State bailout on unemployment insurance?

The extensions of unemployment benefits forced states to borrow money from the federal government to keep from making their own budget crises even worse over the last two years.  Now the Obama administration wants to allow states to suspend interest payments for the next two years to keep them from raising taxes on businesses that would strangle the economy.  But the timing of this move, and Barack Obama’s plans to recoup the money, should have people leery about this proposal:

States that have borrowed billions of dollars from the federal government to cover the soaring cost of unemployment benefits would get immediate relief from the Obama administration under a plan to suspend interest payments for the next two years.

The proposal, which will be included in the budget request President Obama will send to Congress next week, would allow states to avoid raising taxes on employers to cover the payments – which are projected to total $3.6 billion through 2012, according to independent estimates.

Obama also would suspend automatic hikes in the federal unemployment tax scheduled to hit employers in nearly half of the states by the end of next year.

So far, so good, right?  States can put off the interest payments for a couple of years, and businesses already facing tough times won’t have to worry about higher tax burdens in a recessionary environment.  However, you know there’s a big but coming … right?  Right:

But starting in 2014, Obama would target companies for sharply higher payroll taxes to help states replenish their depleted unemployment funds and repay their debts to Washington.

The actual mechanism will be a raise in the taxable base rate for employers on payroll tax for unemployment insurance, which the federal government sets at a minimum of $7,000.  That would increase to $15,000 in states that have become delinquent in repayments, which would allow the states to reap a larger windfall from employers — at least those states that don’t already have a higher taxable base already.

Supposedly, the federal government would lower its own payroll-tax rate to make this closer to revenue neutral for businesses.  But all that means is that the federal government is conducting a shell game to bail states out again, this time over a longer period.  That extra revenue would then promptly return to the federal government, but only after passing through the state bureaucracies first.  Why not just collect it directly, if that’s the end result anyway?  Wouldn’t that be more efficient?

Basically, this is a dodge to allow Obama to declare that he’s cutting business taxes while the overall impact on employers will be to increase their tax burden.  It also provides yet another back-door bailout to states that refuse to seriously address their budget chronic and structural budget problems.  And notably, it makes sure that the bill doesn’t come due until well after the 2012 election cycle.