Tax breaks bankrupted Michigan unemployment insurance fund, says report
A new report by the National Employment Law Project says that the bankruptcy of Michigan’s unemployment insurance fund can be blamed on a series of ill-advised tax breaks given to employers starting in the 1990s.
Noting that the state has borrowed $3.2 billion from the federal government to keep the unemployment insurance fund solvent over the last few years and that the state must make a $117 million payment on those loans by the end of September, the report says:
Michigan’s most recent round of benefit cutting began in March 2011, when Michigan lawmakers enacted legislation to reduce UI benefits by six weeks (from a maximum of 26 weeks to 20 weeks for a regular state claim). This change will take effect for new UI claims filed after January 15, 2012. New bills (House Bills 4781 and 4782) will further reduce UI payments for low- and moderate-wage employees through an across-the-board benefit cut while excluding more workers from UI eligibility. These benefit-cutting bills moved out of a House committee in June and can move toward passage at any point after the legislature returns from its 2011 summer legislative recess.
Those who would further erode Michigan’s UI program fail to acknowledge that today’s financing problems are rooted in a history of irresponsible employer UI tax breaks starting in the 1990s. And, proponents of UI cuts wrongly promise that today’s benefit cuts will result in significant reductions in future UI payroll tax increases on Michigan employers. In fact, there is no reasonable hope that significant payroll tax savings will arise from UI benefit cuts, because we simply cannot cut UI benefits enough to avoid years of future UI tax increases on Michigan employers.
As we explain in this paper, six weeks fewer benefits for state UI claimants in 2012 will have an immediate impact on unemployed workers and Michigan’s economy. Unfortunately, benefit cuts will do little to lower upcoming federal interest payments and nothing to stop future federal UI tax payroll increases on Michigan’s employers. In short, you cannot get substantial UI payroll tax relief by cutting UI benefits in Michigan. After years of worsening UI solvency and ill-conceived legislation “protecting” employers from modest tax increases, Michigan’s UI insolvency has reached the point at which employers are going to pay higher UI taxes. In short, rather than considering futile benefit cuts as a response to UI insolvency, Michigan should face the reality that higher UI taxes are the main ingredient of any path to solvency.
The report notes that Michigan’s UI fund has not been in compliance with standard solvency criteria since the 1970s, leaving the state unprepared for major economic downturns that require having funds built up for the additional unemployment insurance that needs to be paid out during recessions.
The report also notes that Michigan has the lowest taxable wage base for figuring unemployment insurance taxes, leaving that fund insolvent in times of economic duress.