Easing the burden of unemployment insurance
AFTER NEARLY a year of haggling over the most recent round of proposed business tax changes, a compromise seems to be emerging. A special commission voted to recommend that the state Legislature close "loopholes," but also enact a "meaningful" cut in the Commonwealth's 9.5 percent corporate tax rate, the fourth-highest rate in the nation.
House Speaker Salvatore DiMasi has maintained that the tax code should be reviewed in its entirety rather than in a piecemeal fashion. He's right. A 2006 Pioneer Institute/Global Insight study found that high business costs - some of which have nothing to do with taxes - put Massachusetts at a serious disadvantage compared with competitor states.
One of the main sources of that disadvantage is a business tax that has hardly even been mentioned during the recent debate: unemployment insurance. The unemployment insurance program levies a payroll tax on employers that is used to provide a financial cushion for individuals who unexpectedly lose their jobs.
This entirely rational idea has spiraled out of control. The average unemployment insurance taxes paid by a Massachusetts company nearly doubled between 2003 and 2005. Today, only property and excise taxes account for a larger share of the overall state business tax burden. In 2006, Massachusetts companies paid $576 per employee in unemployment insurance taxes, more than twice the national median of $261.
Part of the reason the Commonwealth's unemployment insurance tax burden is so high is because we provide more generous benefits than other states - 76 percent above the national average according to a just released Pioneer study.
Forty-eight states allow claimants to collect for 26 weeks, but in Massachusetts it's 30 weeks (Montana has a 28-week limit). Most states require 20 weeks of work before qualifying for benefits; here it's 15 weeks. In addition to offering the easiest eligibility and longest benefit period, the Commonwealth's maximum benefit of $600 per week is also the nation's richest.
Generous benefits aren't the only reason for our unemployment insurance mess. Although companies whose employees use the system more pay higher taxes, those additional contributions don't come close to covering the cost of the benefits they generate. In 2004, laid-off workers from about 4 percent of Massachusetts companies accounted for almost one-third of total benefits. The companies paid $124 million into the system, while their former employees pocketed $403 million in benefits.
All too often, these "former" employees are current employees. They work in seasonal businesses like construction or landscaping and are laid off like clockwork each year, effectively shifting the burden to unemployment insurance during a company's slow months.
Even more egregious are small business owners who can self-trigger the program. One Nantucket jewelry storeowner earned about $50,000 during 2004. In the fall, she laid herself off and headed to Florida, where she collected $528 per week for 30 weeks, plus $25 for each of her two dependent children. In exchange for $1,534.40 in tax payments, she got $17,000 in benefits sent to her Florida address.
The more closely you look at the program, the less surprised you are to learn that about half the people who apply for benefits in a given year also applied the previous year.
Fixing unemployment insurance isn't rocket science, but it will require substantial political courage. First, we should eliminate incentives to collect rather than work by bringing benefits more in line with other states.
Next, we should force companies who habitually use the system to shoulder more of the load. This would have the additional benefit of reducing the burden on "good" companies that don't take advantage of the system and bear a larger share of the unemployment insurance costs in Massachusetts than in most other states.
Finally, instead of being allowed to lay themselves off, small business owners should be required to demonstrate that their business has actually closed in order to collect.
This year, Massachusetts businesses will pay more than $1.5 billion in unemployment insurance taxes. Rationalizing the system could save them nearly as much as the $400 million the Patrick administration projects the Commonwealth would realize from the business tax changes it has proposed.
In addition to eliminating a major competitive disadvantage for Massachusetts, fixing unemployment insurance would stimulate the economy and generate revenue for the Commonwealth. It would also allow us to make decisions about business taxes within the context of a fairer and more rational business climate.
Charles D. Chieppo is a senior fellow at Pioneer Institute.
