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Rising unemployment taxes could hinder small biz hiring

Associated Press | 11/25/2009, 4:31 a.m.

Federal law requires states to build up unemployment insurance trust funds in good times so they can pay benefits during downturns. The idea is to avoid having to raise taxes or cut benefits in a recession.

But the severity of this recession has bankrupted many states’ trust funds and forced them to borrow from the federal government. States eventually must pay back the loans. Otherwise, the federal government can raise taxes on their businesses.

The tax increases will have “a small, negative effect on hiring” because they will raise employers’ costs, said Wayne Vroman, an economist at the liberal Urban Institute.

Contributing to the problem is that many states cut their unemployment taxes earlier this decade when the economy was healthier. That left them unprepared for the waves of layoffs that began last fall. Some experts say business groups pushed for the cuts and set the stage for tax increases.

States have been swamped by a jump in recipients, from 2.8 million in May 2008 to nearly 9 million now.

The federal government is paying for about 4 million of those beneficiaries. These people exhausted the 26 weeks states typically provide and are receiving extended federal benefits. The unemployed can get up to 73 weeks of extra aid, for a total of 99 weeks, the longest extension on record.

AP Writers Deanna Martin in Indianapolis, Bill Kazcor in Tallahassee, Mark Niesse in Honolulu, Melinda Deslatte in Baton Rouge, Jim Davenport in Columbia contributed to this report.

(Associated Press)