President Obama to Propose Allowing States to Raise Taxes on Employers in 2014 to Fund Unemployment Insurance

February 08, 2011-

The White House today announced that in next week’s budget proposal for FY2012, the president will propose that states be allowed to raise taxes on employers starting in 2014 to pay for unemployment insurance.

The proposal is being made in the context of trying to help states avoid raising taxes this year and next, senior administration officials said.

Under an agreement with the federal government, states collect taxes from employers on the first $7,000 in wages, at whatever rate they choose. The Obama administration proposal will allow them to collect taxes on the first $15,000 in wages.

Hypothetically, the states could tax the larger amount at half the rate, so taxes stay the same, but administration officials anticipate that states will not do that, given the rate of insolvency.

Right now states owe the federal government $42 billion in debt in terms of their obligations to the federal government for unemployment insurance – the largest debt they’ve ever incurred under the present agreement.

Three of the states hardest-hit economically – Michigan, Indiana, and South Carolina – have already seen tax rates for employers automatically triggered to a higher rate so as to avoid greater debt, and the administration says triggers for 20 other states are about to kick in.

For 2011 and 2012, as part of this proposal, the Obama administration would require a moratorium on states raising taxes to pay for unemployment insurance, and would allow states to avoid paying interest on their unemployment insurance debt.

“We are giving help to some states who have had to borrow and not been able yet to pay back — which would legally result in an increase in the federal share that is gotten through a tax on businesses — which we don’t think makes any sense right now,” White House press secretary Robert Gibbs said today.

Administration officials say this is a way for states to be given some breathing space to readjust their budgets during this period of economic recovery.

This proposal will, for “states that are overdrawn on this, ensure that we don’t place an extra burden on them,.” Gibbs said. “Let’s give them some time in an economic downturn to have what they need to effectively meet the needs of those that are unemployed and give them an understanding that in the future…they’re going to rationalize what is offered and how they come up with the funds to pay for what is ultimately offered.”

-Jake Tapper and Sunlen Miller