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Give Maryland Back Its Money

Originally Published in The Daily Record

By Christopher B. Summers, William B. Conerly, Ph.D.
Published on Saturday, March 09, 2002
OP-EDS

With employment in Maryland declining, it's time to demand that the federal government quit taxing employment in the state just to limit the federal deficit. Maryland sends about $120 million a year to Washington, DC in the federal unemployment insurance tax, but only gets $65.1 million back. Most other states are in the same situation.
 
The federal unemployment insurance tax (called FUTA, after the Federal Unemployment Tax Act) is collected from employers, then returned to the states for things like the administrative expenses of the Maryland Division of Employment and Training. However, only 54% of the dollars collected from Maryland find their way back home. The national average is even worse: only 47% of the money goes back to the states. (FUTA is separate from the state unemployment insurance tax, which funds actual benefit payments.)

Congress collects more FUTA taxes than it spends in order to keep the budget surplus high or the deficit low, a victory for window-dressing over substance. FUTA is a tax on jobs. The strategy that we have used to reduce cigarette and alcohol consumption-taxing them heavily-also reduces employment.

The idea behind the tax is that employers should pay the cost of administering the unemployment insurance system. Money was sent to Washington, DC so that it could be allocated to states according to their caseload. States that had to process more claims would get more money. That concept makes no sense, however, when the federal government is just sitting on the money.

This federal system also stifles state creativity. Distributing administrative funding according to workloads penalizes a state for doing a better job of getting people back to work. It also prevents a state from setting up programs that spend more administrative dollars in order to save benefits dollars. For instance, if the Division of Employment and Training thought that expansion of its Early Intervention program would help more people find work sooner-which would save benefits dollars-it would not be able to do so because of limited administrative funding.

The first step in returning the money to the states is to stop collecting it. After the 0.8% federal tax is eliminated, Maryland could levy a tax of only 0.4% of wages and cover its own administrative expenses. The tax cut would come at a time when job creation is sorely needed. Maryland already collects unemployment insurance taxes from employers, so the only change for employers would be a reduction in paperwork. Small businesses will gain from that idea. The excess FUTA taxes build up in federal trust funds.

Maryland's share is now about $427 million or almost seven times the annual administrative expenses now paid by the federal government. Returning that money to the state trust fund, which pays the actual unemployment insurance benefits, would allow Maryland to take responsibility for its own affairs.

In addition to the administrative expenses paid for by the FUTA tax, the federal trust funds provide loans to states that run out of money in their state unemployment insurance fund, plus the "federal share" of extended benefits, which kick in during recessions. As a source of loans to the states, though, the federal trust fund is expensive.

States can borrow at lower rates in the public markets because of the tax exempt status of state debt, or states can agree to borrow and lend among themselves. This safety net could apply to extended benefits as well as regular benefits. The Bush administration has seen the problem that FUTA presents to most states, and is proposing steps to correct it.

The new budget cuts the FUTA tax from 0.8% to 0.2%, and shifts responsibility for administrative funding to the states. It also allows a portion of the existing trust fund to be paid back to the states over time. It's a big improvement over the present system, though it withholds some money that rightfully belong to the states.

The federal unemployment insurance tax has been a bad idea for some years, but it was a bad idea that we could afford. Now, in recessionary times, we cannot afford to continue to tax jobs just to reduce the budget deficit. It' s time to return the money to Maryland, stimulate better ways to help the unemployed, and ease the administrative burden on small business.

— William B. Conerly, Ph.D. is chairman of the board of Cascade Policy Institute and a member of Oregon Governor John Kitzhaber's Council of Economic Advisors.  Christopher B. Summers is president of the Maryland Public Policy Institute.

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