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Feds bail out Texas after years of insolvent-level unemployment taxing

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Texas, a state that hates federal involvement so much that in addition to suing federal officials on a near-monthly basis, it built its own (faulty) power grid, is now taking a massive federal bailout for unemployment.

Texas House Speaker Dade Phelan and Lt. Gov. Dan Patrick announced last week they would put $7.2 billion from the Biden administration’s American Recovery Plan Act into paying back billions in loans the state took out from the U.S. Treasury — shifting the tax burden intended to be borne by Texas employers to taxpayers nationwide.

The state unemployment rates skyrocketed last spring because of the pandemic, climbing to nearly 13%. The state’s anemic coffers were quickly drained, and it began taking federal government loans. Then the federal government added additional monies on top through pandemic assistance for the unemployed. State and federal unemployment payments were more than $51 billion in Texas since the pandemic began.

The plan is to erase the state’s $5.9 billion in Title XII (unemployment) loans and add more than a billion to the unemployment trust fund. This nixes additional interest payments and allows the legislature and the Texas Workforce Commission — who oversees unemployment — to continue to avoid tough decisions about taxing appropriately. It allows the state legislature to continue on its business-friendly course, now at the expense of every other state.

“Texas has not had a solvent unemployment compensation trust fund since 1974. That's one of the worst in the nation,” said Jared Walczak, vice president of state projects at the Tax Foundation.

The state will take that history of insolvency and unlike past recessions avert higher taxes on its own businesses by diffusing it to include out-of-state businesses and people.

Big Tex at the State Fair of Texas in Dallas.
Big Tex at the State Fair of Texas in Dallas.

“Yeah, well, if they were really sort of so hot for state control, they would pay it off themselves,” said Wayne Vroman, an economist at the Urban Institute.

Every major recession in the past 25 years has sent low-business-tax Texas to Uncle Sam with its hand out to borrow. In 2010, the state sold around $2 billion in bonds to pay back its federal debt from Great Recession unemployment claims. It took about six years, and the state had to raise taxes on businesses. This is the first time the state has been allowed to use federal dollars to pay back federal loans — a robbing-Peter-to-pay...well, Peter, situation.

“You don't do fiscally responsible things and then Uncle Sam comes along and bails you out in recessions. And still with no acknowledgement, still have all this rhetoric about the importance of states rights,” said Vroman.

While Texas may be on of the longest-term serial offenders, the move still may be the best use of its ARPA funding.

“One of the most important one-time expenditures we could possibly do right now is to replenish these trust funds. So we can pay for benefits in the future,” Walczak said.

Not only does he think this is the best use, Walczak asked why more states haven’t already; they are all being charged interest on billions in loans.

The funds have limited use legally, but Walczak said legislators across the country are salivating over the potential for their pet projects. In Texas, the elected Republicans want to use some ARPA funds to alleviate property tax.

“By forcing states to choose between reducing taxes and potentially losing billions of dollars in federal funds, the federal government threatens the right of sovereign states to determine their own tax policy,” said Ken Paxton, Texas Attorney General, in a statement about supporting a lawsuit against the restrictions.

Of course, that isn’t exactly true. The state can use it for the things the people giving the money said it could be used for or not take it.

Texas is not alone in shirking its fiduciary duties around unemployment. California and New York both took out massive loans (more than Texas even) to cover their unemployment, along with many others. The total state indebtedness nationwide was in excess of $55 billion at one point. It shrank to $45 billion in September as states rushed to pay down balances before federal interest rates kicked in.

So far, $15 billion in federal CARES Act and ARPA dollars have been used to pay back federal loans around unemployment insurance already and ARPA had around $100 billion initially available for it. Economists expect more states to follow Texas and others’ leads by utilizing the fund.

Texas already repaid $1.2 billion and paid just shy of $9 million in interest on its remaining loan in September.

Economists supporting using the ARPA funds this way argue it breaks the cycle. It gives states that have endured 18 months of overwhelming unemployment the chance to — instead of having to raise taxes and use UI taxes to pay off past UI debt — build their reserves up to solvency. Even with the ARPA funds, it can only legally return the UI trust to where it was pre-pandemic — which Walczak said in Texas was about $4.5 billion off.

“So this is an important first step. But there's also a realignment that has to take place if Texas wants to build up this solvency for the next economic downturn,” he said.

Texas has to raise taxes in better times to ensure the recession times are covered, or cut benefits. Texas gives away more than the national average in weekly unemployment insurance.

The problem is that there is 40 years worth of evidence that won’t be the case in Texas and elsewhere. In the good years, these issues fade from memory. And in the bad ones — when the money is most needed — fragile businesses are struggling to function and oftentimes states forgo raising the taxes to not overburden them, as Texas and several states nationwide did this year.

What happens Next? 

“It's a mini step in the direction of a federal takeover,”
Wayne Vroman

If states owing loans to the Treasury for UI payments, what are called Title XII advances or loans, all pay it back with federal dollars there is fear more states will cut their businesses taxes creating a downward cycle of UI collection that leaves recession-level unemployment to be paid by the feds.

But if states essentially give up on ensuring even the minimum amount of money is there to pay their unemployed (as in Texas the past 40 years) then rely on taxpayers from other states to bail you out, then why trust states with the job?

“It's a mini step in the direction of a federal takeover,” said Vroman.

While on its face it may sound like hyperbole, consider that Texas paid out $13.3 billion in unemployment from when the pandemic began through Sept. 11. During that same time, new federal programs under both Republican and Democratic presidents paid out nearly three times that — $38 billion. If not a takeover — the feds have clearly overtaken the states already.

“Right now, it feels like we've gone that way,” said Walczak. That said he pointed to the extremes of the pandemic need as well outside the ordinary. The nationalization of the program would undoubtedly not be popular in Texas, which still hasn’t expanded Medicaid over concerns of federal usurpation.

It appears that the pandemic has allowed it to overlook the issue in the less-spotlighted arena of unemployment insurance.

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