The Unemployment Insurance Issue and the Governor's Race
Wed August 5, 2009 5:50 pm

Let's just start out by reviewing what has happened so far. As those who have followed the debate know, $555 million in federal stimulus funds was available for Texas, provided that the Legislature agree to make several changes that increased the number of people who would be eligible for UI benefits.

--changing the base period for calculating UI benefits to include employment in the most recent quarter. To be eligible for stimulus funding, a state had to make this change. In addition, a state had to adopt two of the following three changes:

1) eligibility for family members who leave their jobs for a compelling family reason (such as a spouse getting a new job in another city, or leaving work to care for a family member)
2) eligibility for a person seeking only part-time work
3) eligibility for a person who is currently enrolled in a job training program

These changes, if made by statute, would increase benefits by $72 to $75 million per year, in perpetuity. Governor Perry decided to turn down the funds rather than subject employers to these additional costs. Senator Kevin Eltife passed a bill through the Senate that would have allowed the Legislature to override the governor's decision, but it had no chance to become law, and Texas did not receive the $555 million that was available.

I thought at the time that Perry was showboating and had made a decision based on politics and ideology, and I said so in this space. He was showboating. Still, there is more to be said about this topic. I assume that most readers know that UI benefits are paid from a trust fund that is funded by a tax on employers. (Actually, employers pay two taxes. One is a benefits tax designed to ensure that enough money is available to pay benefits to the unemployed. The other is a deficit tax designed to raise enough money so that the unemployment trust fund remains above a certain level, which is 1% of total taxable wages in Texas, or around $86 billion, but below a ceiling of 2% of taxable wages.) Yet another drain on the trust fund is a statute that allows money to be shifted from the trust fund to the governor's Texas Enterprise Fund, when the trust fund balance is above the 1% floor. Employers might well contemplate whether it is wise for their tax dollars to be used for reasons other than keeping the trust fund in sound condition. Then employers will be taxed again to refill the coffers of the UI trust fund, so that yet more dollars can be shifted to the Enterprise Fund.

This brings us to the issue at hand, which is whether employers would be better off if Perry had taken the federal stimulus funds. Had he done so, $555 million would have been available to replenish the UI trust fund and get it above the 1% floor. Instead, the state will end up borrowing the money from the federal government. States can borrow interest-free for a year, but eventually employers have to pay the interest on the bonds. Everything -- benefits, interest, you name it -- that comes out of the fund eventually has to be repaid by employers. Texas would have had to borrow $555 million less than it will have to borrow.

So here is the question: Would it have been better to take the $555 million and borrow less but spend $72-75 million a year more on unemployment benefits in the future, or is it better to borrow the money? I'd be inclined to take the money, because, in the long run, the present value of $72-75 million in the out years isn't much. The crisis is now, and I suspect that most employers would rather have the stimulus funds now, rather than pay higher taxes. As Keynes famously sad, "In the long run, we're all dead." I'm not sure, in the end, if there is much difference between taking the stimulus funds (and paying the increased benefits) and borrowing the money and paying off the interest. Perry was showboating, to be sure, but that doesn't necessarily mean that the consequences for business are significant.

Hutchison has indicated that she intends to make Perry's rejection of the unemployment package an issue in the governor's race. The timing is not good for Perry. Minimal taxpayers -- that is, small business -- will find that their taxes for UI benefits are probably going to increase from around $23.40 per employee to $112.50 per employee. That is a big increase, and it will likely hit employers in January, just as the home stretch is beginning in the governor's race. I've had a hard time understanding the very complicated tax structure for unemployment taxes, and I imagine that voters will too. Perry may find himself with some 'splaining to do.

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