The Path to Insolvency: Tax Changes, Great Recession Drive Unemployment Insurance Trust Fund Challenges
The Unemployment Insurance system works thanks to “forward financing”—employers contribute to an unemployment insurance trust fund in good times so that in tough times, when benefit payouts increase and payrolls shrink, funds are available for workers who lose their jobs through no fault of their own.
In the mid-1990s, North Carolina’s policymakers enacted a series of tax changes that moved the state effectively to pay-as-you-go financing and set the state up for the current insolvency challenges with the Unemployment Insurance Trust Fund.
If North Carolina had required contributions from employers at the national average tax rate during the past two decades, the UI Trust Fund would have $2.8 billion by 2009, potentially erasing the current solvency issues.
Because of a combination of tax cuts and significant and sustained job loss in the Great Recession, North Carolina, like 30 other states, has borrowed from the federal government to sustain the day-to-day delivery of unemployment benefits.
Policymakers must put together a solvency plan that rectifies the tax changes made in the 1990s and ensures that all employers are contributing to this critical program that supports families.