Easing the Burden of Unemployment Insurance

After nearly a year of haggling over the most recent round of proposed business tax changes, a compromise seems to be emerging. A special commission voted to recommend that the state Legislature close loopholes, but also enact a meaningful cut in the Commonwealth’s 9.5% corporate tax rate, the fourth-highest in the nation.

House Speaker Salvatore DiMasi has maintained that the tax code should be reviewed in its entirety rather than in a piecemeal fashion. He’s right. A 2006 Pioneer Institute/Global Insight study found that high business costs — some of which have nothing to do with taxes — put Massachusetts at a serious disadvantage compared with competitor states.

One of the main sources of that disadvantage is a business tax that has hardly even been mentioned during the recent debate: unemployment insurance. The unemployment insurance program levies a payroll tax on employers that is used to provide a financial cushion for individuals who unexpectedly lose their jobs.

This entirely rational idea has spiraled out of control. The average unemployment insurance taxes paid by a Massachusetts company nearly doubled between 2003 and 2005. Today, only property and excise taxes account for a larger share of the overall state business tax burden. In 2006, Massachusetts companies paid $576 per employee in unemployment insurance taxes, more than twice the national median of $261.

Part of the reason the Commonwealth’s unemployment insurance tax burden is so high is because it provides more generous benefits than other states — 76% above the national average, according to a just-released Pioneer study.
Forty-eight states allow claimants to collect for 26 weeks, but in Massachusetts it’s 30 weeks (Montana has a 28-week limit). Most states require 20 weeks of work before qualifying for benefits; here it’s 15 weeks. In addition to offering the easiest eligibility and longest benefit period, the Commonwealth’s maximum benefit of $600 per week is also the nation’s richest.

Generous benefits aren’t the only reason for our unemployment insurance mess. Although companies whose employees use the system more pay higher taxes, those additional contributions don’t come close to covering the cost of the benefits they generate. In 2004, laid-off workers from about 4% of Massachusetts companies accounted for almost one-third of total benefits. The companies paid $124 million into the system, while their former employees pocketed $403 million in benefits.

All too often, these “former” employees are current employees. They work in seasonal businesses like construction or landscaping and are laid off like clockwork each year, effectively shifting the burden to unemployment insurance during a company’s slow months. The more closely you look at the program, the less surprised you are to learn that about half the people who apply for benefits in a given year also applied the previous year.

Fixing unemployment insurance isn’t rocket science, but it will require substantial political courage. First, we should eliminate incentives to collect rather than work by bringing benefits more in line with other states.

Next, we should force companies who habitually use the system to shoulder more of the load. This would have the additional benefit of reducing the burden on “good” companies that don’t take advantage of the system and bear a larger share of the unemployment insurance costs in Massachusetts than in most other states.

Finally, instead of being allowed to lay themselves off, small business owners should be required to demonstrate that their business has actually closed in order to collect.

In addition to eliminating a major competitive disadvantage for Massachusetts, fixing unemployment insurance would stimulate the economy and generate revenue for the Commonwealth. It would also allow us to make decisions about business taxes within the context of a fairer and more rational business climate.

Charles D. Chieppo is a senior fellow at the Pioneer Institute.

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