Watch Out for State Unemployment Taxes!

The heavy cost of providing unemployment benefits to millions of workers in 2009 has straining state governments, leading some to borrow from the federal government and many to eye ways of extracting extra tax revenues from employers. The Journal of State Taxation found that 12 states, including Michigan, Virginia and Texas, borrowed funds from the federal government interest-free under temporary rules established by the "Stimulus" legislation earlier this year. Such borrowings must be repaid by the end of 2010 to avoid interest charges on these loans. States seeking to increase unemployment taxes are using differing approaches, for examples: Texas is tripling their rate while Washington State is dramatically increasing the wage base. A likely additional result of the revenue crunch: fewer stable employers will be rewarded with reduced experience rates.

Like the federal government, most states have not done a good job of financial management during relatively healthy financial times (such as the late 1990s or the middle of this decade) and resultingly were ill-prepared for the economic crisis of the last 15 months. The short-term solution may have to involve borrowing; the longer-term solution will need to combine a higher income base ($12000-15000), required investing of excess funds in "good" years (rather than transfer to the general fund for general spending purposes) and possibly stricter requirements to qualify for benefits.