Unemployment insurance bill kicks the can

A BILL BEING CONSIDERED  by the state Legislature to freeze businesses’ unemployment insurance payments may be a short-term fix, but it does not solve the longer-term problem of how to keep the fund solvent in the future.

“This is a perfectly reasonable, short-term fix for our unemployment insurance shortfall, but it’s a missed opportunity to address the fact that we were underfunding this system well before the COVID crisis,” Evan Horowitz, executive director of the Center for State Policy Analysis at Tufts University, said after the bill was released.

Testimony submitted to the Senate Ways and Means Committee this week in advance of a vote on the bill reflects the longer-term problems.

The unemployment system is funded by payments from businesses, based on how many employees they have laid off and how much money is in the system. Because generous benefits and high unemployment in 2020 drained the system, business’s payments are set to rise from an average of $539 per employee in 2020 to $858 in 2021 and over $900 each of the following three years. The bill would freeze the rate schedule in 2021 and 2022, keeping next year’s increase to around $635, according to the Baker administration.

The problem for businesses, however, is that they will still have to pay for the unemployment benefits. The bill would simply borrow money so the payments would be made over the life of a bond –  either 10 or 30 years, depending on the version of the bill that passes – rather than immediately. And there will be costs for borrowing the money. All these costs would be paid for by a new tax imposed on businesses.

Many business owners argue that this is unfair. They were forced to close during the COVID pandemic due to state government mandates, so why should they have to pay the price?

“To ask small businesses to cover the state’s interest costs for the loan the Commonwealth will take from the federal government to cover UI program costs seems a bit unfair when employers did not cause the unemployment problem,” wrote Robert O’Koniewski of the Massachusetts State Automobile Dealers Association in testimony to the Senate Ways and Means Committee. “In fact, if you were to ask business owners back then who were forced to close or operate under severe state restrictions, almost to a person they would have expressed the desire to remain in business as usual while following various and necessary state health and safety protocols.”

Chris Carlozzi, state director of the National Federation of Independent Business, wrote similarly that many small businesses were forced to lay off employees for the first time because of state-mandated closures. Carlozzi voiced support for the rate freeze. But he argued that going forward, Massachusetts needs to reform the unemployment insurance system to avoid prohibitive costs.

Carlozzi cited a study by the Tax Foundation ranking Massachusetts’ unemployment insurance system as 50^th in the nation when it comes to the burden placed on businesses by unemployment insurance taxes. “Part of this worst-in-the-nation ranking is due to our extremely generous benefits and lax eligibility requirements,” Carlozzi wrote. For example, Massachusetts only requires that someone work for one quarter before becoming eligible for benefits, while most states require two quarters. Massachusetts offers up to 30 weeks of benefits while most states offer 26.

“While House Bill No. 89 addresses the immediate need for UI tax relief, it does not begin to tackle some of the longstanding problems associated with the Massachusetts UI system,” Carlozzi wrote.

Carlozzi notes that some states have used federal money from the CARES Act, a coronavirus relief bill, to replenish the unemployment insurance trust fund, so the burden does not fall fully on employers. Massachusetts has not.

Jon Hurst, president of the Retailers Association of Massachusetts, echoed Carlozzi’s comments and urged lawmakers to take some money from the newly passed federal American Rescue Plan Act to replenish the fund. “Many employers are still not yet back on their feet, and asking current and future employers and entrepreneurs to pay deferred taxes amortized over several years could delay our economic recovery and job growth,” Hurst wrote.

The bill would create a new commission to study and develop recommendations by December 2021 on the long-term solvency of the unemployment insurance trust fund. The commission would be tasked with evaluating whether changes are necessary to how rates are calculated; examining industry-specific impacts of the unemployment system; and looking at how other states have addressed the issue.

Sen. Patricia Jehlen, a Somerville Democrat who sponsored a similar bill to create an unemployment insurance study commission, wrote in testimony, “This current funding crisis is not solely a result of the pandemic but is a result of the combined size of the unemployed workforce and years of underfunding of the trust fund.”

Jehlen said the funding crisis has a real fiscal impact, since the trust fund has never met solvency requirements set out by the federal government in order to obtain no-interest loans for an extended period. She noted that other states’ unemployment funds were able to weather the COVID crisis without resorting to borrowing from the federal government, as Massachusetts did.

There is some debate over who will be on the commission. Jehlen’s proposed commission would have 15 members, while the final bill that passed the House proposes 21 members. Jehlen’s commission would include two appointees by the AFL-CIO, while the House commission only has one. The House’s commission has two more members representing business groups than Jehlen’s has, as well as a member appointed by Greater Boston Legal Services, and two policy experts, from the Massachusetts Taxpayers Foundation and Tufts University’s Center for State Policy Analysis.

A report on the unemployment insurance system by the Center for State Policy Analysis argues that while a temporary rate freeze may be necessary, repeatedly freezing rates, as Massachusetts has done for the last decade, “is a recipe for long-term insolvency and future debt.”

The report says the main problem is that the way the system is designed, the benefits keep up with wages. But the taxes that are collected do not increase as wages increase because employers only pay taxes on the first $15,000 in wages that they pay each employee.

“Massachusetts’ unemployment insurance system virtually guarantees funding shortfalls,” the report said.

Some possible fixes, the report writes, include taxing a higher portion of wages; adding a new tax on employees, as is done to fund Social Security and Medicare; shrinking benefits so they are more in line with other states; and increasing the maximum tax rate paid by businesses with a history of layoffs.

The Massachusetts Taxpayers Foundation, in its policy analysis, wrote that the rate freeze and borrowing is a reasonable solution to address the fund’s current fiscal woes in the short term “while giving policy makers more time to consider other system improvements necessary to address the shortcomings laid bare by COVID-19.”

The potential life of the bond was corrected.