New State Taxes Forcing Employers to Reconsider Hiring

The United States should contract a few states heading into what should be a rough 2011 season. Baseball played around with the idea back in 2001, hoping to eliminate two small market teams like the Montreal Expos and the Florida Marlins in the hopes of shoring up the Leagues’ finances. “It makes no sense for Major League Baseball to be in markets that generate insufficient local revenues to justify the investment in the franchise,” Commissioner Bud Selig said. “This shows we’re committed to solving our problems.”

The United States faces a similar problem. More than a few of our states are failing, in the words of Bud Selig, to generate sufficient revenues. During the economic boom years they spent taxpayer money at a dizzying rate. They gave more generous public sector pensions, they expanded the size of government, and they spent lavishly on existing programs. When the economy crashed, the states fiscal frivolity reared its ugly head. The unsustainable spending was finally uncovered. Now, states like California and Illinois are in deep debt, with no reasonable prospect for escape.

Rather than come to grips with their problems, many states continued, and even expanded, their deficit spending habit during the recession. One of the main problems is state spending on unemployment insurance benefits. The argument here is not against the existence of benefits, it is against the notion that the state governments didn’t attempt to find and cut other spending to make the insurance program revenue neutral.

These indebted states have had to borrow $41 billion from the federal government in an attempt to continue their unemployment insurance fund. Now they are turning to higher payroll taxes in an attempt to pay off their debt. As reported by the Wall Street Journal, “A National Employment Law Project analysis found 41 states increased unemployment-insurance payroll taxes this year by an average of nearly 33.9%. The largest was a 168.5%.

And if states’ appear unwilling, the federal government is right behind them in the collection line. According to Sara Murray of the Wall Street Journal,

In certain circumstances, Washington will increase its tax on companies in states that aren’t repaying loans from Washington. Employers in as many as 26 states will face tax increases of between $21 and $84 per employee per year if their state governments don’t repay Washington by November 2011. Employers in Michigan are already paying the added fee.

A payroll tax is a tax that an employer is required to pay on behalf of an employee. Take Social Security as an example. A certain percentage of an employee’s paycheck is withheld to pay for Social Security. The employer also pays into Social Security for its workers, having to match the amount that is withheld from the employee.

When deciding when to hire an employer must take into account the total cost of an additional employee. This includes wages, but it also includes things such as healthcare and payroll tax, which are viewed the same as wages through the eyes of an employer. The ultimate result then of higher payroll taxes is an increase in the cost of an employee. This in turn, discourages an employer from hiring additional workers.

The sad irony of this situation is that in an attempt to help the unemployed by providing benefits, they are preventing employers from hiring. Such a situation could have been completely avoided had our states realized their unsustainable spending levels. Although they certainly could not have been expected to predict the depth and length of the current recession, many states were in debt long before the economic fall took place. Rather than the small, dynamic, and efficient government that is needed to confront the problem, states were big, clunky, and already so laden with debt that they could not afford the unemployment insurance necessary to help their citizens.

Having proved themselves unable to balance their books, it’s time we take a page out of the MLB playbook and contract them. As Commissioner Selig said, “This [would] show we’re committed to solving our problems.” Okay, so this may not be a realistic option, but we can at least demand that in the future our state governments run a fiscally sustainable course. After all, we don’t have a state like the Yankees who can bail everyone else out.

by Brandon Greife, Political Director of the College Republican National Committee