Fiscal Cliff Debate Puts Jobless Benefits at Risk

At the end of this year, unemployment benefits that were greatly expanded during the recession are set to expire unless Congress acts to extend them.
by , | December 3, 2012

For full coverage of the fiscal cliff's impact on states and localities, click here.

By Jake Grovum

Amid the fervor over the fiscal cliff in Washington, there’s one federal program also facing a Dec. 31, 2012 deadline that if allowed to pass could cost unemployed Americans thousands of dollars and deprive states of crucial federal funding that’s helped them weather the worst of the Great Recession.

At the end of this year, unemployment benefits that were greatly expanded during the recession are set to expire unless Congress acts to extend them. All told, more than $250 billion has been spent toward unemployment benefits over the past five years, according to the Congressional Budget Office (CBO). It’s estimated more than 2 million Americans are currently receiving the expanded benefits and the total cost reached $94 billion in the last fiscal year alone.

Now, though, the debate over extending the jobless benefits has become mired in negotiations over the fiscal cliff, the mix of spending cuts and tax increases set to take effect Jan. 1, 2013 to lower the federal deficit. The $30 billion price tag for extending the entirety of the expanded benefits is too costly, some deficit-wary lawmakers say. President Barack Obama included the provision in his initial offer to Republicans last week, which they quickly rejected.

The extended benefits allowed unemployed Americans to receive benefits far longer than they usually would have. At its longest, the benefits allowed for 99 weeks of unemployment, compared to just 26 weeks under normal circumstances.

As the recovery took hold, Congress has pared back the more generous benefits depending on a state’s unemployment rate. No state currently offers the full 99 weeks, but all offer some form of extended assistance.

But that could come to an abrupt end at the end of this month, and many worry both the economic benefits and the help they offer the unemployed are being lost in the fiscal cliff debate.

The benefit to the economy, even during the worst of the recession, has been significant. The program is seen as a better stimulus of demand for goods and services than many other initiatives, and the CBO says extending the current benefits for another year would boost the economy and create 300,000 jobs next year alone.

But the stakes are also substantial for states and their budgets. As part of the expanded program, the federal government paid for a significant part of the expansion. Normally a jointly funded state-federal initiative, the additional federal money freed states from having to rely on already-stretched unemployment insurance trust funds to help the unemployed.

Those trust funds are designed to cover unemployment benefits and ebb and flow with the economy. They comprise taxes on both employers and wages, and are meant to remain flush during a strong economy and be drawn down when unemployment spikes.

But they’ve been battered by the recession. States collectively are carrying more than $26 billion in debt and billions more in mounting interest, having borrowed more than $50 billion from Washington in recent years to offset cash-strapped funds. As Stateline previously reported, those debts have already forced many states to scale back benefits even as they continue to face high joblessness.

If the expanded benefits are allowed to expire, advocates warn, it would be not only a significant blow to the unemployed, but also would leave many states with decimated trust funds unable to offer benefits to help those still without a job.

What’s more, current law says states facing a deficit in their trust funds are required to repay that debt or raise taxes to make up the difference. There’s worry such a tax increase could dampen still-weak economic growth.

Faced with this scenario, Congress could enact a one-year “holiday” on both repayment and the required tax increases, something the CBO estimates would cost just $3 billion in the next fiscal year.

But while that would help states and defray some of the economic fallout of the expiring benefits, it wouldn’t save the unemployed currently relying on the expanded benefits. Meanwhile, just allowing those currently receiving benefits to continue into next year could cost as much as $14 billion, the CBO estimates.

Many advocates worry that ultimately, it will be the budgetary realities of the fiscal cliff and federal deficit that dictate what happens to the unemployment benefits rather than consideration of their effect on the jobless, state budgets and the broader economy.

Negotiations between the White House and congressional leaders are expected to continue well into this month as both sides work to avoid the fiscal cliff. How much attention the jobless benefits will received in the broader debate, though, is uncertain.

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