By Jim Davenport | The Street
October 15, 2009
COLUMBIA, S.C. (AP) — South Carolina’s unemployment fund covering benefits is broke, thousands of workers are running out of extended benefits and the state’s jobless rate remains among the nation’s highest.
Now, the state is trying to sort out how to avoid the headache businesses and taxpayers here and around the country will face when it comes to repaying the federal loans keeping such funds afloat.
On Thursday, one panel studying South Carolina’s problems wrapped up work, and Gov. Mark Sanford convenes a panel Tuesday to wrestle with what’s expected to become a $2 billion problem.
South Carolina already has borrowed $561.2 million as the jobless rate soared, and August’s 11.5 percent rate was the nation’s sixth-highest. Meanwhile, extended benefits end for 6,900 unemployed residents, the first wave of losses unless federal benefits are extended again.
The borrowing is a national trend as the worst economic downturn since the Great Depression wipes out state jobless insurance reserves. California has borrowed $4.4 billion; Michigan, $2.7 billion; and New York, $1.5 billion. In all, 21 states have borrowed $18.7 billion.
North Carolina only two years ago finished paying off about $230 million it had to borrow to keep benefits paid, and now it’s had to borrow $1.3 billion. This “whole recession is uncharted from so many perspectives,” said Andy James, spokesman for the North Carolina Employment Security Commission.
That state’s past loans were repaid mostly through low-interest bonds. But this time, the state may have to hit employers with higher payroll taxes that could more than double those rates. That approach “might come up with some scary numbers,” James said.
John Rainey, the chairman of South Carolina’s Board of Economic Advisors, has been running an ad hoc study group to deal with the $1 billion he expects the state to owe sometime next year and set aside $1 billion in reserves the state needs to weather downturns.
Last month, he suggested a two-year tax increase of between $249 and $567 in annual costs for every worker the system covers.
In a news release Wednesday, Sanford said his panel needs to work together “to avoid simply raising taxes up to $567 per employee on our state’s businesses, and instead find alternatives” that include putting more people to work.
Sanford said he looked forward to working with legislators in January to “deal head-on with the most visible and pervasive challenge our state faces today.”
Rainey’s panel Thursday heard from state Commerce Department economist Rebecca Gunnlaugsson about problems with how the state taxes employers, provides benefits and puts people back to work.
Businesses only pay taxes on the first $7,000 of each worker’s salary the minimum allowed by federal law. And the state caps the penalties employers pay for frequent layoffs. Some economists argue that if the penalties were stiffer and the taxes higher, it could discourage companies from laying off workers.
“The way you set up your tax structure can either encourage more layoffs or deter more layoffs,” Gunnlaugsson said. “We currently do have a tax structure that really does encourage people or employers to lay off workers.”
And it’s left smaller businesses that don’t often lay off workers paying an unfair portion into the unemployment fund, said Frank Knapp, chief executive of the South Carolina Small Business Chamber of Commerce.
He noted Gunnlaugsson’s figures show 3 percent of employers account for a third of the unemployment benefits paid, yet pay only 8 percent of the taxes.
“It’s those businesses that drove us into the ditch,” Knapp said. “They ought to assume more of the responsibility for getting us out of the ditch.”