A report released today by the Center for State Policy Analysis (cSPA) at Tufts University’s Tisch College describes a range of evidence-based options for fixing Massachusetts’ troubled unemployment insurance (UI) system.
Throughout the COVID-19 crisis, unemployment insurance has provided much-needed income to laid-off workers and bolstered the state’s economic recovery. However, because Massachusetts didn’t set aside enough money to cover these benefits when economic times were good, it has borrowed over $2 billion from the federal government-a substantial debt that will ultimately need to be repaid by Massachusetts businesses.
Without some fundamental fixes to the state’s unemployment insurance program, it will be hard to break this cycle of underfunding and costly borrowing.
Findings from the report include:
- Without legislative action, UI tax rates on employers are set to increase this year. Now may not be the optimal time to raise rates, given the ongoing struggles of many Massachusetts businesses.
- A short-term freeze in UI tax rates could be paired with longer term reforms aimed at building up reserves during good economic times, such as automatic tax increases when unemployment is low.
- While unemployment benefits are designed to keep up with wages, taxes are not; over time the needs of the system tend to outstrip contributions. Technical fixes could make a big difference, including indexing the taxable wage base-a shift that would also limit the degree to which small, low-wage businesses subsidize large ones.
- Adding a tax on employees – as is done for Social Security and Medicare – could generate much-needed funding.
- Massachusetts offers some UI benefits that seem out of line with the rest of the nation. For instance, Massachusetts is the only state that provides support for more than 26 weeks, and its system is open to workers with relatively little recent work history. Despite these provisions, typical benefits in Massachusetts follow the broad rule of thumb that unemployment insurance should replace about half of lost wages.
- Businesses with a history of layoffs pay higher UI tax rates. However, the maximum tax rates may still be too low to ensure that all businesses really pay their fair share.
“Swift action is needed to address the debt Massachusetts has accrued,” said Evan Horowitz, executive director of cSPA. “But now is also a good time for broader fixes, so that the state doesn’t keep falling into this same hole. And since unemployment insurance is a state-federal partnership, there’s lots of research and experimentation around the country that can guide the Commonwealth towards a better-functioning program.”
cSPA provides expert, nonpartisan analysis of legislative proposals and ballot questions in Massachusetts. It is governed by Tufts University and guided by a bipartisan advisory group. cSPA is largely funded by Tisch College; it also has a diverse group of smaller funding sources from across the political spectrum. These funders have no involvement in cSPA’s research.