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Should KY Employers Foot Bill for Unemployment Interest Due to Feds?

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 By Renee Shaw, Public News Service - KY, Contact
August 31, 2011

BEREA, Ky. - Kentucky could face steep penalties for not mailing in a $28 million payment to the federal government by Sept. 30. It's the first bit of interest owed on almost $1 billion the state has borrowed after its trust fund dried up to pay benefits to jobless workers since the start of the recession.

Passing the bill to employers has worked before, says Jason Bailey, director of the Kentucky Center for Economic Policy.

"Kentucky - in the 1980s when the state owed money for its unemployment insurance system as it does now - put in place an employer surcharge to pay the interest. So, this is not unprecedented. We just are the last state in the country to take action to do so."

State leaders still are waiting to hear from the federal government about repayment options. If the state does not act, Kentucky businesses stand to lose a federal tax credit worth hundreds of millions of dollars. State Senate President David Williams, a Republican challenger for governor, has been pressing Democratic Gov. Steve Beshear to call a special legislative session, to let lawmakers use some of the "rainy day" fund to make the interest payment.

Bailey argues that surplus dollars should be protected for public programs such as education and health and human services. This interest payment is only the first to come due, he says, and Kentucky needs a permanent solution.

"This is not a one-time interest payment. We have to make these interest payments once a year until the loan is paid back, and the estimates are it'll be six or eight years before we pay it back."

Since unemployment insurance is financed by employer taxes, Bailey says, it's logical to hold businesses responsible for the outstanding interest. Of the states with loan balances, he says, 19 are using employer surcharges to make their payments.
"Part of the reason that we have a large loan balance with the federal government is that we cut employer taxes. When the unemployment rate was very low, we cut it and we drained money out the trust fund over the last decade."

In an effort to shore up the state's unemployment insurance system last year, Kentucky lawmakers made cuts in future benefits to workers and increased employer taxes. However, Bailey says, they failed to address the issue of how to pay the interest on money borrowed from the feds.

More information is online at kypolicy.org.

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