NC Budget and Tax Center

HB4 will abandon forward financing, undermine the ability of the unemployment insurance system to protect the economy

As part of our series highlighting the implementation of drastic changes to the unemployment insurance system, today we want to lift up a little discussed aspect of the plan.  Along with all of the benefit changes passed by the General Assembly which will go into effect on June 30th, the legislation also failed to effectively address the problems with the financing of the unemployment insurance system.

1weekAs originally conceived, the unemployment insurance system would be funded through forward-financing—employers contribute to an unemployment insurance trust fund in good times so that in bad times, when benefit payouts increase and payrolls shrink, funds are available for jobless workers. Together, wage replacement and forward-financing can create an unemployment insurance system that protects the overall economy—workers and businesses alike—especially in historic downturns.

In the 1990s, when times were good, North Carolina largely abandoned forward financing by cutting taxes for employers and putting the Trust Fund at unsafe levels prior to the historic job losses of the Great Recession.

This legislation fails to return to the bedrock mechanism of unemployment insurance stability and effectiveness: forward financing.  Instead, it relies on the federal law requiring increased payments from employers when the state’s trust fund is insolvent.  It is these payments that comprise the majority of employers’ contribution to repaying the debt.

In fact, by 2017, the cumulative contributions by employers through state unemployment insurance taxes will be a mere additional $24 million, or .7 percent of the total that is paid towards the trust fund balance.  The formula changes to employer’s tax calculations, the elimination of a zero tax bracket and the increase of the highest rate will be insufficient to maintain adequate contributions.

By abandoning forward financing and the idea that employers should contribute to an adequate unemployment insurance system, policymakers moved to make up the difference by reducing benefits.  Here again, they run afoul of a core principle of unemployment insurance financing: wage replacement. In reducing the ability of unemployment insurance to provide adequate, temporary replacement of a worker’s wages, the effectiveness of the system and its protection of the economy in severe downturns is compromised.  That reduction is significant, there will be two-thirds less in unemployment insurance benefits circulating in the economy than under current law in 2017.

There are a host of options that could have been pursued instead and which would have followed from best practices established by economists and other states.   There was nothing inevitable about the choices that were made in HB4, but there is much that is horrible about them.

One Comment

  1. Doug

    June 28, 2013 at 9:42 am

    I am glad you call out the past progressive regimes:
    “In the 1990s, when times were good, North Carolina largely abandoned forward financing by cutting taxes for employers and putting the Trust Fund at unsafe levels prior to the historic job losses of the Great Recession.”

    This story only highlights what a steep hill the current legislature has in order to clean up the mess handed them by the corrupt practices of the past few decades. It only makes fiscal sense to decrease the benefits to more normalized levels, increase the taxes on employers (don’t see you guys hollering about that), and working to pay back the Billions borrowed to keep the system somewhat solvent. Once those problems are solved, and it looks like we are well on our way to doing so, they can take time to formulate a plan. You have to fill in the hole before building on the ground.