POLICY PAPER

 The Arizona Solution to Unemployment Insurance:

A state-based solution for adequate benefits and a solid trust fund

 October 5, 2020

 

 Dave Wells, Ph.D., Research Director

With assistance from Max Goshert, MA, Associate Director, Alex Tam, Research Associate, and James Cooper, Research Associate

Edited by Amy Pedotto, Executive Director

 

 

Executive Summary

Contrary to Governor Doug Ducey’s repeated assertion that “Arizona has done its part,” state public policy leaders have done nothing to address Arizona’s catastrophically inadequate unemployment benefits. Arizona has the opportunity to significantly change its poorly designed unemployment insurance (UI) program. The timing is ripe to improve benefits, as state regular UI benefits are mirrored in payments provided by federally-funded UI programs including Pandemic Unemployment Insurance (PUA), Pandemic Emergency Unemployment Compensation (PEUC) and Extended Benefits (EB).

If Arizona’s leaders adopt GCI’s recommendations put forward in this policy brief, the state’s unemployed workers will receive an additional $675 million in UI benefits paid for by federal programs. This move would generate a $1.6 billion net economic gain for the state and $107 million in state and local revenue.

In this policy brief, the Grand Canyon Institute (GCI) proposes a series of recommendations for UI benefits that are in line with most other states and recommendations for how Arizona’s UI trust fund can be sustainably financed to recover from the current economic crisis and to guarantee sufficient financing for future recessions.

If Arizona’s leaders adopt GCI’s recommendations put forward in this policy brief, the state’s unemployed workers will receive an additional $675 million in UI benefits paid for by federal programs. This move would generate a $1.6 billion net economic benefit for the state and $107 million in state and local revenue.

Acting immediately is critical, as unemployed people in Arizona are beginning to transfer from regular state UI benefits to federal programs at which point their benefit amounts will be locked in at the current rate, which is the second lowest in the nation. If state leaders elect not to act, now, the state will fail to maximize federal unemployment payments to Arizonans and place them at great risk if Congress does not provide a supplement, whereas unemployed workers in other states will receive significantly higher benefits through federal UI programs.

GCI acknowledges that there is a cost to these reforms however the return on investment — for the state’s 400,000 insured unemployed and the state’s ravaged economy — warrant adopting these changes now along with the proposed financing mechanisms that will ensure future financial sustainability of the state’s UI trust fund at modest expense to the state’s employers.

These recommendations are put forward in the context of a severe economic crisis that is even more unequal than usual, according to former Federal Reserve Board Chair Ben Bernanke. “The sectors most deeply affected by covid disproportionately employ women, minorities and lower-income workers.”

While recessions often have a greater impact on poor households, this one is doing so at a scale that is the worst in generations according to a Washington Post analysis. Across the nation, nearly half of lost jobs have been regained, yet several key demographic groups have recovered more slowly, including mothers of school-age children, Black men, Black women, Hispanic men, Asian Americans, and younger Americans (ages 25 to 34), and people without college degrees.[1]

A drop in consumer spending of 5.8% this year is driving Arizona’s economic downturn, with significant declines in business fixed investment, residential investment, and net exports as well.[2] Increasing UI benefits represents an important financial support to Arizona’s unemployed and a stabilizing force for the economy as a grapples with the impact of severely reduced spending.

 

 

Key Findings & Recommendations

• Immediately increasing Arizona’s unemployment insurance benefits will impact 400,000 people and leverage $420 million in federal funding as unemployed people exhaust their state UI benefits and transfer to federal UI programs. Importantly, a person’s benefit amount is locked in at the rate they are receiving when they transfer to the federal UI program, so the earlier benefits are increased the more people will be impacted as tens of thousands of people will be transferring from the state to federal UI program.
• GCI projects that by the end of 2021 the state’s UI trust fund will be in deficit by about $210 million and continuing to decline if the state government takes no action. GCI’s recommendations, at a cost of $600 million over a 15-month period, will ensure that Arizona’s UI trust fund achieves long-term sustainability.
• GCI provides recommendations to overhaul financing of Arizona’s UI trust fund to ensure that it can afford the proposed benefit increases as well as future sustainability during economic downturns, an issue faced during the current crisis. In anticipation of the UI trust fund going into deficit due to the pandemic, these reforms should see Arizona’s UI trust fund achieve a positive balance by 2023. Specifically, GCI’s recommendations include:
  • Expand the taxable wage base to $12,000 immediately, and increase it incrementally until it reaches 20 times the average weekly wage when certain triggers are met.
  • Establish a temporary employer surcharge of 0.1% of all employee wages (not just the taxable wage base to limit the impact on small businesses) that remains in place until the state repays its anticipated federal loans that will be necessary to replenish Arizona’s UI trust fund.
  • Establish a reducible employee tax of 0.1% on all employee wages (or $1, on every $1,000 earned), not just the taxable wage base, that would continue until Arizona’s anticipated federal UI loan is paid off and the UI trust fund reaches an average high-cost multiple of 1.0 at which point it would be gradually reduced to zero once the average high-cost multiple reaches 2.0.
  • Adopt a tax on contract/self-employed workers’ reported income to enable them to contribute to the UI trust fund and draw benefits, if needed.
• The long-term impact on employer costs is modest at an estimated average annual amount per employee of $300 in 2021, up from the 2010-2019 range of $148 – $209. State UI taxes paid by employers are currently less than 4% of all business taxes—among the lowest in the nation.
• Increasing UI benefit amounts according to GCI’s recommendations while leveraging federally-funded UI benefits will have the following economic impact:
  • Provide $675 million in federal funds, bringing in $1.6 billion in economic benefits at a cost of $600 million to the state,
  • Result in a net gain to the state of nearly $3 in overall growth per $1 invested arising from both added local spending and maximizing federally-funded Pandemic Emergency Unemployment Compensation (PEUC) and Extended Benefits (EB).
  • Generate $110 million in additional state and local tax revenue.
  • While difficult to calculate here, increasing the UI benefits of 400,000 Arizonans will also stave off financial hardships such as mortgage defaults, evictions, utility cut offs, and stress related to meeting a family’s daily needs.

^[1] Long, Heather, Andrew Van Dam, Alyssa Fowers, and Leslie Shapiro (2020), “The covid-19 recession is the most unequal in modern U.S. history,” Washington Post. Retrieved on September 30, 2020 from https://www.washingtonpost.com/graphics/2020/business/coronavirus-recession-equality/.

^[2] Hammond, George W., Ph.D. (2020), “Arizona’s 30-Year Outlook: Short-Run Trouble, Long-Run Growth: 3rd Quarter 2020 Arizona Economic Forecast,” University of Arizona Economic and Business Research Center. Retrieved on Sept. 30, 2020 from https://eller.arizona.edu/departments-research/centers-labs/economic-business-research/arizona-economic-outlook.