John O'Leary spent two years in the trenches running the most expensive unemployment insurance system in the nation. That, of course, would be the Massachusetts unemployment insurance system. Here is what he saw:
A Nantucket jewelry store owner who made about $50,000 in the summer of 2004 and then laid herself off and headed to Florida for the winter. In exchange for paying $1,534.40 in unemployment tax, she collected $528 a week for 30 weeks, plus $25 a week for each of her two children - or $17,340 mailed to her while she was "out of work" in the Sunshine State.
The family business - mom, dad, and grown child - that every year reduced the work schedules, and collected a wage subsidy through unemployment insurance. In 2004, the family business paid $5,100 in unemployment insurance premiums; family members collected $17,770 in benefits. The family also collected in 2003 and 2005.
The Brockton school bus driver who made $33,700 and another $7,620 in unemployment benefits - and collected for 24 years. He was outdone only by the interior decorator who collected for 25 years.
The details of each case have been altered to protect the individuals' confidentiality, O'Leary says. But each is an actual claim, in actual dollars, paid out by the state during O'Leary's tour of duty as director of the Division of Unemployment Assistance in the Romney administration.
The unemployment insurance system is one of our most basic safety nets, intended to provide a temporary bridge for those who lose their jobs through no fault of their own. But in Massachusetts, a state long dominated by a single political party that too often answers to organized labor, the unemployment insurance system has become something else: one more expensive barrier to job creation and a disincentive to reemployment.
Massachusetts is never going to be a low-cost place to do business. But to an impressive degree, the Commonwealth has made progress in confronting some of the key issues - and attitudes - that earned us our reputation as Taxachusetts. The unemployment insurance system remains one of those outliers that still needs to be fixed.
In a new analysis, O'Leary and Steve Poftak, research director at the Pioneer Institute, the conservative Boston think tank, say Massachusetts leads the nation in unemployment insurance taxes - an average of $637 per employee in 2005, or about twice the national average of $315. They blame the huge disparity on a number of factors, including: generous benefits, massive cross-subsidies for certain industries, the ability of the self-employed to lay themselves off, and what they call "frequent fliers" - those who turn up on the unemployment rolls year after year.
Cutting benefits is always dicey, all the more so with a recession maybe already underway. But there are perverse incentives in the system that can be repaired even without touching the benefits - up to $600 a week per employee, or about 50 percent above the national average. Take the big cross-subsidies.
All insurance has cross-subsidies. But in the unemployment insurance system certain sectors - most notably construction and other seasonal industries - use the program as a regular wage supplement. Under the system, companies are taxed based on their experience of benefits paid to former employees. But the tax maxes out at $1,530 per employee. "At the maximum benefit rate of $600 a week (the highest in the country), it's easy to see the incentive to utilize the system to augment wages in certain seasonal industry," Pioneer says.
Those subsidies exceeded $312 million in 2005, much of that to ongoing businesses that effectively use the system as a wage subsidy to their workforce, Pioneer says. Industries like finance and insurance are picking up the bill.
The Patrick administration is open to using the broken system as a chit in its negotiations with the business community over the issue of closing so-called corporate tax loopholes. A freeze in the unemployment insurance rates, for instance, for a deal on the broader business tax issues. But freezing the rates would not even begin to address the problem.
When it comes to costs, you never want to be on top - where Massachusetts is on unemployment insurance costs. Energy and healthcare, just to name two, represent big, intractable costs for the region. Unemployment insurance, by comparison, is the kind of discrete, fixable problem that can be resolved by reasonable people.
Steve Bailey is a Globe columnist. He can be reached at bailey@globe.com or at 617-929-2092.
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