30 States Take Out Loans To Pay For Unemployment Benefits

California and more than 30 other US states have taken out loans to pay for jobless benefits. With repayment of these loans starting in 2011, many of these cash-strapped states have raised unemployment insurance taxes - further discouraging employers and potential employers from adding new jobs to the economy. See the following post from Expected Returns.

California takes down the prize for being the state with the worst finances, followed closely by abut 40 other states. States are starving for cash, which will result in higher taxes and cuts in services. States can't even come up with the cash to insure millions of unemployed Americans who are watching this apparent economic recovery unfold from the sidelines. From Reuters, California leads in borrowing for jobless benefits:

The Golden State has borrowed $8.8 billion so far to cover jobless benefits during a recession where the national unemployment rate crested above 10 percent. It is not alone. More than 30 states have had to take out similar, albeit smaller, federal loans to keep their unemployment benefit systems afloat.

Their combined debt tops $40 billion and the U.S. Labor Department expects 40 states to be in debt to the federal government by year's end, underscoring the labor market's problems in the deepest recession since World War Two.

To give cash-strapped states a break, the federal economic stimulus program enacted last year suspended interest on the loans to states for two years. Without an extension, interest payments resume next year and Washington could raise payroll taxes on employers in delinquent states if loan balances remain outstanding.

State leaders fear that would derail a jobs recovery which they need so employers replenish bare state coffers and enable states to repay the unemployment loans.

States will have to start repaying loans to the federal government in 2011 at around 5% interest. This is money that is coming directly from states budgets at a time of crisis. One must question how long states can defer the repayment of debt into the future before a crisis unfolds.

Rising Taxes Guaranteed

By 2012 employers in 25 states, including California, New York and Texas, could face rising federal payroll taxes if unemployment loans remain outstanding, which analysts expect they will, said Rich Hobbie, executive director of the National Association of State Workforce Agencies.

"They can't completely solve their problems in the near term," Hobbie said. "If we have eight years of sustained growth as we had back in the 1980s then the states have a shot of repaying their loans."

In order to raise cash, states have raised unemployment insurance taxes. The net effect is that employers are even more wary to hire new workers, which makes the unemployment situation even worse. Taxes are bound to increase, although the proper response in this situation would be to cut spending dramatically. But we know this isn't going to happen.

This post has been republished from Moses Kim's blog, Expected Returns.