The unemployment insurance (UI) system has been part of the social contract between companies and their workers since the Great Depression. The federal-state system is designed to provide workers with money to temporarily meet their basic needs after they have lost their jobs through no fault of their own.
Companies pay taxes into a trust fund on behalf of their workers. During good economic times with low unemployment, the taxes collected are far greater than the benefits that are paid out and the trust fund balance swells. In tough economic times such as these, the trust fund pays out far more in benefits than it collects in taxes, and the trust fund balance dwindles.
The unemployment system is overseen by the U.S. Department of Labor, but each state sets its own rules for how much to tax companies, and what benefits workers receive when they lose their jobs. As of August, Louisiana’s average weekly unemployment benefit of $180.86 was the lowest in the nation. Louisiana’s “wage replacement rate” – the percentage of weekly pay that is covered by unemployment benefits – is also the lowest of our peer states. Our current maximum weekly benefit of $247 is the third-lowest in the nation
The economic crisis sparked by the Covid-19 pandemic has put unprecedented strains on Louisiana’s unemployment system. The state’s trust fund, which had a $1.1 billion balance before the pandemic, ran out of money in early October. That means the state has to borrow money from the federal government to pay weekly benefits to the more than 165,000 jobless Louisianans who are currently on the rolls.
Anytime the trust fund balance falls below $750 million, state law calls for businesses to contribute more money to the trust fund, and for unemployed workers to get a reduction in benefits. But the “solvency tax” and benefit cuts cannot take effect until the trust fund balance is officially recognized by the state’s Revenue Estimating Conference. That has not happened yet. Although the trust fund is bankrupt, the REC refused to officially certify that fact at its September meeting, electing instead to give the Legislature time to find an alternative to raising taxes on businesses.
So far, the Legislature’s only answer has been to suspend the solvency tax and the benefit cut until August 2021 – which effectively punts the problem to next Spring’s legislative session.
At some point, however, the state trust fund must be replenished. Just as importantly, Louisianans who lose their jobs through no fault of their own deserve an unemployment system that can provide enough income to sustain them until the economy recovers and jobs return.
For now, unemployment benefits are being paid with borrowed federal dollars that, thanks to the Families First Coronavirus Response Act, is interest-free for the remainder of this year.
While the top unemployment benefit is $247 per week, the average Louisianan on unemployment receives $180.86 a week – just $724 a month – to keep the lights on and the mortgage paid until it is safe for the economy to fully reopen. By comparison, the United Way’s ALICE report estimates that a single adult in Louisiana needs at least $2,021 a month to cover basic expenses. A family of four needs $5,811 to make ends meet.
Louisiana’s paltry benefit level is hurting our economic recovery. Unemployment benefits circulate in local economies and support local landlords, grocery stores and retailers. Meanwhile, our neighboring states all outpace us in average weekly benefit, maximum weekly benefit, and wage replacement rates – meaning their unemployed workers are likely having an easier time keeping the lights on.
The Legislature’s fall session is over, but the need for reforming Louisiana’s unemployment insurance system and rebuilding the trust fund remains urgent. There are several steps the state can take to help unemployed workers and speed our economic recovery.
Borrow money and boost benefits
Louisiana should take advantage of the opportunity to raise benefit levels using money the state can borrow, interest-free, from the federal government. Louisiana’s $247 maximum weekly benefit replaces just 33% of the average worker’s wages in Louisiana. The legislature should increase benefits to replace at least 50% of workers’ wages and implement a $370 maximum benefit which would put us ahead of neighbor states such as Mississippi and Alabama, but would still keep us below Oklahoma, Texas, and Arkansas. With the $600 weekly benefit gone, a boost to weekly benefits would be a lifeline to thousands of Louisiana families.
Misclassification occurs when companies treat their workers as independent contractors who should be classified as full-time or part-time employees. Doing this lets companies avoid paying taxes on behalf of those workers into the UI trust fund, and means that the workers don’t qualify for unemployment benefits if they get laid off. Studies have shown that between 10% to 20% of employers misclassify at least one worker as an independent contractor. This has the effect of draining the trust fund of revenue that makes it harder to pay claims during economic downturns.
Under current law, companies that misclassify their workers only get a written warning for their first offense. House Bill 34, which died in the House Labor Committee in the special session, would have encouraged more businesses to follow the law by allowing penalties of up to $5,000 against companies that intentionally misclassify their employees. Having more companies paying into the trust fund – and more workers eligible for benefits if they become unemployed – would improve the solvency of the trust fund and create a stronger safety net in hard times.
Create a work-sharing program
Work-sharing (or “short-time compensation”) is a voluntary program that lets companies avoid layoffs by reducing their workers’ hours and use unemployment insurance to supplement some of the lost wages. As of 2019, more than two dozen states had a work-sharing program. Louisiana had a work-sharing law on the books, but the Legislature repealed it in 2014 before it could be enacted. House Bill 93 would re-enact a work sharing program in Louisiana.
Work-sharing programs help workers stay connected to their jobs during financial downturns, and help companies reduce the time, money and effort it takes to recruit and train new workers when business activity picks back up. They boost the economy due to workers earning more than they would if they were entirely dependent on unemployment insurance. The U.S. Department of Labor estimates that work-sharing programs saved 570,000 American jobs between the Great Recession and 2016.
Workshare benefits are typically paid from the state unemployment trust fund. But under the CARES Act, the federal government is subsidizing any work sharing benefit drawn from a state’s trust fund until the end of 2020. The CARES Act also provides assistance to states to enact or expand work sharing programs, meaning Louisiana is eligible for $1.2 million in federal grants if we pass a work sharing bill before the end of 2020.
Tax conformity with neighboring states
Louisiana should consider long-term reforms to preserve the trust fund in future economic downturns, even if it means that businesses pay more into the system. Louisiana currently taxes the first $7,700 of payroll per employee, which jumps to $8,500 when the trust fund dips below $750 million. The maximum rate is 6.2%, but the vast majority of companies pay far less than that. The U.S. Department of Labor reported that Louisiana’s average tax rate on taxable wages for employers in 2019 was 1.45%, lower than the national average of 1.88%. The U.S. Department of Labor also forecasted that the average Louisiana company would pay just $105 per employee in taxes, compared to the national forecasted average of $125.
While Louisiana’s weekly benefits currently top out at $247, the maximum weekly benefit a worker could receive is $284. But the trust fund balance would have to be at least $1.4 billion for that to take effect. This points to a fundamental flaw in the current structure. Right now benefits go up – and taxes go down – when the economy is strong and workers have an easier time finding jobs. Benefits fall and taxes go up when the economy is soft and jobs are scarce. Louisiana should consider switching to a system that works the opposite way – with lower taxes and higher benefits during hard times and higher taxes with lower benefits during boom periods. That way, the trust fund would grow at a faster pace when the state can afford it, and be better prepared to weather inevitable economic downturns.
The unemployment insurance system is a critical part of the social contract between companies and their workers. With the Covid-19 crisis putting unprecedented strains on this system, the Legislature has mostly been focused on avoiding taxes on businesses – not the workers who rely on unemployment benefits to stay afloat. These benefits are an economic lifeline to families, and help keep local business afloat during hard times. Policymakers should do all they can to maximize the benefits that workers receive, while ensuring that all companies pay a fair share to keep this system viable for years to come.
-By Neva Butkus, Policy Analyst