States deplete unemployment reserves, raise payroll taxes to repay federal loans

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Thirty-one states have completely depleted their reserves for unemployment benefits and have turned to the federal government for loans to pay workers who have lost their jobs. In order to repay the feds, 41 states have upped payroll taxes, averaging 34% in 2009. States say that more increases are on the way.

The state unemployment system works by taxing employees and employers, and building reserves while times are good. When unemployment rises, the reserve balances decrease as more benefits are paid than payroll taxes collected. State unemployment benefits run for 26 weeks, although in the current economic downturn, the federal government has extended benefits to a total of 99 weeks. The extra weeks are being paid by Washington.

The states admit the dilemma of having to raise taxes in the current economy to pay back the loans. The amount of jobless benefits has taken states by surprise; during the fiscal 2008-2009 year, states collected $31 billion in unemployment-insurance taxes, while paying out $79.4 billion in benefits.

As states have run out of funds to pay benefits, they have been borrowing heavily from the federal government. States have borrowed a total of $41 billion with California leading the pack owing a total of $8.8 billion as of mid-November. The loans have been interest-free so far, but a special waiver under the Obama administration’s 2009 fiscal stimulus program is due to expire in January, and interest charges will kick in.

The federal government also charges its own separate tax for unemployment benefits. For those states in which loans are still outstanding, Washington can raise the rate it imposes. Next year, as many as 26 states will face increases ranging from $21 to $84 per employee.

While businesses are trying to keep costs down and make it through the recovery, the cost of doing business with the state and federal governments keeps rising.

The Wall Street Journal

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