Separating Fact from Fiction: North Carolina’s Unemployment Insurance Crisis

By Andy Ellen

NC Retail Merchants Association

The federal government isn't the only one facing a "Fiscal Cliff." North Carolina is staring down its own fiscal cliff in the form of a $2.5 billion debt in loans from the federal government to help the state fund its unemployment insurance system. North Carolina has the fourth highest unemployment insurance debt in the nation. That is not a top ten list on which we want to be.

We didn't get into this situation overnight. As unemployment skyrocketed in the state during the Great Recession, unemployment claims climbed above the trust fund's balance. North Carolina, like many other states in similar situations, made the decision to borrow money from the federal government to continue to make payments to the unemployed.

Now, just like anyone else who uses credit rather than cash to fund large expenses, North Carolina's debt has come due. The interest payment alone in 2012 was $77 million. Who paid this interest payment? North Carolina employers - the same employers who are working to expand their businesses as we climb out of the recession and add jobs. The retail industry added over 465,000 employees nationally to their payrolls for the holiday shopping season, but the instability in the unemployment insurance fund threatens to stall hiring and threaten economic growth on the state level.

Going into a new legislative session lawmakers knew they had a choice to either demonstrate leadership by making the hard decision to fix the problem once and for all, or watch as the federal government taxes North Carolina businesses an additional $21 per employee incrementally every year until 2019.

The General Assembly has chosen the leadership path. On January 8, 2013, the Revenue Laws Study Committee approved a comprehensive proposal to the N.C. General Assembly that would:

• pay off the $2.5 billion debt by 2015;
• rebuild a $1 billion surplus in the unemployment insurance fund to prepare for the next economic downturn; and
• restore North Carolina’s Employment Security System to its intended function of being a re-employment agency rather than a benefit agency.

Numerous news articles have criticized the Revenue Laws proposal lamenting the proposed reduction in benefits for the unemployed. At the same time, the proposal has been made out to be a sweetheart deal for the North Carolina business community.

FICTION – North Carolina got into this debt because employers were not paying enough unemployment taxes.

FACT - This billion-dollar problem is neither the sole result of significant unemployment insurance benefits expansion nor caused solely by a reduction in unemployment insurance taxes paid by North Carolina employers in the 90s. It was a combination of these two factors. A real solution must address both of these factors.

FICTION – North Carolina businesses are getting a sweetheart deal.

FACT – North Carolina employers pay 100% of unemployment insurance taxes. Employees pay nothing. All of North Carolina’s employers saw their unemployment insurance tax bill rise by $21 per employee in 2012 and will undergo another $21 per employee increase in 2013. Critics downplay the current plan to repay the federal debt as just loose change for employers. For a local, independent grocery store with 50 employees, that loose change amounts to $2,100 in additional unemployment tax this year and then $3,150 in 2014, $4,200 in 2015 and so on. Without reform, by 2019 the additional cost per employee will increase 330% percent from an additional $21 to an additional $189 (or $9,450 for the independent grocer with 50 employees).