US states to pay unemployment bills, taxes could rise

Thu Sep 8, 2011 2:51pm EDT

By Lisa Lambert and Karen Pierog

WASHINGTON/CHICAGO, Sept 8 (Reuters) - U.S. states will start sending more than $1 billion to the federal government in coming weeks for loans used to pay unemployment benefits and some may have to raise business tax bills to cover the charges.

The 2009 economic stimulus plan made it easier for states to borrow from the federal government to pay benefits for unemployed workers, easing the strain on their budgets as revenue cratered and high numbers of residents filed for assistance during the recession.

In February, President Barack Obama asked Congress to extend the help and delay any impending tax hikes, but Republican resistance and general criticism of the $830 billion stimulus plan muted the possibility of a continuation.

The 2009 package of tax breaks and spending measures waived interest on the states' loans. When it expired in December, interest began accruing and now more than half the 50 states must make an annual interest payment by Oct. 1.

The impact on some states' finances will be mild as they had time to prepare for the payments. Others must find funds to cover another bill on top of other spending demands for health and social programs.

"The normal way that states will collect the interest is a special assessment on employers," said George Wentworth, senior staff attorney at the National Employment Law Project, a group closely monitoring the loans. "The federal law says you can't take it out of your unemployment trust fund."

States can also pull money from general revenue budgets or issue debt for the interest payment. If they miss it, they can be cut off from federal funds for unemployment insurance.

Employers in states with outstanding loans as of Jan. 1 would begin losing a federal tax credit, too, driving up the amounts they pay into unemployment insurance, according to NELP.

California, Michigan, Pennsylvania, New York, and North Carolina have to send in the biggest interest payments, said Chris Mier, managing director at Loop Capital Markets, which has been tracking states' unemployment loans.

Not all states owe -- 33 states will pay interest totaling nearly $1.2 billion, according to Mier. Still, he said, "more states borrowed more money than ever before" to handle the deepest downturn since the Great Depression.

Currently, they have $37.1 billion in principal outstanding, his data showed.

Obama on Thursday is expected to propose a $300 billion plan to address the unemployment problem. Instead of easing states' fiscal burdens, he will likely focus on creating jobs, though.

DRAWING ON TAXES, TOBACCO, BONDS

Many states, such as New Jersey and Georgia, cut taxes deposited into trust funds for paying benefits during the economic boom that preceded the current bust. That is a chief reason they had to borrow and why companies, accustomed to lower tax bills, may be jolted by new levies.

Michigan, which had one of the highest jobless rates during the recession, imposed a "solvency tax" on thousands of employers this year that will cover $47 million of the state's approximately $106 million interest payment, according to Sara Wurfel, Governor Rick Snyder's press secretary. Another $39 million will come out of the state's general fund and $20 million from an unemployment penalty and interest account.

Ohio, which tackled an $8 billion structural deficit heading into the current biennium, is tapping money from its share of a nation-wide settlement with tobacco companies for its approximately $70 million interest payment, according to Ben Johnson, spokesman for the state's employment department.

It would have owed more but it plans to pay off $300 million of its principal this month, he added. That still leaves Ohio with $2.3 billion outstanding and it expects a reduction in businesses' federal tax credit starting Jan. 1.

Last November, Texas sold $1.1 billion of revenue bonds backed by a tax on employers. Bonds are also being considered by Michigan and Illinois.

California owes $319.5 million in interest, said H.D. Palmer, a spokesman for the state's finance department, the most of any state. The payment is included in the current budget for the employment department, so it will not add to the state's general fund troubles.

(Additional reporting by Jim Christie in San Francisco; Editing by Andrew Hay)