Federal government to give states break on interest payments

February 9, 2011

We’ve talked a lot about the dismal fiscal situation faced by an increasing number of States – and the tough, but critical, choices many are beginning to make to get back on track. It appears there’s yet another layer to the story. We’ll withhold judgment on the wisdom of the proposal until we find out more, but we thought you should know the latest…

According to The New York Times, President Obama won’t ask states to repay the $1.3 trillion in interest owed for money they borrowed from the federal government to pay unemployment benefits.

Below are excerpts. Click here to read the full article.

President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans.

The administration is betting that employers will back the proposal, especially in states where their taxes would otherwise go up. Michigan, for instance, owes the federal government $3.7 billion it borrowed to pay unemployment benefits. Under current law the state would be forced to pay $117 million in interest to the federal government this fall, and the federal tax on employers would automatically step up each year to repay the debt.

Representative Dave Camp, Republican of Michigan, who is the chairman of the House Ways and Means Committee, dismissed the plan. “We need to reform our unemployment programs, but any plan that relies on more than doubling the tax base and then continuing to raise payroll taxes in perpetuity isn’t going anywhere in the House,” he said in a statement.

[However], Republicans in Congress might feel pressure [to support the plan] from their counterparts in statehouses around the country: states with Republican governors, including Florida, Indiana, New Jersey, Pennsylvania and Wisconsin, owe the federal government billions of dollars.

Iris J. Lav, a senior adviser at the Center on Budget and Policy Priorities…said that the unemployment system has “a constellation of problems that need to be solved.”

“The near-term problem is the economy is not yet O.K.,” she said. “And both the interest payments and the principal repayments are cutting into employers, and it makes great sense to postpone them. The larger question is how you get states to solvency.”

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