Obama looks to help states with jobless aid

chart_unemployment_insurance.top.gif By Tami Luhby, CNNMoney

NEW YORK (CNNMoney) -- States and companies may get a little more help from Washington in dealing with high unemployment costs -- at least for the next two years.

The Obama administration is proposing waiving interest payments for two years on the $42.3 billion states have borrowed from the federal government to cover unemployment benefits. Some 30 states are on the hook for an estimated $1.3 billion in interest charges this year.

The measure, one of three related to unemployment insurance costs, will be part of the federal budget President Obama will deliver to Congress next week. Already, Republicans are lining up to oppose the proposal, which must be approved by Congress in order to become law.

The other two measures would directly affect the taxes employers pay to support the unemployment system. One would delay for two years an increase in federal unemployment taxes, which are used to pay down the principal of the loans.

The other, however, is proving to be the most controversial. It calls for increasing the level of workers' wages subject to federal unemployment tax to $15,000 in 2014, up from $7,000 currently.

Tax relief ... at first

The waiver of interest payments would help states, but it would be a big relief for employers too, since they are the ones who usually have to foot the interest bill through surcharges. Companies had been spared this expense over the past two years because of an obscure provision of the 2009 Recovery Act that expired on Dec. 31.

Businesses would also benefit from delaying the hike in federal unemployment tax that goes to pay the principal. Already, companies in three states -- Indiana, South Carolina and Michigan -- have seen this levy rise by either $21 or $42 per employee depending on when their state started borrowing. Next year, employers in another 24 states could suffer the tax hike without federal action.

"It gives some relief for a couple of years so the cost of hiring doesn't go up any more than it's already going up," said Douglas Holmes, president, UWC Strategic Services on Unemployment & Workers' Compensation, a business trade association which lobbied for the measures.

The measures also give states some time to adjust their tax rates and benefit levels for the future, said White House Press Secretary Robert Gibbs at his daily briefing with journalists Tuesday. This will make it less likely the federal government will have to step in.

"It prevents future state bailouts, because in the future, states are going to have to rationalize what they offer and how they pay for it," Gibbs said.

States have already been raising unemployment taxes on businesses -- to the tune of 34%, on average, in 2010 to cover rising payouts.

Several states are also looking at reducing benefits to rebuild their trust funds, though they are loath to do so in the midst of the poor economy.

This rebalancing is not unprecedented. In the early 1980s recession, states borrowed $28 billion on an inflation-adjusted basis. It took them until 1990 to repay the loans. And 44 states cut back on benefits or eligibility to cope with the debt at that time.

Big tax hike could come in 2014

The news isn't all good for employers, though. They could see a big tax hike if the administration increases the wage base on federal unemployment tax to $15,000 in 2014. Most states would likely follow suit, though 17 already tax wages greater than $15,000.

The higher wage base would help states pay down their loans and replenish their unemployment trust funds more quickly.

"The goal is to get more states back in the black before the next recession," said Andrew Stettner, deputy director of the National Employment Law Project.

While states don't usually repay loans from their general revenues, they are eager to settle their debt with the federal government and build up their unemployment trust funds. That will allow them to reduce taxes on employers, which states hope will spur economic growth.

While the details of the wage base increase are still unclear, unemployment tax rates could go down as a result, said Rich Hobbie, executive director of the National Association of State Workforce Agencies.

Still, the proposal will not win Obama friends in the business community, which he has been courting heavily.

Raising jobless insurance taxes could keep businesses from expanding their workforces.

"Higher payroll costs mean companies are less likely to hire new employees because it's more expensive," Holmes said.

Before these measures could take effect, Obama would have to get them through lawmakers on Capitol Hill, who have yet to pass last year's budget. Republicans are not warming to the idea of hiking taxes on businesses.

"We need to reform our unemployment programs, but any plan that relies on more than doubling the tax base and then continuing to raise payroll taxes in perpetuity isn't going anywhere in the House," said Dave Camp, a Michigan Republican and chair of the House Ways and Means Committee. "Employers are demanding reforms to the unemployment program, not higher taxes on job creation."

Senate Republican leaders took a similar view.

"The administration's so-called cure to our high unemployment rate could actually make things worse," said Sen. Orrin Hatch, a Utah Republican and ranking member of the Senate Finance Committee.

"By more than doubling unemployment taxes from $7,000 to $15,000, either employers will have less money to hire or workers will face reduced wages. Neither makes any sense and runs counter to our shared goal of getting the American people back to work." To top of page

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