Attorney advises keeping unemployment taxes high
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By DANIEL BARLOW Vermont Press Bureau - Published: October 14, 2009
MONTPELIER – Vermont should keep unemployment taxes high when the economy is doing well so that it will have the money to pay out benefits when the next recession hits, an unemployment attorney told lawmakers Tuesday.
Rick McHugh, a staff attorney with the National Employment Law Project, said many states made the mistake of cutting taxes on employers during the economic boom of the 1990s, only to find themselves with little money when business went south.
In Vermont, unemployment taxes on employers have not been increased in nearly two decades and the state's unemployment trust found is expected to go bankrupt in January. The state is expected to borrow money from the federal government to cover the shortfall.
"My advice to you is to keep taxes up even when you don't see a storm on the horizon," McHugh told the Vermont Unemployment Trust Fund Reform Study, a group of lawmakers looking to make the fund solvent. "Continue to do this even when people are asking why the state has all this money in its trust fund."
Vermont's unemployment rate right now is 6.8 percent, nearly double the rate it was just two years ago. More than 10,000 Vermonters receive unemployment checks every week, draining a fund that many economic experts say is essential to keeping out-of-work residents above water in this recession.
If no changes are made to the equation of how much employers pay into the fund and how much benefits are paid out, the state will be $400 million in the hole by the end of 2013, according to the Vermont Department of Labor.
Lawmakers looked at a patchwork proposal Tuesday that would make that fund solvent by 2018 by relying on a combination of increased unemployment taxes and freezing maximum weekly benefits at current levels, which is $425 a week (the average unemployment check right now is $300 a week, with some residents receiving less and some receiving more based on their prior income).
The proposal studies Tuesday – which is far from final and raised concerns from several members of the panel – would increase the taxable wages from $8,000 to 50 percent of the statewide average annual wage between 2010 and 2018.
The maximum weekly benefit would be frozen at $425 until 2018, when the trust fund is expected to begin building up a surplus again. At that point, the benefits would increase over a five-year period until it reaches 57 percent of the statewide average annual wage.
"This is a starting point for discussions," said Sen. Ann Cummings, D-Washington, the chairwoman of the trust fund study group. "My hope is that we emerge from this with a couple of scenarios to look at."
Sen. Doug Racine, D-Chittenden, the chairman of the Senate Health and Welfare Committee and an announced 2010 gubernatorial candidate, echoed the concerns of others on the panel when he said he was troubled by the notion of freezing benefits for eight years.
Racine said the formula may have too many assumptions built into it, including that unemployment will drop over the next eight years and that inflation won't hit consumers hard as it did in the 1970s. Other members of the panel agreed.
"So, what we have here is 18 years of tax breaks for employers followed by 10 years of cuts in benefits for employees," said Sen. Mark McDonald, D-Orange, referring to the years that unemployment taxes were not increased on businesses when the economy was good.
William Driscoll, the vice-president of Associated Industries of Vermont, a business group, said he was worried that the plan floated by lawmakers relied too heavily on increasing taxes on businesses to make the fund solvent.
Driscoll and other business leaders unveiled a plan back in April to increase the taxable base wage from $8,000 to $16,000 and reducing the maximum weekly benefit to $409, along with other reforms. He said Tuesday that the problem has gotten worse since then and they are now revising a new plan to address a larger budget shortfall.
"As a state, we need to ask ourselves what a fair benefit is," Driscoll said after the meeting. "And then we need to ask if it is sustainable."
Vermont is not the only state facing unemployment trust fund problems. According to McHugh, 22 states have borrowed money from the federal government already to pay out benefits and by the end of next year, 41 states are expected to be doing so.
So far, the states have borrowed $16 billion in interest-free money from the federal government, he said.
Many of these states were unprepared for a recession that rivals the Great Depression in length and severity, McHugh explained, and the cumulative state trust fund balance of $38 billion before the recession is estimated to become an $88 billion deficit by the end of 2012.
McHugh said Vermont is not in as poor a position as some other states. Our unemployment is lower than the national average, he said, and our trust fund is expected to last longer than nearly half the other states. But, still, there is hard work and even harder decisions to make, he said.
"It's taken you a long time to work into this mess and it will take you a long time to work out of it," he told the lawmakers.
daniel.barlow@timesargus.com.
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