Unemployment Insurance Stimulus Funds: Boon for Texas or Taxes “To Infinity and Beyond”

by James Aalan Bernsen
Texas Republic News

Legislators from both sides of the aisle squared off in a debate over the controversial unemployment insurance stimulus funds recently rejected by Gov. Rick Perry.

Perry rejected the $550 million in funds based on fears that they would encumber businesses in the Lone Star State for years to come with unnecessary tax burdens. Opponents say he overstates the case and rejected the money for political expediency.

Thursday, the Texas Public Policy Foundation held a policy primer on the issue featuring a debate between three legislators. Republicans Kelly Hancock of Fort Worth and Dan Gattis of Georgetown squared off with Austin Democrat Mark Strama on the issue. Another Democrat was scheduled to be on the panel, but had a last-minute change of schedule.

(To hear the full audio of the Policy Primer, click here.)

This is no “Toy Story”

Hancock led off the discussion with his experiences as a small business owner in Tarrant County. He said what concerned him both as a businessman and a legislator, was the issue of changing state law and incurring long-term harm to businesses.

“Unlike our businessman where I had to go borrow a lump sum of money up front, so that I could make more money in the end, unemployment insurance for us actually does the opposite,” Hancock said. “Rather than increasing the revenue long term, it increases the expense side long-term.”

Hancock said that the effect to businesses in the short term was minor, but became a serious concern long-term, and would give us tax increases – to use a phrase from the movie Toy Story – “to infinity and beyond.”

Hancock said that the current recession is part of a business cycle that comes and goes, and the issue of unemployment insurance always arises. He pointed to 2002, when the federal government gave states a loan to cover unemployment costs.

“This is not unique, we’ve been through this before,” Hancock said. “The only thing that’d different is that the Feds are now using it to attempt to enact legislation that we’ve denied as a state. Now, if you don’t believe in the 10th Amendment, that’s fine, but I happen to believe in the 10th Amendment and think we should be in charge of our own state policies.”

Hancock, using statistics from the Texas Workforce Commission, said that not accepting funds is actually a “better scenario” for business than accepting them.

“What this decision boils down to is what your vision is...” Hancock said. “It takes a little work to look beyond the short-term impact of these funds on the State of Texas.”

Hancock said that beyond the costs to business was the whole issue of whether Texas controlled its own laws.

“This time, they’re taking our money, holding it and saying, ‘I know that if you’ve never passed these bills before. I know that you’ve looked at doing this. But we think you’re wrong, Texas, and you should do it our way.’ I happen not to agree with that,” he said.

The Counter Argument – Taking the Funds

Rep. Mark Strama said that the decision on whether or not to take the funds should be fact-based, not ideologically-based. The difficulty, he said, is making a decision when “the facts are all over the map.” Citing the same Workforce Commission study that Hancock did, Strama instead focused on the front of the curve – the near-term costs.

“What’s best for the economy and the people in Texas, both in the short and long term,” he asked. Strama said that as a businessman, he is more concerned with his near-term taxes than his taxes 10 years from now.

He made the case that not accepting the funds was equivalent to a 20 percent tax increase on business in the short term.

“While those look like small numbers, the effect on the taxpayer can be more substantial than it appears,” he said.

“The effect of taking the money is to reduce the tax burden on businesses during this recession, and to increase it – by a lesser amount – than the reduction we would get during the recession,” Strama said. “So that’s the choice.”

Hancock and Gattis, while agreeing with Strama’s point, noted that the short-term was a small period, whereas the long-term was – to use Hancock’s phrase “infinity and beyond.”

Changes in Law

What the federal government is requiring of Texas in exchange for taking the stimulus funds for unemployment insurance (the strings attached):

1. Alternative Base Pay. This changes the quarters used to determine eligibility for unemployment insurance. Proponents of the legislation argue that this is essentially modernizing the system, since the reason for using the old system was because of slow reporting. Opponents say that it’s a burden on business and doesn’t give an accurate view of the situation.

2. The law would also require changes to eligibility. Although there is some flexibility in the legislation on which eligibility criteria the state can accept, Texas must accept at least two of them:

a. Current law already covers people who leave work for compelling family reason: People with a sick child or spouse. The new federal law would expand that to parents

b. Current law covers people whose spouses leave their jobs to relocate to another area, but only after a six-week period in which they can look for work. The new law would cover them immediately.

c. The new law would require Texas to cover part-time workers. This is the majority of the costs, estimated at $30 million to the state a year.

Critics of the latter part say that such changes are the “camel’s nose under the tent” and worry that ultimately, this could be extended further.

Like a big “payday loan”

Rep. Gattis argued that the policy and fiscal reasons for not taking the stimulus funds were compelling. Although the federal government now says that if states pass these changes in law, they will have the right to go back and change them in the future. Strama, who supports the changes, admitted that that would never happen. Gattis agreed.

“What are we looking at?” Gattis said. “We’re looking at a big payday loan. That’s what we have.

“I don’t think anybody in this room will fall for the proposition of ‘I will give you $555 dollars today if you will give me $75 dollars a day from here to eternity,” he said. “Because that’s the basic proposition that’s been placed upon us.”

Gattis agreed with Strama’s point that the relatively minor change in tax rates would be large for businesses. But he pointed out that the same is true of the long-term, not just the short-term costs. That, he said, is bad for business, and hence, bad for the unemployment situation.

“I think the best salvation for unemployment is a job,” he said. “That’s what matters...And when you increase the costs on businesses, that’s what you decrease is the opportunity for jobs.”

Gattis dismissed the study by a liberal think tank which claimed that the money would stimulate the economy because it was new money.

“The thought process is that there’s some money tree somewhere in the federal government that this money is coming into our state from another place,” he said. “Why do I say that? The only way that the federal government or the state government can put money into a system that has an economic impact is to take it from somebody else.”

The legislature will debate the stimulus funds this session and could pass legislation to accept the funds despite Perry’s decision, though there is a strong likelihood that such action would be unconstitutional, since it violates the 10th Amendment to the constitution.

Regardless of whether Texas takes the additional money, it still has its existing unemployment insurance funds, and due to a better-than-the-nation economy, will not see as large of a need as other states. Even if the state took the federal money, Hancock pointed out that $550 million sounds like a lot, but would only cover the state’s unemployment costs for eight weeks.