RALEIGH — A top-to-bottom makeover of the state’s unemployment system took a major step forward Tuesday when the Republican-backed bill won preliminary approval in the Senate by a 36-13 margin.

The measure, which was approved by the House last week over the objections of Democrats who complain it hurts jobless workers by significantly cutting their benefits, is scheduled to get its final vote by the Senate on Wednesday. Gov. Pat McCrory has said he will sign it into law.

Backed by the politically potent N.C. Chamber, the bill was inspired by the $2.5 billion the state owes the federal government, money it began borrowing to cover the first 26 weeks of jobless benefits when unemployment soared during the recession. The state continues to borrow money, about $25 million a week, to cover those benefits.

That debt has triggered higher federal unemployment taxes for businesses, which are rising at a rate of $21 per employee each year until the debt is erased. Individuals don’t pay unemployment taxes; businesses pay both federal and state unemployment taxes.

The bill would accelerate paying off the debt by slightly raising the state unemployment taxes for most businesses, adding to the pool of employers that pay into the state unemployment trust fund and significantly cutting benefits for workers.

Republicans portray the bill as necessary to prevent “deadbeats” from taking advantage of unemployment benefits that are higher than surrounding states and to minimize the escalation of the unemployment taxes businesses pay. They say those higher taxes are hurting the private sector’s ability to create jobs and are a deterrent to companies seeking to relocate to North Carolina.

“We surely don’t want ... to add to the unemployment rate by having them let go some of their employees to pay for the tax,” Sen. Bob Rucho, R-Mecklenburg County, said during Tuesday’s debate.

Advocates for the poor complain

Democrats and advocacy groups for the poor counter that the bill’s formula for paying back the debt places the brunt of the burden on jobless workers already struggling to make ends meet. They also contend that the current benefits aren’t out of line with the national average and that cutting them will hurt the state’s economy when the unemployed can’t pay their bills.

“I have reached the conclusion that there are those in the state that don’t want people to have these benefits,” said Senate Minority Leader Martin Nesbitt.

There has been no middle ground where the two sides were willing to compromise. On Tuesday, Democrats offered five amendments, four of which were defeated and one which was withdrawn by its sponsor, Sen. Floyd McKissick of Durham.

“I can read the handwriting on the wall,” McKissick said

Among other things, the amendments would have lessened the reduction in unemployment benefits and restored benefits to their current level after the federal debt is repaid. The sponsor of the latter amendment, Sen. Mike Woodard of Durham, noted that employers’ federal unemployment taxes will revert to lower prerecession levels once the debt is repaid, but the impact on the jobless would be permanent.

“We’ve dug ourselves into a hole and we must climb out,” Woodward said. “But please, please don’t leave our unemployed workers down there when the rest of us get out.”

‘Simply unconscionable’

The bill also will cost workers’ extended federal benefits that kick in after the initial 26 weeks of unemployment. A new federal law requires states to maintain weekly benefit amounts to receive the federal money. One of the amendments rejected Tuesday would have delayed the state cuts until Jan. 1 to preserve the federal benefits.

North Carolina would become the first state in the nation to lose federal emergency benefits, according to the National Employment Law Project.

“Roughly one in 10 North Carolinians is still unemployed, and the state’s recovery remains fragile,” Christine Owens, NELP’s executive director, said in a statement. “Refusing available aid under these circumstances is simply unconscionable.”

North Carolina’s seasonally adjusted unemployment rate of 9.2 percent is fifth-highest in the nation.

GOP on tax increase

Some Republican senators said they were reluctantly voting in favor of the bill because it imposes higher state unemployment taxes on businesses – in addition to the higher federal taxes they must pay.

Sen. Tommy Tucker of Union County, a small-business owner, noted, “I’m going to have to vote for this tax increase on my business, and I do it reluctantly.”

House Speaker Thom Tillis, R-Mecklenburg County, was asked Tuesday if members of the Republican caucus raised concerns about raising taxes when some members have pledged not to support tax hikes.

Tillis replied that groups such as the N.C. Chamber, local chambers of commerce and the National Federation of Independent Businesses, were in favor of the bill and that even the group pushing the no-tax-hike pledge, Grover Norquist’s Americans for Tax Reform, doesn’t see the bill as inconsistent with the pledge.

“They don’t view that as a tax increase if you maintain or reduce the overall tax burden on North Carolinians,” Tillis said. “That’s the only way you get out of this cycle.”

McCrory: ‘Very difficult’

McCrory told an audience of about 1,000 people at the Emerging Issues Forum luncheon at the Raleigh Convention Center that his decision to support the bill was “very difficult.”

“I am firmly convinced that if you don’t pay off your credit card, it is going to cost everyone more money,” McCrory said of the state’s debt and the higher unemployment taxes for business that it has spawned. “It is going to cost us jobs and it’s going impact services of those people who need those unemployment checks now more than ever.”

Staff writers Craig Jarvis and Rob Christensen contributed to this story.

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