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Connecticut's Unfair Unemployment Insurance
March 24, 2000
Connecticut provides more generous benefits to recipients of unemployment insurance (UI), and at a higher cost to taxpayers, than the vast majority of other states. This is the conclusion of a recent report on "New Ways of Evaluating State Unemployment Insurance," published by Robert Tannenwald, Christopher O'Leary and Wei-Jang Huang in the Federal Reserve Bank of Boston's New England Economic Review.
Looking at UI taxes as a simple percentage of total wages, Connecticut appears, on the face of it, to have the seventh highest UI tax rate in the country. But even this high ranking is deceptively low, the researchers found. This is because the actual UI tax in any given state reflects, not only current public policy towards the UI system, but also the history of UI in a given state. For example, when a state has experienced a long bout of high unemployment and its UI trust funds are down, automatic tax adjustment mechanisms kick in to raise the UI tax rates until the trust fund has been replenished. The result is that it is not always easy to know a state's real unemployment insurance tax burden simply from looking at the current rate. Indeed, a state might have a very lean UI tax schedule, yet show a high collection rate, especially if it were emerging from a nasty regional recession.
Tannenwald and his colleagues worked to separate out pure tax policy from the distortions of a state's recent economic history by using sophisticated computer simulations that calculate the UI tax under six different kinds of scenarios, covering a wide range of assumptions about what might be happening to the state's local economy. If a state's ranking is high across most of these simulations, the authors found, it is safe to conclude that the state has a relatively high UI tax rate.
Unfortunately, Connecticut's ranking in the six different simulations was 2nd, 1st, 3rd, 2nd, 1st, and 2nd for the twenty-eight states on which the calculations were performed. The first and third simulations (2nd and 3rd place) used income levels that most closely approximate Connecticut's, leading us to conclude that if all the states studied has the same average wage rate as Connecticut, our taxes would be the 2nd or 3rd highest out of 28. The researchers did not combine their six simulations into a composite, but it isn't hard to develop an overall score. Taking all six simulations and giving them equal weight, Connecticut is tied with the state of Washington for the highest unemployment insurance tax rate of all twenty-eight states studied.
Connecticut's benefits are, like its taxes, among the highest in America. Indeed, by some measures, they are the highest. The House Ways and Means Committee publishes benefits based on four hypothetical workers as a way to compare the different states based on identical people. In their four cases, Connecticut ranks 1st, 1st, 1st, and 1st out of fifty-two states and territories. Averaging these ranks clearly suggests that Connecticut is easily the most generous state in the nation.
Do Connecticut taxpayers have a right to be concerned that their state's unemployment insurance system levies unusually high taxes to fund exceptionally generous benefits? Despite the common belief that economists can never agree on anything, one conclusion that both liberal and conservative economists who have studied the subject tend to agree on is that generous UI benefits increase the average duration of unemployment. In other words, a system like Connecticut's is a cross subsidy from one group of workers to another - from those who are most diligent in their job searching efforts to those who are most inclined to use and abuse the system. This subsidy would be increased even more by a recent proposal from the Clinton Administration that would pay unemployment insurance to those who take time off under the Family and Medical Leave Act.
Can anything be done to restore a fairer balance to our UI system, short of simply cutting UI taxes and benefits? "Yes," according to the American Institute for Full employment. The Institute's Full Employment Plan, based on procedures used in fourteen states to help welfare recipients find work, would replace unemployment insurance with a subsidized job as a temporary prop for those who cannot find work. Abuse of the system would fall dramatically, as there would be no incentive to drop out and take advantage of a "free" income. The UI tax rate could be cut substantially while, at the same time, providing a humane bridge for unemployed workers going from one long-term job to the next.
Dr. Lewis M. Andrews is Executive Director of the Yankee Institute for Public Policy Inc. at Trinity College, a Connecticut research and educational institute.
Dr. Conerly is Chairman of Conerly Whalen, Inc., a Portland, Oregon, investment firm.
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The Yankee Institute for Public Policy, Inc. is a nonpartisan educational and research organization founded more than two decades ago. Today, the Yankee Institute's mission is to "promote economic opportunity through lower taxes and new ideas for better government in Connecticut." The Yankee Institute for Public Policy, Inc. is classified by the IRS as a 501 (c) (3) public charity. Contributions are deductible to the extent allowed by law.
