BTC REPORTS: Ignoring Lessons from the Past in Unemployment Insurance Financing

By Alexandra Forter Sirota
BTC Director
December 2012

EXECUTIVE SUMMARY

  • The combination of tax cuts for employers in the 1990s and two historic downturns in the 2000s has created today’s fiscal challenges for the state’s unemployment insurance trust fund.
  • The proposal to reform the unemployment insurance system presented at the NC General Assembly’s Revenue Laws Study Committee appears to be highly out of balance in that it would cut benefits deeply for workers to eliminate the debt and to pay for further tax cuts for employers.
  • A conservative estimate of the size of the reduction in taxes is that 43 percent of the state’s taxable wages would be taxed at a lower rate if the proposal were enacted. More detailed data could reveal an even greater tax cut on taxable wages and provide information about the number of employers and fiscal impact of those cuts.
  • Benefit cuts in the proposal include reduction of the maximum benefit amount by 33 percent, reduction of the maximum duration of benefits from 26 weeks to 20 weeks, changes to the calculation of benefit amounts, and changes in the eligibility rules to reduce the share of unemployed workers that can access benefits.
  • Data available on the impact of just the reduction from 26 to 20 weeks on total benefits paid out finds that there would be $166 million less circulating in the economy by the time the system reached solvency in 2016. The economic impact of this loss as measured by economic multipliers could range from the Congressional Budget Office’s conservative estimate of $183 million to the estimate of $257 million by Mark Zandi of Moody’s Analytics.
  • Further analysis and more transparent accounting of the impacts of each aspect of the proposal will be needed to fully determine the impacts on workers, business and the broader economy.
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