December 7, 2001

Suspension Also Would Reduce State Revenues and Widen State Budget Deficits
by Wendell Primus, Robert Greenstein, and Nicholas Johnson

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On December 5, House Ways and Means Committee Chairman Thomas proposed a modified unemployment insurance package. The package would provide 13 additional weeks of benefits in all states for workers who lost their jobs after March 15, 2001 and exhaust their regular unemployment benefits. The Thomas proposal also would suspend the taxation of unemployment benefits for calendar year 2002. Finally, the proposal retains a House-passed provision to accelerate the scheduled transfer of $9 billion from the Federal Unemployment Insurance Trust Funds to state unemployment trust funds. As a recent survey of states conducted by the National Association of State Workforce Agencies shows, little of the transferred funds would be used to strengthen unemployment benefits.(1)

While this is a significant improvement over the meager unemployment insurance provisions in the stimulus bill the House of Representatives passed earlier this fall, it falls well short of what is needed in two key respects. First, the Thomas proposal does not include important provisions included in the Senate Finance Committee stimulus legislation that would enable a substantial number of deserving — and primarily low-income — workers to receive unemployment benefits when they are laid off. Second, the Thomas proposal replaces the Senate Finance Committee provision for a temporary 15 percent increase in unemployment benefits with the provision to suspend the treatment of unemployment benefits as taxable income through December 31, 2002. As this brief analysis explains, this change is extremely ill-advised: it would largely eliminate the stimulative effect of the measure, would shift significant relief from low-income households with an unemployed worker to higher-income households with an unemployed worker, and would cause states to lose substantial state revenue, thereby aggravating state budget problems. The proposed replacement of a modest across-the-board increase in unemployment benefits with a benefits-related tax cut represents the elevation of anti-tax ideology over sound policy.

Effect of Proposal on Filers in Different Tax Brackets
Tax Bracket Increase in Net Unemployment Benefit Under Thomas Proposal
38.6% 63%
35% 54%
30% 43%
27% 37%
15% 18%
10% 11%
0 0

End Notes:

1. See Wendell Primus, "Survey Shows Most States Would Not Use Unemployment Insurance Funds They Would Receive Under House Stimulus Bill To Expand or Extend Unemployment Benefits," Center on Budget and Policy Priorities, December 3, 2001.

2. The provision would assist some low-income filers who owe little or no income tax and who receive unemployment benefits during 2002 by increasing their earned income credit. Filers who receive the EITC and are in the income range over which the EITC phases out would receive a larger EITC benefit as a result of unemployment benefits not being counted as part of adjusted gross income in 2002. In some cases, the increase in the EITC benefit would exceed the increase in unemployment benefits an unemployed worker would receive under the Finance Committee provision; in other cases, the increased EITC benefit would be less than the increase a worker would receive under the Finance provision. Even in cases where the increased EITC benefit would exceed the increased unemployment benefit under the Finance provision, the increased EITC benefit would not be provided until early 2003, rather than as part of the unemployment checks a worker would receive while unemployed in 2002.

3. Consider two workers, one in the 10 percent income tax bracket and the other in the 38.6 percent bracket. Currently, the after-tax value of $1,000 of benefits to the lower-middle-income worker in the 10 percent tax bracket is reduced to $900, while, as noted above, the after-tax value of $1,000 of unemployment benefits to the high-income worker in the 38.6 percent tax bracket is reduced to $614. Suspension of taxation means both workers would receive the full $1,000 of benefits, an increase of 11 percent for the lower-income worker and 63 percent for the higher-income worker. The disparities would be further magnified if state tax implications were accounted for in the calculations.

4. Iris J. Lav and Kevin Carey, "House Stimulus Package Would Worsen State Fiscal Conditions by Causing States to Lose $5 Billion a Year in Revenue for the Next Three Years," Center on Budget and Policy Priorities, October 18, 2001.