Obama Plans to Rescue States With Debt Burdens

President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans.

Even more worrisome, to some states, is that current law would effectively raise taxes on employers by about $21 per worker in nearly half the states so they could start paying down their debt, which states worry would put pressure on businesses that have already been reluctant to hire in the downturn.

In his budget, officials said, Mr. Obama will call for deferring interest payments on the debt and postponing the automatic tax increases. Then, in 2014, to bring that money back into federal coffers, the administration proposes to raise the minimum level on which employers pay taxes.

Current law requires states to collect unemployment taxes on at least the first $7,000 of income; that minimum has not been raised in decades.

The president’s proposal would raise that minimum taxable wage base to $15,000. The rate of the federal portion of the unemployment taxes would then be lowered, so the proposal would not raise federal taxes on states that do not owe the federal government money. But it would speed the rate at which states that do owe money repay the federal government, and allow states to collect more unemployment taxes to rebuild their trust funds if they do not lower their tax rates.