More on the States’ Unemployment Pickle

As the GAO noted yesterday, 34 states have exhausted all funding for their unemployment insurance programs, forcing them to borrow roughly $40 billion to keep jobless workers in benefits. By 2013, the Department of Labor estimates, that trend will affect 40 states, requiring federal loans totaling $90 billion.

Under normal circumstances, states would have to pay Washington back for the borrowed cash, plus interest. Recognizing the uniquely severe nature of the recent downturn, however, Democrats waived the interest requirement as part of last year’s economic stimulus bill. Trouble is, that waiver runs out at the end of 2010, leaving struggling states with several options, and none of them good for their unemployed residents.

In one scenario, states will simply cut back on their UI benefits — a dubious strategy in a downturn, considering that unemployed folks tend to spend the money quickly, providing an immediate boost to the the economy.

In another scenario, states will borrow from their general funds to make the additional payments to Washington. But the recession has squeezed general funds severely, forcing states to trim a number of safety net benefits already. Dipping into the general account to pay interest on borrowed UI funds would only exacerbate the funding problems of those other state programs.

In yet another scenario, states will hike the unemployment tax on employers to cover the interest. (Indeed, in many states, this tax hike is mandatory). And while a number of experts say that such a tax hike is probably necessary during periods of economic growth, they’re also worried that the additional cost would discourage employers from hiring new workers at the same time that the nation’s underemployment rate has topped 17 percent.

For all these reasons, a number of consumer advocates and policy shops are already urging Congress to extend the moratorium on states paying back UI interest beyond the end-of-the-year deadline. The burdens of the recession are enough, the Center for Budget and Policy Priorities, a liberal policy shop, argued this week, that Washington shouldn’t impose additional costs while the economy remains fragile.

“The budget cuts and tax increases that states will have to impose to close [existing] shortfalls,” CBPP warned in a report issued yesterday, “will significantly reduce demand in the economy and create a drag that slows economic recovery.”