Jobs or Unemployment Insurance: Which is Better?
With the economy still struggling and unemployment levels high, we ask which should concern Marylanders the most: (a) The balance in the Unemployment Insurance Trust Fund; or (b) Jobs? Prompting us to write this article is a state labor department letter imposing a steep tax hike. Much was said about the trust fund; little was said about jobs. Employers will receive increased tax bills that range from $136 to $382 per employee if the General Assembly does nothing.
The question of whether to choose the Unemployment Insurance Trust Fund or jobs is absolutely critical because every additional dollar paid to the trust fund will hamper the business community's ability to create jobs in Maryland. Conversely, every dollar saved in the unemployment insurance tax allows more economic activity and job creation. This economic principle is known as the "multiplier effect" or "spending multiplier." It explains why spending in a given locality allows more consumption and increases the overall economic activity beyond the initial investment. In addition, the multiplier from an investment can repeat many times in a year.
Why would an increase in this tax suppress the multiplier effect? Because, every dollar paid by employers and held in the trust fund is a dollar not going towards wages or spending in the local economy. On top of that macroeconomic scenario is the simple reality of how trust fund revenues are derived. Payroll taxes on each and every employee finance the trust fund. The fewer employees there are, the less taxable wage base there is, further straining the fund.
This is not the first time that Maryland has been caught in the grip of an economic dilemma where the general economy is lagging and the payout of unemployment insurance benefits drains the trust fund. In the recessions of the '70s and '80s, Maryland's trust fund was depleted and tax rate surcharges were imposed to replenish it. Maryland employers persuaded the General Assembly to pass legislation to limit the size of the increases both times. The case made then was to prevent unemployment insurance surcharges from causing unemployment to increase.
Maryland businesses have less than 60 days to make their views known to legislators. After the General Assembly convenes on January 13, the sand begins to run out on the opportunity to reduce the looming tax increase for unemployment insurance. When Maryland lowered taxes in the last two severe recessions, employment levels increased and the trust fund remained solvent and recovered sooner than anticipated.
It is not reasonable to completely deplete the state's trust fund balance; however, neither is taxing employers so much that they are forced to eliminate jobs. A measured response that takes job creation into account is the only way to restore long-term solvency in the trust fund. Maryland's business community and the General Assembly will need to work together to make that happen.
This article appeared in The Baltimore Sun, 3:16 PM EST, November 18, 2009
