Unemployment Benefits Extension & The Debate Over Cost

The White House wants to extend unemployment benefits, but Republicans say the federal deficit can't bear the $33 billion cost. Before they will agree to reauthorize benefits, Republicans are demanding that the spending be offset with cuts from another part of the budget. However, Democrats are strictly opposed to this as well as GOP proposals to pay for benefits by using money from the 2009 stimulus bill.

The 2.5 million long-term unemployed citizens, who no longer receive benefits checks, are desperate for Congress to act quickly and extend emergency insurance rather than continue the bipartisan debate.

The debate on how to pay for the benefits is complicated however. Since the 1950s, to fight recessions Congress has offered federally-funded benefits to help people who can't find work before using state benefits.

Democrats argue that because Congress has never offset the cost of the benefits, doing so now would void the stimulative effect of giving money to people who immediately spend it, and it would threaten unemployment insurance in the future.

This assertion has been mostly unchallenged. However, a few Republicans say Democrats are wrong about offsetting benefits and wrong about what has been done historically.

Congress has offset the cost of unemployment benefits, but Congress has never substantially cut spending elsewhere in the budget to fully pay for them as Republicans now want to do.

The Huffington Post reported that in 1991, then President GeorgeGeorge W. BushBush signed a bill for 13 additional weeks of jobless benefits at a cost of $5.5 billion which was fully offset with tax hikes (e.g. financed from higher corporate estimated tax payments, increased taxes on lump-sum pension distributions and a one-year elimination of the personal exemption for high-income taxpayers).

And in November 2009, additional benefits were offered and the cost was offset by an increased in the federal unemployment payroll tax. President Obama said at the time that it was fully paid for (i.e. not add to the deficit) so it was fiscally responsible. However, subsequent reauthorizations later were labeled "emergency spending" and not subject to pay-as-you-go rules.

Unemployment insurance are indeed benefits financed through federal and state payroll taxes (FUTA and SUTA). During recessions, Congress gives the unemployed additional weeks of benefits and the federal government pays half the cost. States pay the other half and can borrow from the federal Unemployment Trust Fund if needed. When the economy improves, states are supposed to replenish their own trust funds and repay the federal government by collecting unemployment payroll taxes.

"Really what is going on here is that there are two ways to understand 'paid for.' Unemployment Insurance in the real world is 'paid for' by federal and state payroll taxes over a business cycle," wrote Rick McHugh, a staff attorney with the National Employment Law Project. "In the federal budget world, this does not count as 'paid for,' even if in the real world those benefits are going to actually get paid for by UI payroll taxes."

Congress has reportedly used FUTA surtaxes to offset the cost of benefits during recessions in some decades, but no offsets in others.

"UI extensions have never been paid for with offsetting domestic spending cuts, even if there have been times when it was 'paid for' in the budgetary sense by some sort of FUTA surtax extension or other tax code changes," wrote McHugh.

Republicans are not in favor of raising taxes to pay for unemployment benefits. The cost of benefits could offset the deficit impact if Republicans would agree to not reauthorizing the soon-to-expire tax cuts for the wealthy, which would cost an estimated $678 billion over ten years. And hurting the jobless is not a smart way to reduce the deficit. Republican have also argued that extended benefits make people lazy.

Congress has never allowed extended unemployment benefits to lapse when the unemployment rate in the U.S. was above 7.2 percent. On Tuesday, the Senate will vote again on jobless aid.