Tax Rebate Loans Can Better Aid the Unemployed
The Covid-19 pandemic drew attention to America’s ramshackle system of Unemployment Insurance. As the number of claimants surged from 2 million in February to 21 million in May 2020, a third of benefits were not paid, as antiquated computer systems left many states unable to process applications. And today, the federal Government Accountability Office found that “fraudsters may have stolen $1 of every $7 in covid jobless aid,” that is, over $135 billion.
Even if it functioned as intended, America’s 87-year-old UI system is poorly suited to the modern economy. It provides meager support to workers who most need help, entirely excludes those at greatest risk of being laid off, and mostly distributes aid to households who have little need for assistance.
Congress would do well to set up a more robust and better targeted UI system before the next crisis hits: unemployed workers should be allowed to claim back up to $500 per week of taxes from the two previous tax years as an income-contingent loan, which they would repay with an additional 2% income tax after their return to work. The current 6% unemployment insurance tax on the first $7,000, then, could be done away with.
When workers suddenly lose their jobs, bills keep coming: housing costs, utilities, food, car loans, home repairs, and parenting expenses. The median unemployment spell lasts for 8 weeks; but in 2022, only 37% of households had emergency savings sufficient to cover a month of lost income.
The current Unemployment Insurance system is supposed to tide people over. Federal law imposes a 6% payroll tax on the first $7,000 of earnings (effectively a $420 head tax on workers), which states can mostly capture by setting up their own compliant UI systems. Benefits nationwide average $416 per week, but terms vary greatly between states.
States design benefits with an eye to mitigating disincentives to work: payments are proportioned according to prior wages (typically 50% of weekly earnings up to a cap), limited in duration (most often 26 weeks), and eligibility is restricted to workers fired without cause. In 2022, the unemployed in Massachusetts could claim up to $37,986, while the maximum in Alabama was only $3,850. Whereas 43% of the unemployed in Massachusetts received benefits, only 7% in Alabama did.
As a result, the system provides much larger benefits to those with higher prior earnings, even though such workers are generally able to self-insure against income risks with private savings and borrowing. By contrast, those in the most insecure employment circumstances (the self-employed, gig workers, or those holding multiple jobs) are typically entirely ineligible for benefits. In 2019, 64% of unemployment compensation went to families with incomes above the median.
UI benefits provide an implicit subsidy for firms to hire and fire workers in line with seasonal fluctuations in demand. Indeed, most laid off workers are subsequently rehired by the same employer. States attempt to deter this by adjusting employers’ UI payroll taxes in line with their past claims; but doing so concentrates the burden on businesses in declining industries.
Income-contingent loans would be better suited to assisting those temporarily pinched. By maintaining personal responsibility over time, these could allow unemployment assistance to be made more broadly available to those in the greatest need, without deterring employment, imposing taxes on businesses, or encouraging claims by those who can provide for themselves.
A new Manhattan Institute report recommends that the current patchwork of state UI benefits and their associated taxes should be replaced by a new national system. This should allow unemployed workers to claim weekly benefits worth 50% of their average weekly income for the previous two tax years, up to $500, for up to six months – an amount similar to their Social Security payroll tax contributions over the previous two years. Households claiming such benefits should subsequently be subject to an additional 2% income tax, until they have paid back whatever assistance they have claimed.
Such a system would greatly expand the availability of funds to workers in the most insecure employment circumstances. But it would also cut out the bulk of payments to workers with the means to privately absorb income shocks – allowing the ramshackle present structure of UI taxes and bureaucracy to be eliminated.
Chris Pope is a senior fellow at the Manhattan Institute.
