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Tax breaks for businesses led to state unemployment funds going broke

August 6th, 2012 | Laura Clawson

Laura ClawsonOver the past four years, a whopping 36 states have had to borrow from the federal government to pay unemployment insurance benefits. Obviously a recession with high unemployment has a lot to do with that, but not as much as you might think. Tax breaks for businesses (PDF) are once again a hidden culprit for state budget problems.

A new report from the National Employment Law Project shows that, recession or not, many states could have avoided borrowing for unemployment payments if they hadn’t spent a decade weakening their unemployment insurance trust funds by slashing employer contributions:

Between 1995 and 2005, 31 states reduced employer contribution rates by at least one?fifth (Henchman 2011, 16), causing the nation’s average employer contribution rate over the decade leading up to the Great Recession to fall to its lowest point in the program’s 75?year history.

As a result, going into the recession, state unemployment insurance funds were short of recommended minimum solvency standards by a combined $38 billion, and 30 of the 34 states not meeting that minimum standard ended up borrowing, combined with just six of 19 states that started the recession with adequate funds. Adequate unemployment insurance reserves could have reduced borrowing to 13 states borrowing $9 billion rather than what ended up happening, with 31 states borrowing $42 billion.

But while the funding shortfalls came from employers contributing less than at any point in the previous 75 years, it’s been jobless people who’ve gotten the blame and felt the pinch, with “At least ten states [passing] legislation to reduce the number of weeks of benefits available, severely restrict eligibility, or impose measures designed to discourage people from filing UI claims.” Taxpayers, too, are paying, since states have already paid $3 billion in interest and penalties on what they’ve borrowed for unemployment, with more to come.

Businesses paid less when the economy was decent (not even good for many of the years of contribution cuts). Then the bad economy hit unemployed people first when they lost their jobs, second when their benefits were cut despite ongoing high unemployment. Again and again we’re told that a bad economy is not the time to raise taxes on businesses or the wealthy—apparently it’s never the moment for that, always the moment to cut another hole in the safety net.

This blog originally appeared in Daily Kos Labor on August 3, 2012. Reprinted with permission.

About the Author: Laura Clawson is labor editor at Daily Kos. She has a PhD in sociology from Princeton University and has taught at Dartmouth College. From 2008 to 2011, she was senior writer at Working America, the community affiliate of the AFL-CIO.

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