NC jobless pay to cut employers’ taxes

January 18, 2014 

The N.C. Division of Employment Security is housed in a large, rambling building on a hill that was the former home of Raleigh’s Rex Hospital.

There are still elements of the old hospital. The doors spring outward as a visitor approaches as if opening for a gurney. Former patients’ rooms are now offices lining long corridors. The design seems odd for a government office building, but it is in its way appropriate. For it is here in these converted hospital halls that the state is treating the affliction of unemployment with the powerful but untested medicine of House Bill 4.

The legislation approved last year by the Republican-led General Assembly and signed by Gov. Pat McCrory imposed the nation’s sharpest reductions in unemployment benefits, cutting the maximum weekly payment from $535 to $350 and shrinking the period of eligibility to 12 to 20 weeks, instead of the former 26 weeks

The legislature cut the benefits to accelerate the payback of $2.5 billion North Carolina borrowed from the federal government to handle a big spike in unemployment during the Great Recession. As long as the state’s unemployment fund has debt, participating employers must pay higher amounts into it. Even with the surcharge, the payments aren’t onerous, but lawmakers made it a top priority to get relief to employers.

The legislature refused to delay the benefit cuts despite a federal warning that changes in unemployment coverage in 2013 would mean the immediate loss of federally funded benefits for the long-term unemployed. When HB 4 took effect on July 1, 70,000 unemployed North Carolinians immediately lost their benefits and another 100,000 lost out by the end of the year.

Those exclusions – North Carolina was the only state to change benefits and pay that price – were particularly cold-hearted, but they were only the beginning of the damage being done by cuts that weaken the economy in the name of helping businesses save on taxes.

Backers of HB 4 argue that the savings from an accelerated payback will help the state’s businesses compete, expand and create jobs. Maybe the tax reduction will spur jobs someday, but the prospect isn’t having that effect. Last year was the worst year for job creation in North Carolina since the Great Recession ended in June 2009. The size of the state’s labor force dropped by 2.5 percent last year even as the state’s population grew by 1 percent.

“Anytime your population is growing and the labor force is contracting, you’re moving in the wrong direction,” said Allan Freyer, a public policy analyst with the Budget & Tax Center, a project of the N.C. Justice Center.

The contraction of the labor force was caused largely by unemployed people who’ve given up looking for work and are no longer counted in the labor force. As the labor force shrinks, the unemployment rate typically goes down. North Carolina’s unemployment rate dropped 1.5 percentage points between July (8.9 percent) and November (7.4 percent).

Promoters of the draconian cuts claim that since the state cut back on “paying people not to work,” unemployment is going down. Indeed, Republicans nationally are pointing to North Carolina as a reason not to extend federal benefits to the long-term unemployed. You stop giving benefits, their argument goes, and the unemployed get off the couch and go get a job. This delusion runs so deep that there are rumblings that if Congress were to approve money for the extended benefits, North Carolina might not accept it. Why extend benefits when the reduced payments are driving down unemployment?

That’s not the reality. There are three unemployed people for every job opening in the state. If cutting off benefits drove the unemployed to get jobs, the number of people working in the state would be going up, but it’s not. The unemployed are simply being pushed out of sight and out of the economy that would be stronger if they could participate, however meagerly.

Meanwhile, back at the former hospital where this economic experiment on humans is being conducted, things are looking brighter for employers. The state has paid down almost $1 billion of what it owes the federal government and that the repayment rate is $100 million ahead of schedule.

DES Assistant Secretary Dale Folwell, a former Republican legislator, is trying to make the historically error-prone work of processing claims more efficient. That’s getting claims paid faster, but it doesn’t ease the pain of smaller and fewer payments.

Folwell said about 60 percent of the repayment comes from claimants getting less and 40 percent from a wider base of employers paying more. That ratio is especially unjust when the cause of the federal debt is considered. Democrats cut unemployment taxes in the 1990s and left the fund unprepared when the inevitable rainy day turned out to be a hurricane. Now those who enjoyed a tax holiday in the good times are getting bailed out extra fast during a sluggish recovery.

The increased taxes on business will go away when the debt is paid and a $1 billion endowment is established. But the shrunken benefits will endure until some future legislature with a better understanding of economics and more empathy for those who’ve lost their jobs decides to make the old Rex Hospital again a place dedicated to helping people recover.

Editorial page editor Ned Barnett can be reached at 919-829-4512, or at

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