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.”
 

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