Thursday, October 19, 2006

Taking Credit Where No Credit's Due

On Monday, Maryland Governor Bob Ehrlich's office issued a press release trumpeting "Governor Ehrlich Cuts Unemployment Insurance Taxes by $95 Million--Millions in Reduced Taxes Go to Maryland Employers." In other words, the Governor implied that he engineered a tax decrease.

He didn't.

To understand what actually occured, one has to know a little bit about unemployment insurance and the Maryland Unemployment Insurance Trust ("UIT").

Unemployment insurance is funded by a payroll tax. The tax is earmarked for a fund, the UIT. Financial demands on the UIT increase when unemployment rises and decrease when it falls. During recessionary periods, when unemployment is high, these demands threaten the solvency of the UIT.

In order to avoid a situation where the UIT became exhausted and could not pay unemployment insurance benefits, the General Assembly enacted a supplementary surtax that kicked in whenever the reserves in the UIT fell below a designated level. This determination was made every September 30. If on that date the reserves had fallen below 4.7 percent of the previous year's state-wide taxable wages, the surtax was triggered. The surtax applied to wages paid beginning in January of the following year. Due to sluggish labor market growth, the surtax was in effect for 2004 and 2005.

Maryland's method of funding the UIT had been criticized for a number of years. Among the criticisms was the fact that the surtax was triggered during times when the labor markets were under the greatest pressure. Because the surtax raised the cost of labor, it created a disincentive to hiring and wages at a time when tax incentives should have been pulling in the opposite direction. See here.

In 2003, a special task force was created to revise the way the UIT was funded. As a consequence of that task force's efforts, a comprehensive change in the funding mechanism was enacted by the General Assembly, Ch. 169 Laws of Maryland, 2005. That statute established a single experienced tax rate system to replace the previous experienced rates and flat-rate surcharge system. Six tax rate tables were established. The table used for a particular year now depends on the UIT balance from the preceding September 30 as a percentage of total taxable wages. The rate tables can be found here.

Gov. Ehrlich did not cut taxes on September 30. What actually took place was that the Division of Unemployment Insurance followed the mechanical procedure that had been mandated by Ch. 169 as enacted by the General Assembly in 2005. When it utilized this mandated formula, employers' were required to make unemployment insurance contributions based upon a lower rate table. The change in the formula used was due to the improvement in the labor market as the country came out of the recession: more money flowed into the UIT because of the increase in employment due to the (shallow) recovery and unemployment rates fell slightly, reducing demands on the fund.

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