Unemployment Insurance Taxes Kills Jobs

This not good news for industry, especially small businesses. More taxes will just impede hiring and therefore less growth in the GDP.

Some reports say there are jobs to be had, but many workers are afraid of taking jobs that don't have pay levels like the ones they had before, and they will lose their unemployment checks as well that are paying better then the new job.

Reality check - many of the old high paying, low skill jobs that were lost will not return. Time to face the new norm. Get use to having less discretionary cash or up-grade your educational skill to meet the demands in the new job market.

Is it time to shut off unemployment at the end of 26 weeks, period?

Unemployment Insurance Taxes
Source: Joseph D. Henchman, "Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds," Tax Foundation, October 2011.

Record high levels of unemployment and record low reserve funds have placed great pressure on the federal-state unemployment insurance (UI) tax and benefit system. Indeed, many states have been forced to borrow from an already cash-strapped federal government.

Because it does not appear that these funds are likely to be repaid any time soon, corporations must look down the road at the potential consequences of this shortfall, focusing on the probable tax increases that will be necessary to cover the difference, says Joseph D. Henchman, the vice president of legal and state projects at the Tax Foundation.

Between 2008 and 2011, $174 billion was paid in unemployment taxes while $450 billion was paid out in benefits, a gap of $276 billion. In 2011 alone, employers and employees are projected to pay $51.8 billion in taxes, while $131.4 billion is projected to be paid out in benefits for workers recently unemployed.

Over the past two years, 34 states exhausted their unemployment insurance trust funds and have had to borrow from the federal government, with only seven having repaid those funds to date.

The current outstanding balance of loans is $37.3 billion, which will result in approximately $1.3 billion in interest payments starting in October 2011.

One of the primary concerns about UI insurance going forward is that those 27 states that are now in the red will be forced to implement new UI taxes to cover their shortfalls. UI taxes are paid by employers and employees within each respective state, meaning that increased taxes will hit businesses when so many are already hesitant to hire; this could negatively affect job growth, thereby having the exact opposite of the countercyclical effect that UI was intended to have.

Reforms should be considered to the UI program.

First, those who have been unemployed for atypically long periods should be offered bonuses for obtaining part-time work while they search for a full-time position.

Second, bonuses should be offered to those recipients of UI benefits who find new work quickly.

Third, states should conduct mandatory job-search seminars and ramp up fraud prevention efforts.