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Expect Reduced Benefits, Higher Taxes To Pay Back Unemployment Insurance Debt

North Carolina legislative leaders will unveil a plan Wednesday to pay back a massive debt to the federal government. The state owes nearly $2.5 billion for money it borrowed during the recession to pay for unemployment insurance.

Legislators in charge of the plan to pay that back say the solution will likely include fewer benefits for the unemployed and higher taxes for some businesses.

North Carolina's unemployment insurance is fully funded by businesses. Most of them pay a tax on every employee they have, and that money goes into a giant trust fund.

Getting 'Out Of Balance'

Gary Salamido of the state Chamber of Commerce said the problem started in the 1990s, when times were good.

"Employers and employee groups alike said well, we can cut the taxes. And at the same time, benefits were expanded, so what we did is we got out of balance," Salamido said.

The state got away with it when there was low unemployment. But when the economy tanked and unemployment soared, "the out of balance that we were in showed up dramatically," Salamido said, "so what happened is we started taking loans from the federal government to pay what we were obligated to pay under that current system."

North Carolina was one of about 20 states to run up a huge tab because of the recession. It peaked at $2.8 billion in April, and the state stills owe almost $2.5 billion. That's more than any other state except California and New York.

North Carolina Republican legislative leaders are working on a plan to pay that back. Senator Bob Rucho of Mecklenburg County is one of them.

"It is going to be painful on everybody," Rucho said.

Higher Taxes

Rucho said part of the pain for businesses is out of the state's control. The federal government automatically increases their taxes each year until the debt is paid off. Beginning in January, they'll pay an extra $42 per employee.  Altogether, the average business contributes $412 per employee toward unemployment insurance.

But Rucho said the state needs to bring in more money to pay down the debt, and it'll do that by taxing businesses that aren't currently paying into the trust fund.

"It's just like paying health insurance," Rucho said. "Everyone pays a premium, don't we? Well this is unemployment insurance, same idea. Everybody will be paying something."

It'll still be on a scale. Businesses that tend to have more layoffs pay more – think of a heavy manufacturer like Freightliner. Those that don't have a history of layoffs, like a mom and pop store, pay less but will now at least pay something.

Reduced Benefits

That's the pain on the tax side. On the benefits side, "we're going to make them conform with the other Southeastern states," Rucho said.

North Carolina currently offers 26 weeks of unemployment insurance. South Carolina offers 20, and in Georgia, it's between 14 and 20.

Also, N.C. pays the highest average amount of weekly benefits of all its neighbors. That'll probably go down too, although Rucho wouldn't go into detail before the plan is released. The average weekly benefit is close to $300, and the maximum is $535.

"It is wrong to make the most vulnerable people in our state right now pay the price," said Harry Payne, who headed the division that oversaw the state's unemployment insurance system from late 2001 to early 2009. Now he's with the N.C. Justice Center, an advocacy group.

He said there's a problem with the "shared pain" argument. He said in the '90s, taxes were cut much more than benefits were expanded.

"It wasn't shared when they were giving out tax cuts, for heaven's sake," Payne said. "What it was – was tax breaks to business."

And Payne said North Carolina is actually near the national average with its benefits now, so it shouldn't race to the bottom with its Southern neighbors.

Few Options To Close The Tab

But Rucho said if you don't cut benefits, you have to tax businesses even more. He said that could keep them from hiring, which would make the problem worse.

"What we're trying to do is find the right line of benefit reductions, of tax increases, of adding new people to broaden the base, so that we can come to the solution," Rucho said.

He also said the new unemployment insurance proposal would put a bigger focus on retraining people who get laid off. That's one thing he and Payne agree on – the state will have a much easier time paying back its debt if more people get back to work.