Jobs or Unemployment Insurance: Which is Better?

Every Maryland employer trying to keep the doors open, the lights on, and make payroll was sent an unpleasant letter recently, courtesy of state government, which will add a sharp object to this juggling act. The state labor department is gearing up to send a tax bill with a steep increase as the economy lingers somewhere between free fall and feeble recovery. This is bad timing. The O'Malley Administration is proposing to address problems in the state's unemployment trust fund - not in terms of the impact on jobs, but in terms of the impact on the program. This is the wrong subject.

Some have seen this before. In the recessions of the early '70s and '80s, Maryland's Trust Fund was depleted and tax rate surcharges were imposed to replenish it. Maryland employers contacted members of the General Assembly which passed legislation to limit the size of the tax increases both times. The case made then was to prevent unemployment insurance SURCHARGES from causing unemployment to increase. It worked then, and it can work now.

The state labor department announced that the unemployment insurance trust fund balance as of September 30 fell precipitously to $301.7 million, from $895 million a year earlier. At this burn rate, the fund would go bankrupt by this spring. Consequently, the department sent a letter October 23 to Maryland employers explaining their rationale for a tax hike. Employers will pay up to $1,147 per employee, up from $765. At the low end of the scale, where employers haven't let people go and thus pay lower rates, the tax more than triples to $187 per employee, up from $51 per employee this year.

No one can say when further tax hikes are necessary after that. That's because the economic premise of the federal-state unemployment insurance program is that during severe recessions a downward spiral siphons off cash at ever-increasing velocity. Trust fund inflows decrease, as the employer tax base shrinks, while trust fund outflows increase as unemployment goes up and more people file benefits claims. Taxing businesses causes a reduction in critical variable costs that help the economy, such as hiring new employees, thereby perpetuating the cycle. And since the payroll levee is collected per worker, the fewer employees there are, the less the taxable wage base is. Absent a robust economic recovery, politicians can over-correct and exacerbate the problem. Maryland's political leaders are relying on two things to avert trust fund bankruptcy that will make things worse: a one-time federal stimulus infusion to prop up the fund and a 2005 state law that automatically triggers a tax hike based on a pre-determined actuarial formula.

The 2005 trigger law, enabling the Maryland labor department to send the tax hike letter to employers bypassing the legislature, replaces the flat rate surcharge previously applied to businesses. Under this law, the state labor department uses a graduated tax scale, ranging from an "A" table to an "F" table, based on an employer's experience rating, or the frequency with which employees are let go. Employers with a better experience rating, pay from .03% to 2.20% - the former under Table A, the latter, Table F. Those with a worse experience rating pay between 7.50% and 13.50% applying these same tables. Maryland employers will be paying table F tax rates next year if nothing is done.

As for the stimulus, in order for Maryland to qualify for $127 million, the federal government, with state government following suit, has adopted the term "modernization legislation" as a euphemism for prodding states to expand a series of federal eligibility mandates through their legislatures. Maryland's net cash infusion will drop to just over $100 million after subtracting $25.6 million in increased benefits, according to the state labor department's own projections. Every year thereafter, Maryland businesses will be on the hook for untold millions in added payouts due to these federal requirements.

The stimulus and the 2005 trigger law, paper over the real problem. Like other social insurances such as Social Security and Medicare, there is an inherent flaw in the program itself. All are subject to actuarial realities that result in chronic fiscal imbalances. Unlike Social Security and Medicare entitlements, states have wide latitude to administer their own unemployment insurance trust funds. Outflows are managed by determining unemployment benefits criteria and inflows are managed by setting the tax rates employers pay.

There are various proposals to address the problems in the Maryland fund that better reflect the balance between employers, employees and the unemployed. Maryland Business for Responsive Government Co-Chairs Ellen Sauerbrey and Marvin Mandel recently offered a guiding principle. The choices, as difficult as they may seem, come down to weighing which has more value: jobs or the trust fund.

Tom Saquella, a member of the State's Unemployment Insurance Oversight Committee, is the President of the Maryland Retailers Association. He believes there is potential for a better outcome for businesses than simply adopting modernization proposals in their entirety. Achieving long-term cost savings and enacting an immediate employer tax reduction in 2010 and 2011 would reduce employers' financial exposure while enabling Maryland to collect modernization stimulus funds. Due to the shaky finances of the trust fund, however, it may require Maryland to borrow from the federal government, as other states are doing, incurring interest expenses.

Saquella says the Maryland Retailers Association is leaning towards this approach, but more discussion and negotiations will take place before that is adopted as an official position.

Another option the General Assembly could consider is an offset in benefit entitlement as part of a legislative package adopting the modernization proposals. For example, discontinuing the payment of dependence allowance and sick claims, requiring a waiting week, and changing the methodology used in determining benefit duration and weekly benefit amounts, would address the cost side of the equation.

This is the approach favored by Ronald Adler, another representative on the committee, who runs a human resources consulting business in Montgomery County. However, Adler does not think it would be wise to scrap the A-F tables which he helped devise as part of the 2005 reforms. In his view, such action would weaken the experience rating system, misallocate costs, and penalize better-rated employers.

"It's a pay now or pay later situation," said Adler, about the advantages he sees in retaining the table payment scale.

Unknown, is what course the Administration and General Assembly will ultimately take in the wake of employer tax hikes. In the October 23 state department of labor letter, the O'Malley Administration promises to work with employers on a case by case basis to develop a "payment plan." Julie Squire, assistant secretary for the Division of Unemployment Insurance, told the Baltimore Business Journal October 22 that the so-called payment plan would entail extending the unemployment insurance tax due date from April to June without a late fee.

Business and Economic Development Secretary Christian Johansson said the Administration is developing an outreach plan with Maryland businesses to seek input on dealing with the trust fund problem. If the Administration makes a genuine effort to do that, Maryland businesses can help policymakers better understand the inherent relationship between employers who provide jobs and pay into the fund, and the program itself. As the Administration works on its outreach plan, businesses can contact members of the General Assembly in the two months remaining before session starts and before the new tax bills go out.

What should be avoided is passive acceptance of ever-increasing tax hikes, brought on by federal government stimulus requirements and a five year-old state law passed in a very different economic climate than the one we're in now.