With stock portfolios collapsing nationwide yesterday, President Obama held a press conference to respond to a stream of negative economic events that have shaken the confidence of investors. In reaction to the stock sell-off and S&P's downgrading of America's credit rating from AAA to AA+, Obama outlined two clear short-term policy solutions: extension of the payroll tax cut and an extension of unemployment benefit spending.
While the payroll tax credit is an attempt to spur job creation through reducing the burden on employers, continued unemployment spending brings a double dose of financial burden to state governments and employers alike.
The unemployment fund is mandated by federal law, though it is administered by the states. It is financed through a tax on employers for each of their employees. If the state unemployment fund becomes insolvent, the state government is required to continue cutting benefit checks, financed through loans from the federal Department of Treasury.
Those borrowing costs are ultimately passed on to employers through addtional taxes.
According to a Colorado Legislative Council Staff report from May, Colorado's unemployment benefits fund is insolvent and has been since January 2010. As of August 5, Colorado was nearly 1/3 of a billion dollars in debt to the Department of Treasury, including over $10 million in interest alone. While Colorado has until November 2012 to pay back the principal on the loan, the interest bill comes due at the end of September 2011.
Colorado's ability to pay back the loan will have a major impact on the continuing costs to employers.
Though Colorado's government borrows the money, the unemployment benefits fund is ultimately funded directly by employers. When the fund goes insolvent, employers taxes increase. When they hit a rough patch and have to let some employees go, their taxes increase even more.
Currently, the federal unemployment insurance tax on employers is only 0.8 percent of the first $7,000 of each employee’s wages, due to a 5.4 percent tax credit for the state's good standing. If the state should lose that good standing, by not paying the loan back for example, the federal tax on employers would jump to 6.2 percent.
In addition to the federal unemployment taxes, employers must also pay a state tax that is primarily based on the number of their former employees requesting unemployment benefits. Businesses who lay off more employees pay a higher rate of tax. Up until 2011, all employers were also required to pay a 0.22% "socialized" surcharge.
When the unemployment fund goes insolvent the costs to all businesses also rise dramatically, spurring an additional solvency surcharge to all employers.
Colorado's insolvency has now caused unemployment tax rates to hit their highest possible level.
While legislation was passed by the Legislature in 2011 to reduce the likelihood of the fund's insolvency in the future, primarily through a higher taxable base wage, it has had a more immediate effect of greater financial burden on employers today.
The fiscal drag created by spiraling unemployment insurance costs only exacerbates the debt burden — simultaneously driving up the cost of government and the cost of doing business at a time when both are already under inordinate weight.
So Obama's policy prescription for an economy saddled with government debt and high unemployment is to increase government debt and pass on those costs to employers.
It's almost as if Obama has learned nothing from this debt crisis.