Fiscal Policy

How the States Can Fight the Federal Incentives Encouraging Joblessness

Attendees at a job fair at Hembree Park in Roswell, Ga., May 13, 2021. (Chris Aluka Berry/Reuters)
How states can undo the economic damage done by Congress.

President Biden signed the $1.9 trillion American Rescue Plan Act (ARPA) into law on March 11, capping a year of unprecedented federal aid to families, firms, and state and local governments. Yet emerging evidence reveals the self-defeating nature of this costly federal overreach. Since ARPA was signed, jobs reports have fallen a combined 900,000 jobs short of economists’ expectations. Inflation is hitting levels not seen in a decade, eating away at Americans’ savings. And state and local governments are flush with excessive federal cash — even as the federal government piles up debt. States do not have to accept congressional overreach; they can take the lead in putting Americans back to work.

Employment trends vary widely across states, revealing the profound impact of state policies. For example, Idaho and Utah have already recovered the payrolls lost during the pandemic, and South Dakota is not far behind. States such as Texas, Tennessee, and Arizona imposed fewer economic restrictions during the pandemic, and they are just months away from a full jobs recovery. On the other hand, states such as Michigan, California, and New York imposed draconian economic measures, and they remain more than a year from recovering their pre-pandemic jobs counts.

Although economic lockdowns are largely in the rearview mirror, states have plenty of tools to improve local labor markets. A shocking 91 percent of small businesses report few or no qualified applicants for job openings, a worker shortage exacerbated by unemployment benefits that leave recipients better off without jobs. To solve this problem, 25 states have pushed back on federal overreach and opted out of enhanced federal unemployment benefits, recognizing that temporary economic assistance should be temporary. The remaining states should follow suit and incentivize workers to fill the record 9.3 million open job opportunities.

States should also fix their unemployment trust funds without a business tax increase. The trust funds were depleted by the pandemic recession and are now $93 billion below pre-pandemic levels. These trust funds are ordinarily refilled with a payroll tax levied on employers. Under the current extraordinary circumstances, however, states should use federal aid dollars to quickly replenish their trust funds back to pre-pandemic levels, thus sparing businesses tens of billions in payroll taxes right as they struggle to rebuild their payrolls. Businesses that were shut down and workers who were laid off due to state orders should not face tax increases as a consequence.

Americans are in the mood for broader tax relief, and their state leaders should deliver. Although President Biden and congressional Democrats are focused on federal-tax increases, American workers and businesses are increasingly enjoying state-tax relief. States should leverage their federal aid dollars to provide short-term tax relief by adopting Congress’s emergency tax measures from 2020. And beyond emergency tax relief, states should take advantage of strong revenues to advance long-term tax reforms, thus rewarding workers and encouraging new investment. Kansas, Montana, Nebraska, Louisiana, and Oklahoma have enacted significant pro-growth tax reforms in 2021, while Arizona and North Carolina are also considering ambitious tax restructuring. Meanwhile, voters in Illinois soundly rejected a high-earner income-tax increase, and even California voters said no to a business-property-tax increase.

Legal and regulatory policy fixes will further encourage growth and re-employment. Dozens of states have enacted coronavirus tort protections to shield vulnerable health-care providers, manufacturers, and small businesses from frivolous lawsuits related to the pandemic. Mississippi and Kansas advanced the national trend of occupational-licensing reform, allowing new residents to easily transfer their licenses from out of state. States that make it easier for workers and businesses to move in will find themselves rewarded with more workers and businesses.

Let’s not forget about states’ role in encouraging the fast-growing innovation economy. Utah policy-makers created a new regulatory standard in 2021 by enacting the first-in-the-nation regulatory sandbox for all industries. This policy modernization makes government rules more flexible and adaptable to new business innovations and allows businesses to apply for broad regulatory relief from rules that are not tailored to new products, services, and business models. Regulatory sandboxes are a growing trend that have been adopted on a targeted basis in states such as Arizona and Florida for financial technologies, and South Dakota and West Virginia for new insurance products. Utah is the first state to provide such regulatory relief for all industries. Regulatory sandboxes put states on the front line of encouraging cutting-edge business innovations.

States should lead the way to economic recovery, and the federal government should stop encouraging joblessness. ARPA ironically rewarded state governments that produced the worst unemployment crises by allocating money to states proportional to the number of unemployed in each state. And federal bonus-unemployment benefits pay Americans to stay home, disincentivizing the earned success of a proper paycheck. Americans need more innovative leadership in the policy laboratories of the states, and less self-defeating federal programs.

Michael Lucci is a senior policy adviser with the State Policy Network. He previously served as the deputy chief for policy to Illinois governor Bruce Rauner and vice president of State Projects for the Tax Foundation.

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