Why is Alexandria Ocasio-Cortez pushing to add even more benefits to Democrats’ shrinking $3.5 trillion spending plan? Part II

Yesterday I reviewed the recent demands by Rep. Alexandria Ocasio-Cortez (D-NY) and her liberal colleagues that unemployment insurance (UI) benefit expansions be included in Democrats’ still-evolving $3.5 trillion spending plan.

Today, let’s consider which states would be most affected by some of the significant benefit increases AOC and her colleagues would mandate across the country. That’s an important detail since individual states have since the 1930s determined key features of the UI system within their borders, including who qualifies, how big benefit checks are, and how long checks are paid. Those considerations drive state payroll tax rates, with more generous state benefits resulting in bigger payroll taxes on jobs that economists agree translate into lower wages for workers.

The policy AOC and her colleagues are promoting is reflected in legislation introduced earlier this week by Sen. Ron Wyden (D-OR), Chairman of the Senate Finance Committee. Here’s how a summary of Wyden’s legislation describes two key policies included in his bill, plus background behind each:

1. “Requires states to offer at least 26 weeks of unemployment compensation.”

Background: Most states currently offer up to 26 weeks of benefits per person. But longer durations are frequently dependent on how much the claimant worked prior to layoff or on an elevated unemployment rate in the state. Only 10 states currently offer a uniform 26 weeks of benefit checks to all recipients at all times, as the proposed federal policy would mandate on all 53 UI programs (that is, including DC, Puerto Rico, and the US Virgin Islands).

2. “Requires states to cover individuals who have at least $1,000 of covered wages in the high quarter and at least $1,500 in the base period.”

Background: States typically expect claimants to have minimum “covered wages” in four calendar quarters (known as the “base period”) prior to layoff to qualify for even the smallest UI checks. States set the amounts, but the principle is consistent with UI’s being reserved for those with a significant attachment to work, in contrast with welfare benefits typically paid to nonworkers. Such required minimum wages range widely, with several states expecting over $5,000 in base period wages to qualify (including Arizona at over $7,000) and others expecting less than $1,000.

As the table below displays, Wyden’s legislation would force 43 states to increase the duration of benefit checks to a flat 26 weeks for all recipients. It would also require 40 states to expand coverage to workers whose very low wages would not qualify them for UI today. In each case, most of the states forced to expand benefits are red states, but each policy would affect a significant number of blue states as well.

Source: Department of Labor description of monetary and nonmonetary eligibility conditions in current state laws.

Significantly, two-thirds of all states (34) would be forced to expand benefits and taxes both ways, including 21 red states and 13 blue states. The states experiencing that double hit include Arizona, home of Sen. Kyrsten Sinema (D-AZ). And West Virginia, home to Sen. Joe Manchin (D-WV), would be forced to cover more very low-wage workers. Both will no doubt hear from their governors and employers about the negative effects of these new benefit and tax hike mandates if they are included in the legislation.

The new federal mandates don’t stop there, as Wyden’s legislation also would require states to count more recent wages in determining eligibility for and the size of the benefit checks. It also requires all states to pay benefits to former full-time workers seeking only part-time work, which only a handful do today. As with the policies described above, those changes would increase benefit payouts to those with a more marginal attachment to work, converting UI increasingly into a welfare-style program for individuals with minimal prior and future attachment to the kind of full-time work needed to lift families out of poverty.

The policy hammer behind each of these mandates is a massive potential hike in federal payroll taxes. Specifically, failure to enforce any of these new benefit mandates would mean the current federal payroll tax of typically $42 per worker per year would zoom to $420 per worker — a 900 percent increase in states that don’t obey.

Naturally, no state will want to run afoul of such a massive federal tax hike on every job within its borders, so they will be forced to increase state payroll taxes to cover the cost of these most unwelcome new federal benefit mandates. With most state unemployment trust funds already insolvent and massive state payroll tax hikes already on the way to cover the cost of expanded benefit payouts during the pandemic, it’s hard to imagine a worse time for such new mandates to take effect.

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