This article originally appeared in Forbes.com
Unemployment insurance (UI) reform in North Carolina continues to be the gift that keeps on giving. The 2013 UI reform, made possible by the Republican-dominated General Assembly and Governor Pat McCrory, will enable $240 million in tax savings for state employers in 2016 alone, thanks to a UI Trust Fund that has grown to over $1 billion. In addition, the Tar Heel State’s 2013 tax reform bill will once again lower the corporate income tax rate, from 5% to 4% (it was 6.9% prior to 2013).
North Carolina employers certainly aren’t complaining, but that wasn’t the case just a few years ago. In January 2013, North Carolina’s unemployment insurance program was in terrible shape. Like most states, North Carolina had borrowed funds from the federal government to cover increased unemployment benefits during the great recession. This resulted in $2.75 billion of debt to Washington and stiff federal UI tax hikes on state employers. Meanwhile, North Carolina was experiencing an unemployment rate above the national average.
Making matters worse, North Carolina’s Division of Employment Security (DES) (the agency that oversees the UI program) was a mess. A 2012 news investigation found DES’s claim accuracy was the worst in the country, rife with fraud. The call center was answering less than 5% of its incoming calls. Benefit appeals took seven months on average.
What changed in 2013
But 2013 was a landmark year, featuring two major changes which turned around the unemployment program and the agency that runs it.
In February of that year, Governor McCrory signed a bill that reduced the maximum amount and duration of unemployment benefits to levels in line with those of neighboring states. This triggered the cutoff of long-term federal UI benefits being moved up by six months.
The resulting savings 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. The New York Times’ Paul Krugman declared the reforms to be part of a “war on the unemployed.”
Ironically, in his 2010 economics textbook, Krugman expressed an opposing sentiment. “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.”
Government fostered a wave of dependency
Indeed, there is a very important moral dimension to consider. Through misguided programs with unintended consequences, our government has fostered a wave of debilitating dependency. As American Enterprise Institute President Arthur Brooks wrote recently, “While the tide of dependence for the poor has crept forward, work has receded.”
With its UI reforms, North Carolina decided to stop participating in this trend. Now, the Tar Heel State has added jobs at a rate higher than neighboring states and the national average.
Because of the early debt payoff, employers will save more than $2.5 billion over the next four years. While North Carolina’s highly touted income tax reforms garnered much media attention, these cuts will actually put more money in a shorter time back into the state’s economy.
For individual employers, the early debt payoff has freed money for job creation and capital investment that will lift wages. As reported by the Winston-Salem Journal: “According to the U.S. Labor Department data, the average employer paid $554 per covered employee toward the $2.15 billion debt in 2013, as well as $247 in 2014 toward what was then a $980.9 million debt.”
Under the federal government’s repayment plan, 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.
Early debt repayment enabled massive savings for job creators
Due to the reforms, however, the federal UI tax hikes were halted in 2014, and dropped back to standard rates after the debt was paid off last year. The result has been significant tax relief for job providers.
The second major change in 2013 was the recalibration of DES under the leadership of former state House Speaker pro-tempore Dale Folwell. Today, the call center answers 97% of incoming calls, up from a dismal 5%, and the average appeals process has been driven down to just 74 days from seven months.
DES also cracked down on fraud. Prior to 2013, benefit checks were regularly sent out to new claimants before the former employer could verify the reason for unemployment. Folwell reversed that process to ensure benefit recipients were fully eligible before receiving a check. New legislation now also requires claimants to show photo ID to collect unemployment checks.
In 2012, the U.S. Department of Labor determined from a random sampling that only 12% of unemployment benefit recipients in NC were actually legally eligible. By June of 2015, that number had increased dramatically to 58%.
Today, North Carolina’s fiscal health is in far greater shape than it was in 2012, thanks to bold unemployment insurance reforms that will enable an additional $240 million in tax relief for state employers in 2016. For a roadmap to UI reform, states should look no further than North Carolina, where a crackdown on fraud has saved tax dollars and early debt repayment has enabled massive savings for job creators.
For more on the state’s fiscal history, check out our Budget Policy Guide.
Garland S. Tucker III is the CEO of Triangle Capital Corporation, a publicly traded company based in Raleigh. Brian Balfour is Policy Director of the Civitas Institute, a Raleigh-based think tank.