Business/Economy, Coronavirus, Exclusives, Joshua Sharf, Uncategorized

Sharf: Unemployment insurance rules a drag on economic recovery

Colorado’s economy, as measured by employment, has been among the hardest-hit in the country by the restrictions imposed by governments in response to the coronavirus.  Now, the state’s Unemployment Insurance rules may make recovery even harder.

According to Wallet Hub’s weekly survey, Colorado workers have been among those suffering the most from unemployment since Governor Polis imposed the coronavirus state of emergency.  The raw November unemployment rate itself isn’t awful, although at 6.2% and #34 in the country, it’s nothing to write home about.  But it’s 158% higher than it was in November of 2019, and 114% higher than it was in January of 2020, both good for 4th worst nationally.  And its continued unemployment claims are 2.8 times higher in November 2020 than in November 2019, for a rank of 40.

It’s reasonable enough to argue that Colorado was starting from a better position than most states.  However, many states with lower current unemployment rates also have recovered more.

In part that may be because of Colorado’s Unemployment Insurance rules, which the Tax Foundation rated as the 43rd most-damaging in the country in 2020.  Things have only improved slightly in 2021, with the state rising to 41st worst.

The bulk of that rating comes from the highest possible rate from the least-favorable schedule, 10.39%, higher than all but three states: Maryland (13.5%), Massachusetts (18.55%), and Wisconsin (10.70%).  In addition, the minimum rate on the most favorable schedule, the least that an employer can pay, is 0.51%, higher than all but Alaska (1.00%) and Massachusetts (0.56%).  Taken together, these two brackets mean that Colorado employers face both a higher ceiling and a higher floor than nearly all other states, raising the cost of hiring new employees.

Colorado’s Wage Base, the salary on which the unemployment insurance payment is assessed, is right in the middle of the pack, at $13,600.  However, that number is scheduled to start rising in 2022, to $30,600 by 2026, effectively increasing the tax by 125% in 5 years.  If other states leave theirs in place, Colorado will have the 11th highest wage base in the country.

As in 2008/2009, the Unemployment Insurance Fund has borrowed money from the federal government, which it will have to repay.  In addition to increasing the wage base, Senate Bill 20-207 ensures that there will be no surcharge in 2021 or 2022.  The fund will also not charge employers for COVID-19 related claims.

Despite that, the rate for new employers entering the system in 2021 will be significantly higher for construction and trades.  Businesses in the trades will jump 70% from 1.70% to 2.91%, heavy construction rises from 5.94% to 7.74%, and general construction rises from 1.70% to 2.07%.  Even if there are no further increases, combining the rate increase with the wage base increase means that a new heavy construction business in 2022 will pay 62% per employee more than a similar entrant did in 2020, and new business in the trades will pay 114% more.

The effects of UI are further aggravated by the ongoing solvency tax, and the surtax still being levied to repay the previous federal loan, and the one expected to be levied to repay the new federal loan from this recession, something 17 other states have.

Taken together, the net effect of Colorado’s unemployment insurance structure will be to retard job growth, even as the state has suffered some of the greatest job losses in the country, on a percentage basis.

Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.

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