In 2013, North Carolina’s unemployment insurance (UI) program was in terrible shape. Like most states, North Carolina borrowed funds from the federal government to cover increased unemployment benefits during the great recession. The Tar Heel State owed Washington $2.75 billion. As a result, the state’s employers were being hit with stiff federal UI tax hikes.
Making matters worse, North Carolina was still experiencing unemployment rates that were exceeding national averages. To help kick start the state’s recovery, North Carolina legislators passed historic state income tax cuts that were estimated to generate $2.4 billion in tax savings over five years.
While reams of articles, studies and analysis have been devoted to those reforms, I bet you haven’t heard a word about another tax cut that has already saved North Carolina’s economy roughly half a billion dollars, and will cut taxes by an estimated $700 million per year during the next four years.
These sizeable savings can be traced back to North Carolina’s early repayment of the UI funds borrowed from the federal government.
Reforms to the state’s unemployment benefits in 2013 included bringing maximum amount and duration of benefits in line with those of neighboring states. These moves also triggered the cutoff of long-term federal UI benefits being moved up by six months.
Those changes brought savings that enabled the state to pay off the feds by May of this year. Without the changes, North Carolina would not have paid off the debt until 2020.
Predictably, however, the reaction from the media and talking heads was fierce and uniformly negative. For instance, the New York Times’ Paul Krugman declared the reforms to be part of a “war on the unemployed.”
Supporters, on the other hand, pointed out that reducing the UI benefits would alter the incentives facing the unemployed, tipping the scales on the margins in favor of returning to work versus staying on the unemployment rolls and waiting for more ideal job opportunities that may never materialize.
Ironically, none other than Paul Krugman himself in his 2010 economics textbook agreed. “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect,” wrote Krugman, explaining that granting more generous benefits “reduces a worker’s incentive to quickly find a new job.”
So what were the actual results? Since the UI reforms, North Carolina has added jobs at a rate higher than neighboring states and the national average.
Moreover, because of the early debt payoff, employers will save more than $2.5 billion over the next four years – a huge relief that frees up money for job creation and capital investment that will lift wages.
Under the debt repayment plan drawn up by the feds, North Carolina’s job creators would have faced increasing federal unemployment tax rates, with a final payoff date as late as 2020. UI tax costs per worker on businesses would have tripled by 2019, draining hundreds of millions in funds annually that otherwise could have been reinvested in the businesses to create jobs. The interest payments alone would have totaled close to half a billion dollars.
Instead, due to the reforms, the federal UI tax hikes were halted last year, and dropped back to standard rates again this year after the debt was paid off.
Moreover, the UI reforms have helped the Employment Security Commission build up reserves in the UI Trust Fund to nearly $750 million, which is expected to reach $1 billion by the end of the coming winter. That in turn likely will speed up further savings under a newly revised state law.
Previously, a 20 percent surtax would be added on to the UI tax as long as the UI Trust Fund balance stayed below $1 billion as of August 1. But Senate Bill 15, ratified in September, pushed back the deadline to next March 1 – providing enough time for reserves to reach the $1 billion threshold and thus making the surtax suspension applicable to 2016. This would generate another $240 million in tax savings for NC employers next year alone.
Keep in mind that, without the 2013 UI reforms and the resulting early debt payoff, the $1 billion threshold likely would not have been reached for another five years or more, potentially costing job creators another $1.2 billion in taxes.
And as employers either retain the additional UI tax savings or use them to invest in job creation, more tax revenue will flow to the state’s General Fund. This helps state income and sales taxes remain low.
So it’s such a shame North Carolina’s 2013 unemployment insurance reforms, which stirred up a lot of controversy at the time, have drawn so little attention since – and why it’s time more people hear about North Carolina’s other tax cuts.
A version of this article was published in The Fayetteville Observer.