Nixon Veto Will Lead to Future Unemployment Tax Hikes – By Rep. Jay Barnes

Re-printed with permission from Representative Jay Barnes

Those who ignore the past are destined to repeat it. Sen. Kehoe had that adage in mind when he sponsored legislation this year to reform Missouri’s unemployment benefits system.   Unemployment benefits are a forced short-term insurance plan administered by the government to guard against the temporary setbacks of workers who lose their job through no fault of their own. To administer unemployment benefits, government takes money from working Missouri employees by taxing Missouri employers to give short-term payments to eligible Missouri workers.   Unemployment benefits are different from typical federally administered social welfare programs because they are funded almost entirely by the state. When the economy is humming, the UI Trust Fund collects sufficient taxes to pay ongoing claims. But when the economy slows, Missouri’s UI Trust Fund has a history of falling behind. When that happens, Missouri goes hat-in-hand to the federal government for a loan. In the last recession, Missouri joined 35 other states in the beggar’s line. Ultimately, Missouri borrowed more than $700 million.

Representative Jay Barnes

Representative Jay Barnes

Consequently, Missouri employers were hit with an additional tax of approximately $84 per employee.   Senate Bill 673, which I carried in the House for Sen. Kehoe, would help Missouri avoid this spend-borrow-tax trap in three ways.    First, it would require the state board, which oversees the UI Trust Fund, to consider bonding as an alternative to borrowing from the federal government. In the last borrowing cycle, the board refused to even consider the idea. However, in future scenarios, it may be cheaper for Missouri employers to bond debt over a longer period of time rather than face steep tax increases in the short-term and in the middle of a recession. In this regard, SB 673 merely ensures that the board considers all options.

Second, it would increase the amount the UI Trust Fund would keep in reserve from $750 million to $870 million before reducing the unemployment tax. The rationale, naturally, is that the larger the cushion, the less likely the state will be asking the feds for a loan.

Third, SB 673 would tie the length of unemployment benefits to the unemployment rate. Under current law, recipients are able to receive benefits for 20 weeks. Under SB 673, eligibility would be shortened as Missouri’s economy improved. If the unemployment rate fell below 6 percent, benefits would only be available for 13 weeks. This would reduce payouts from the UI Trust Fund and make future borrowing less likely.

Unfortunately, Gov. Nixon vetoed SB 673 this week. In his veto message, Nixon argued that the bill was no longer necessary because the UI Trust Fund just recently (and finally) repaid the loan it received from the feds in the last recession. In this Gov. Nixon is like a homeowner who rebuilds in the same flood plain without a levee or any other protective measure.

“The water has receded,” Gov. Nixon proclaims, “We don’t need a levee!”   Gov. Nixon next argued that reducing the duration of unemployment benefits in good times would “be damaging to our economy.” That statement relies on the same big-government multiplier-effect philosophy that justified Gov. Nixon’s attempted $2.4 billion giveaway to Boeing. The theory follows: when government spends “X,” it stimulates the economy and it receives “X times Y” in economic benefits.   For some categories of spending, this may actually work. Take, for example, police, fire, roads, and education. It’s generally agreed that some level of government spending on these items returns multiples of economic benefits because they serve as the infrastructure for a functioning economy. But unemployment benefits are different – they are instead a straight wealth transfer from people who are currently working to people who are not.   In today’s economy where decisions on Wall Street can cause pink slips on Main Street, unemployment insurance is a vital cushion for those Missourians who lose their job through no fault of their own. SB 673 recognizes we have finite resources and, accordingly, prescribes that benefits should move with the economy.   As with every other social welfare program, economic research has shown that incentives matter. According to Alan Krueger, President Obama’s top economic adviser from 2011 to 2013, extended unemployment benefits correlate with longer spells of unemployment. Not surprisingly, the job-finding rate of Americans on unemployment jumps just before benefits expire – and, in states with more liberal unemployment benefits, recipients don’t search for a job as intensely as those in states with more conservative benefits. Other studies from Fed economists have found that extensions of unemployment benefits increased the unemployment rate in the last recession, particularly among highly-educated workers who become “more relaxed and more patient in selecting jobs” as duration of benefits increases. Yet another study found that, contrary to Gov. Nixon’s argument, “UI benefits and contributions provide little impact of consequence upon general economic activity.”

In addition, money to fund unemployment insurance isn’t just plucked from a tree. Nor is it a matter of “Brinks Truck Economics” — the theory that a state benefits by asking the federal government to send a truckload of money to be distributed in that state as opposed to some other state. Unlike other federal social welfare programs, money for unemployment funds is generated by a tax on employers for every employee in our state.   When the economy turns south and Missouri has to borrow from the federal government, the UI tax is increased. Raising taxes in a recession is something even Gov. Nixon would have to admit is a bad idea. Yet, by vetoing SB 673, if history is our guide, Gov. Nixon has nearly guaranteed that unemployment taxes will be raised in a future economic downturn.   I, of course, believe the legislature should override this veto, but it’s unclear at this point whether there will be enough votes. The bill passed with a veto proof majority in the Senate, but had only 101 votes in the House. I believe six additional votes will be available in veto session, but that’s two shy of an override. As we get closer to September, we’ll know more.

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