Ferg's Fiscal Insight
Jun. 4th, 2012: - johnlocke.org Manage Subscriptions

Beyond North Carolina's Unemployment Insurance Crisis
By Fergus Hodgson

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North Carolina's staggering Unemployment Insurance (UI) debt -- which fluctuates around $2.5 billion -- has been growing for two and a half years and is in the top five among the 50 states on a per capita basis. In 2011, state officials added another $470 million to the total without any reforms to curb the bleeding.

The pain has already arrived. State officials sent a $78 million interest payment to D.C. late in 2011, and from January employers have had to pay higher UI taxes on all wages, $21 per employee each year. So long as the state remains delinquent, more interest charges will accrue, and by federal mandate the UI tax will step up by another 0.3 percent each year.

Given that the state's UI program brings in less than $1 billion per year, repayment of almost three times that amount appears very difficult. With a little context, however, one can see that a few simple reforms would return this program to solvency.

In fact, North Carolina has the most generous UI benefits of its neighbors, including by far the highest maximum weekly benefit of $506. If state officials were to match the benefit levels and weeks of eligibility of South Carolina's program, for example, it would be sufficient for repayment within seven years. One way to do this would be to lower the highest benefit and bring the program closer to a uniform subsistence income, as the North Carolina Chamber has supported and as I called for back in January.

A simple bond issue, to be paid by employers, could achieve this. First, that would disentangle the state from the federal debt. Second, it would allow the state to downsize the program to cancel out the additional burden on employers.

The other proposition of higher taxes is simply not viable. As the Entrepreneurship Council and Chamber have rightly noted, a higher tax burden would further dissuade offers of employment when the North Carolina labor market is already fractured and the rate of labor force participation is one of the lowest in the nation.

Further, past workers are receiving benefits far in excess of what their contributions -- paid through employers -- ever justified. Rather than curtail overly generous benefits, an increase in taxes on employment would shift the burden onto new and current workers who would not be recipients.

Beyond this particular episode, the UI is a convoluted system, combining state and federal agencies with various funding streams with variable and dependent tax rates. If you want to better understand it, please see my spotlight on this, "First, Stop the Bleeding," which I published in January.

The program's complexity also points to its forgettable origins. Legislators designed it during the Great Depression with tax rebates to conceal its unconstitutionality -- since it is a federal mandate, plain and simple. Additionally, at that time labor unions were one of the biggest sources of opposition, since they already provided such insurance on a private basis. Times may have changed in that regard, but the program's moral and constitutional grounds remain more than questionable to this day.


  • The research staff here at the John Locke Foundation have been busily working on our upcoming publication of Agenda 2012. It is a candidate's guide and an update from the previous, 2010 version. Stay tuned for that, as it should be out within another couple of weeks.

  • My most recent speaking engagement turned into an insightful discussion in Winterville, North Carolina. We examined my latest research article, which I encourage people to read. My analysis lays to rest the notion that the latest budget cut state spending. In fact, state spending this fiscal year 2012 will be a record and on a per capita basis more than three times what it was in 1970.

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Thursday, Jun. 7th, 2012 at 6:00pm
North Carolina History Project Lecture
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"James Madison, North Carolina, and the Problem of Governance"

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