Gov. Gina M. Raimondo's fiscal 2017 budget plan includes several proposals geared specifically toward creating jobs and improving the overall economic climate of our state. Included in this was what seems like a rather innocuous item, a reduction in unemployment-insurance taxes.
Of all her proposals, this was the only one not to receive any discussion, as it seems like something simple and very easy to implement without any negative consequences. While I won't argue that this is simple to implement, two things immediately came to mind upon my hearing about this measure: actuarial soundness and timing.
Let me state from the outset, what I am writing is not in any way meant to sound an alarm. If anything, what I am detailing is a somewhat minor concern at this point. Nonetheless, it is something that needs to be stated so that hopefully we will more fully consider the full range of what is involved with any such changes in the future.
If we were to put reductions in unemployment taxes into a historical context, we would have to say "been there, done that." We went down this road in the 1990s, adopting a series of measures that reduced both the tax rates and the taxable wage base for unemployment insurance. What was not understood at that time was that by doing this we inadvertently set into motion a set of potential actions that could eventually more than nullify any beneficial effects of the decreases in the burden of unemployment insurance.
There is a trust fund for unemployment insurance. Payments from employers, presumably based on their layoff experience, go into that fund and ultimately provide the money with which to pay benefits (obviously not those paid by the federal government).
While it would appear relatively simple to arbitrarily lower the unemployment-insurance tax rates or to reduce the taxable wage base, because these ultimately impact the soundness of a funding source, namely the trust fund, it is necessary to consider a question that I have almost never seen explicitly taken into account for as long as I have lived in Rhode Island: Is this change actuarially sound?
Because the recent changes are relatively minor in magnitude, I don't foresee any meaningful damage occurring to the trust fund as the result of their passage.
In the future, we must avoid the temptation to arbitrarily put forth similar changes. This brings me to a second point – timing.
The proposed decreases in unemployment-insurance taxes are occurring at precisely the time that our state's economy is slowing, as it has been for several months now, based on my Current Conditions Index and reduced national economic momentum. So, while we're not likely to see any major negatives emerge from this action, the fact that our elected officials are so willing to embrace it at exactly the wrong time, and absent any understanding of the need to consider its actuarial soundness, can potentially lead us down to the path we were forced into during the last recession. In order to re-establish the soundness of our trust fund, which if you recall became insolvent, we were ultimately forced to raise both unemployment taxes and the taxable wage base during the worst of economic times – the Great Recession. Not only did this exacerbate the economic downdraft Rhode Island was experiencing, it lengthened the duration of the labor-market declines we experienced as well.
So, in the coming months and years, we must avoid the temptation to make any changes to unemployment-insurance taxes without first investigating both the timing and actuarial soundness of the proposed actions.
The problem for this state, however, is that implementing my recommendation requires that we institutionalize due diligence – something we virtually never undertake here. Perhaps that would be the far more critical and strategic change for our state's economy. •
Leonard Lardaro is a professor of economics at the University of Rhode Island.