislation created questions about whether states may use their federal aid dollars for restocking unemployment trust funds.

“There are states that are unfortunately prioritizing the trust fund, when right now we need to focus on getting that money into the hands of folks who need it,” said Alexa Tapia, unemployment insurance campaign coordinator for the National Employment Law Project.

Trying to lower costs to prevent employer tax increases is short-sighted, she said, pointing to research that shows unemployment benefits provide an overall economic boost during recessions. Shoring up state trust funds “shouldn’t be a priority right now, but it is,” she said.

Ohio, among other states, is considering cutting the number of weeks laid-off workers can receive benefits from the current maximum of 26 while also reducing the dollar amount for some recipients—part of a package of proposed benefit reductions that would likely wait until after September to avoid losing eligibility for enhanced federal jobless benefits.

“Of the states with a maximum duration less than 26 weeks, none have an outstanding loan balance with the federal government,” said Kevin Shimp, director of labor and legal affairs at the Ohio Chamber of Commerce. The chamber is advocating the proposal as a way to strengthen the state’s trust fund, which has a long history of not meeting federal funding standards. “Ohio hasn’t reached the U.S. Department of Labor’s solvency target since 1974,” he said.

In Massachusetts, legislation awaiting the governor proposes to issue up to $7 billion in bonds to fund the unemployment system and/or pay down federal loans, while in Florida lawmakers have a unique plan to allocate up to $1 billion a year in new tax revenue to the unemployment fund by enacting sales tax requirements for online retail sales that most states already have in place.

“That again shifts that burden away from employers onto workers,” Tapia said.

Perhaps in response to such concerns, the Florida Senate’s GOP leadership is advancing separate legislation to increase the state’s maximum weekly benefit amount to $375 from $275, which currently is one of the lowest in the nation.

Other states, including Oklahoma and Texas, are considering legislation to delay unemployment tax increases, staving off the reckoning with measures similar to those already enacted in New Jersey and Washington state.

Delaying ‘Inevitable’ Tax Hikes

Like individual workers, businesses also have been hit hard by the pandemic, and letting their unemployment tax rates increase will hinder their recovery, said Jared Walczak, vice president of state projects at the Tax Foundation.

“Eventually unemployment insurance tax increases are inevitable. Most states want to avoid this happening quickly because they don’t want dramatic tax increases on the active rehiring,” he said.

Each state sets its own unemployment tax rate, and many states automatically adjust them based on the trust fund balance. Employers also pay a federal unemployment tax, which automatically increases for employers operating in any state that owes past-due balances on federal unemployment loans.

Some states opt to delay automatic tax increases or cap the tax rates for the next few years, but others are making plans to use federal aid dollars from the American Rescue Plan enacted last month to replenish their trust funds.

Maryland Gov. Larry Hogan (R) announced a plan March 30 to put $1.1 billion—more than a quarter of the state’s expected federal aid money—into the unemployment trust fund. The Kentucky legislature also passed a bill in the past week allocating $575 million for paying down the state’s federal unemployment loan, pending the approval of Gov. Andy Beshear (D).

Walczak said he favors using the federal aid for unemployment trust funds, but added that most states are waiting for the U.S. Treasury to clarify whether it’s allowed. The federal relief legislation barred states from using the aid dollars to pay for tax cuts, which includes moves that prevent a tax increase, he said.

“We are still in wait and see mode until we get guidance,“ said Kirk Fulford, deputy director of Alabama Legislative Services’ fiscal division. Alabama was one of several states that allocated a portion of their CARES Act funding last year to their unemployment trust funds, which helped limit but didn’t necessarily eliminate tax increases. “The process with that last year was slow and confusing, which made it difficult to get funds out immediately. Hopeful that’s better this go around.”

Benefit Cuts

Worker advocates are on high alert for states considering benefit cuts, as several did a decade ago after the last recession. Those included Georgia, which reduced its maximum duration of benefits to 14 weeks, but temporarily returned it to the previous level of 26 weeks in response to the pandemic.

“It’s something that we’re very mindful of and suspicious may happen,” said Alex Camardelle, senior policy analyst at the left-leaning Georgia Budget & Policy Institute. “It almost feels inevitable, because of the history.”

It’s early in the process, with many state policymakers still focused on navigating through the ongoing pandemic rather than addressing its aftermath.

But the Ohio plan stands out as a clue to what other states might consider. The state’s chamber is recommending the legislature replace the 26-week maximum with a sliding scale that adjusts based on the state’s unemployment rate but never exceeds 20 weeks. The chamber’s plan also calls for eliminating a dependency benefit that can add up to $233 per week to the unemployment checks of workers with children.

Employers faced lingering tax increases after the Great Recession of 2008-09, paying $1.75 billion in interest and penalties over several years on the state unemployment system’s past-due federal loans, the Ohio chamber’s Shimp said.

“Eliminating the dependency benefit will have the greatest impact on shoring up the unemployment trust fund solvency,” he added. He also said the dependency benefit only kicks in for higher-wage earners, while benefits for lower-wage workers already max out at half of the state’s average weekly wage.

The proposal, which is tied up in the legislature’s state budget negotiations, is driven by a skewed perspective, said Zach Schiller, research director for the progressive group Policy Matters Ohio. Unemployment taxes are a small portion of a company’s labor costs, amounting to about half a cent for each dollar of wages paid, he said, adding that a history of underfunding the system—rather than benefit levels that match the national average—is to blame for its insolvency.

“This is a matter of policy. We’ve decided we don’t want to fund this system properly,” Schiller said. “The response of the employer community is, ‘well, let’s cut benefits.’”

-with additional reporting by Alex Ebert in Columbus, Ohio, and Sam McQuillan in Washington