KY faces big bill for unemployment benefits, which could mean a tax hike on businesses

01/28/2011 01:46 PM

By the end of September, Kentucky will have to make its first payment to the federal government for the $831 million it borrowed to cover benefits for unemployed Kentuckians. And it’s not yet clear where the state will get the money.

If the state can’t deliver, it could affect employers as the federal government will reduce unemployment tax credits they get by .3%.

The first interest payment is due Sept. 30 and is expected to be between $30 and $40 million.

And Kentucky is not alone. The recession has depleted most states’ unemployment trust funds that contain money collected through special taxes from businesses.

Unemployed workers are entitled to up to $415 a week for as many as 99 weeks. And unemployment swelled from low single-digits in Kentucky and most states to double digits for the last two years.

Kentucky’s unemployment rate was 10.3% in December.

In all, Kentucky has borrowed $831 million from the federal government, placing it in the middle of 30 states that have remaining loans to be paid.

The problem leaves Kentucky, and other states, with a few options, Workforce Development Commissioner Beth Brinly told cn|2 Politics. The first, which several states are lobbying for, would be to get a federal waiver on the interest payments that would delay payment or — better yet — completely forgive the interest.

The state could tap into its general fund to make the payment, but with Kentucky already struggling to balance its Medicaid budget this year and next, that’s unlikely, Brinly said.

If neither of those options work, the state would either have to require an extra tax on employers to make up the payments or risk those same employers losing a portion of their federal tax credits to help pay the debt.

So far, no decisions have been made, Brinly said. But she believes a federal waiver is a “viable option” for states, including Kentucky.

But help from Washington doesn’t appear likely any time soon.

“That proposal would face a steep, uphill battle given that the new Speaker of the House and Republican leadership have voted consistently against extending unemployment benefits for Americans trying to make ends meet and have pledged to make drastic across-the-board cuts to nearly every federal program,” said Trey Pollard, spokesman for U.S. Rep. John Yarmuth said in a statement to cn|2 Politics.

Pollard’s comments reflect the battle Congress had over unemployment benefits last year, when Republicans said they would only vote to send more money or extend benefits if money was found elsewhere to pay for it.

A spokesman for Republican Minority Leader Mitch McConnell said there was “nothing to report” on the issue when asked for comment, signaling that the U.S. Senate didn’t view a waiver as a priority right now.

And on the state level, many legislative leaders, including House Speaker Greg Stumbo, said they hadn’t been briefed on the issue of interest payments coming due and were unsure if it was the General Assembly’s role to help pay.

Brinly acknowledged that the remaining options — the federal government taking away part of the tax credits to business or the state increasing unemployment taxes — aren’t attractive to businesses. Those moves could divert money away from a company’s ability to hire, therefore hindering the chances to reduce the unemployment rate, she said.

According to a New York Times story, other states have turned to bonding or assessing extra taxes to pay their loans.

-Reporting and videos by Kenny Colston

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