Obama plan would ease state debts through payroll taxes

An Obama administration proposal would ease the debts of states struggling to pay unemployment benefits by increasing the amount of payroll taxes collected from businesses.

The proposal, reportedly to be included in the president’s budget next week, has the potential to provide relief to the states that might otherwise be tempted to seek a federal bailout. At the same time, word of the plan comes a day after President Obama extended an olive branch to businesses in a speech before the U.S. Chamber of Commerce, which is unhappy with the corporate tax structure.
 
With the unemployment rate at more than 9 percent, 30 states have had to borrow a total of $42 billion from the federal government to help their out-of-work residents. "Ultimately, the states are going to need to repay their debts, and we're not going to want to bail them out," said an anonymous administration official quoted in The Washington Post.
 
Under the plan, a moratorium would be placed on employer tax increases and interest payments on the debt to the federal government through 2013. Starting in 2014, Obama wants to double the portion of worker wages subject to the unemployment tax, from $7,000 to $15,000, the Post reported.
 
The official said that if Congress adopts the plan, 28 states could repay over the next decade. Only 13 are expected to repay under the existing system. Starting this fall, the federal government is scheduled to charge interest, as much as $1.3 billion, on the $42 billion borrowed, The New York Times reported.
 
Employers pay both state and federal unemployment taxes. Under the new plan, states would be able to collect up to $100 billion more over a decade, the source said. That would give states the money to pay back their federal debts. The federal government would adjust its unemployment tax rate so businesses wouldn’t see an increase on the federal side.
 
The plan would reduce federal revenues in the short run, which means it may run into opposition from Republicans in Congress. On the other hand, some say, a tax moratorium might be appealing.
 
The debt already has triggered automatic state tax increases on employers in Michigan, Indiana, and South Carolina. Forty states raised unemployment-insurance payroll taxes last year to boost revenue, The Wall Street Journal reported. The Journal also said that the White House proposal “appears to be offering states a more palatable way to raise revenues than to boost tax rates.”
 

Related articles:

You may like these other stories...

Did you know that the tax code allows you to claim tax deductions for household damage caused by thefts, vandalism, fires, floods, hurricanes, and others kinds of casualties? But the law imposes several restrictions.Relief...
Inversions: Loophole Is the ProblemJacob J. Lew, the U.S. Treasury Secretary, published an opinion piece in the Wall Street Journal that "the system has become full of inefficiencies and special-interest loopholes. That...
School tax breaks get House support as Democrats objectRichard Rubin of Bloomberg reported that the House of Representatives on Thursday voted to expand and simplify tax breaks for education as Republicans continue to pass...

Upcoming CPE Webinars

Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.