Obama Proposes Debt Relief for States
The Washington Post reports:
Heavily indebted states could get immediate relief from the Obama administration under a plan to temporarily suspend interest payments they owe the federal government for borrowing money to cover the soaring cost of unemployment benefits.
The proposal, to be included in the budget request President Obama will send to Congress next week, would also temporarily relieve states with elevated debt from having to automatically raise taxes on employers so the loans can be repaid.
But starting on 2014, the proposal would more than double the portion of workers' wages subject to the unemployment insurance tax that employers pay. This increase, from $7,000 to $15,000, would be aimed at raising revenue to repay the federal government.
"Ultimately, the states are going to need to repay their debts, and we're not going to want to bail them out," said an administration source familiar with the discussions. The source described the plan on condition of anonymity because the budget has not been released.
While the proposal would reduce revenues to the federal government in the short term, it would improve the budget picture over the long term as states repaid their debts, according to administration estimates. Only 13 states are expected to repay the money over the next decade under the current system, but the source who described the plan said as many as 28 states would be expected to repay if the Obama proposal were adopted by Congress.
States are grappling with a collective budget deficit of $175 billion through 2013, even after several years of tax hikes and spending cuts. State revenues are projected to remain depressed for several more years, as the U.S. economy slowly recovers.
Among the biggest factors in states' financial woes is the uphill struggle to put enough people back to work. The U.S. unemployment rate has been above nine percent for nearly two years, since May 2009, forcing millions of Americans to turn to the government for assistance. As the ranks of the jobless swelled, more than 30 states ran through the trust funds that help cover the cost of state unemployment benefits, which provide support for 26 weeks. With tax collections failing to keep pace with the cost of the program, 30 states have been forced to borrow money from the federal government and now owe an unprecedented $42 billion.
Under federal law, the elevated debt load has already triggered tax increases in Michigan, Indiana and South Carolina, where employers are being forced to pay more into the unemployment system. Employers in an additional 17 states are expected to see taxes rise before the year is out, according to administration estimates.
