The Governor’s Job Con

On March 12, Gov. Rick Perry called a press conference at Bering’s, a family hardware and luxury household-goods store in Houston, to announce that he wanted to turn down free money. The federal government is offering $555 million in stimulus funds to help Texas pay unemployment benefits to its rapidly rising population of laid-off workers. Here was the governor, saying no thanks.

Perry’s venue apparently was meant to show that the governor was siding with homegrown Texas businesses. This was his rhetoric, a classic social conservative argument: The unemployment insurance stipulations in the new federal stimulus bill will ultimately increase the burden borne by Texas employers. The math is simple: Employers who have to pay more taxes have less money to meet their payroll, hire new employees, and grow their businesses.

In reality it’s not so simple. Rejecting the funds actually would raise taxes though not by much on Texas employers in the short term. It would also prevent tens of thousands of Texans from being eligible for unemployment benefits. In the long run, rejecting the funds would hurt the state’s economy.

In Perry’s view, of course, the stimulus money isn’t free. To receive the $555 million, Texas must comply with the federal Unemployment Insurance Modernization Act, which requires states to make more people eligible for unemployment aid. That expansion likely would be permanent, resulting in more Texans receiving unemployment benefits in the future. And that would mean a long-term tax hike on Texas businesses, because employers pay for unemployment benefits. Perry doesn’t like that—as policy or as politics.

The governor’s timing was anything but propitious. The Texas Unemployment Insurance Trust Fund—whence the benefits paid to unemployed workers flow—is quickly going broke. In the last week of March, the Texas Workforce Commission, the agency administering the fund, saw 28,000 new unemployment claims and paid out $74 million in benefits. The same week in 2008, there were half as many new claims and $27 million in payouts.

With claims rising fast, Texas’ fund essentially is insolvent. The Workforce Commission projects the balance will dwindle to $19 million by Oct. 1. That’s $840 million below the fund’s legally required minimum. So when Perry announced his desire to deny this bankrupt system $555 million from the feds, a political squall ensued.

Criticism came from all quarters. Members of the Legislature and newspaper editorial boards denounced the governor. A New York Times editorial called Perry, Louisiana Gov. Bobby Jindal, and other Republican governors rejecting stimulus money “grandstanders.” The Times characterized their decisions as “posturing” that puts “ideology ahead of the needs of their constituents.” Even President Barack Obama chastised the governors for putting politics over good sense.

Many observers believe Perry’s rejection of the stimulus money had more to do with the 2010 governor’s race than anything else. U.S. Sen. Kay Bailey Hutchison will almost certainly run against Perry in the GOP primary. The governor’s rejection of the stimulus money was, at least partly, a play to the GOP’s right-wing base—his base—as he attempts to frame Hutchison as a big-government Washington spender. (Hutchison, having voted against the stimulus bill, doesn’t really fit the part. But she has cautiously suggested that Perry, in rejecting the funds, hasn’t considered the ill health of the unemployment fund.)

Political posturing aside, Perry’s “rejection” of the unemployment funds is far from the final word, because he holds one of the least-powerful governorships in the country. For Texas to receive the federal funds, the state has to change its unemployment eligibility laws—and changing laws, not to mention making budget decisions, is the domain of the Legislature. Because the Legislature is in session, Perry’s “rejection” is actually a threat to veto bills expanding unemployment benefits.

Legislators who favor taking the money have been furiously authoring and debating unemployment insurance bills in a rush to pass them with enough time to override Perry’s likely veto before the end of the session. (The Legislature can’t, under current law, override a veto once it adjourns.)

Right-wing lawmakers such as Rep. Dan Gattis, a Georgetown Republican, argue that accepting the money amounts to a short-term fix that will result in a long-term drain on employers and the Texas economy. “We’re looking at a payday loan,” Gattis said in a recent debate organized by the conservative Texas Public Policy Foundation. “I don’t think anyone in this room would fall for the proposition of ‘I will give you $555 today if you will give me $75 a day from here to eternity.'”

On the left side of the debate, Rep. Jim Dunnam, a Waco Democrat who’s chairing a select House committee on the economic stimulus, argues that Perry is denying employers a half-billion-dollar gift during a recession. Perry “is doubling the tax on the businesses at the time when they least need it,” Dunnam told reporters in March.

Somewhere between Gattis’ and Dunnam’s positions is where most of the pushing, pulling, needling and negotiating is taking place.

As the Legislature began scrutinizing unemployment insurance anew, the governor’s office found itself plunged into yet another controversy. For the past four years, Perry has used the dwindling unemployment trust fund to bankroll his Texas Enterprise Fund, which grants taxpayer money to big businesses to induce job creation. Critics have called it Perry’s “slush fund” and “corporate welfare.”

In all, $460 million of unemployment money has been funneled into the Texas Enterprise Fund since 2005, when Perry snuck a little-noticed bill through the Legislature authorizing the transfers. In recent hearings, lawmakers have raised the roof over $50 million of unemployment funds sent through the Enterprise Fund to build a new biotech center at Texas A&M, Perry’s alma mater.

“It seems like every day that we go through this thing, it gets more disturbing,” said Rep. Jim Pitts, a Waxahachie Republican who chairs the House Appropriations Committee.

Despite all the hubbub, accepting or rejecting the $555 million won’t have a huge impact on Texas businesses. With unemployment claims rising, employers will have to pay higher taxes regardless. That’s the way the system works: When a recession hits, unemployment payouts go up, and businesses foot the bill.

Texas must continue to pay out benefits one way or another, says Workforce Commission spokesperson Ann Hatchitt. The state will raise money for the fund, as it has in the past, probably by floating a five- or seven-year bond that will be repaid by a tax increase on businesses.

The unemployment trust fund will need, by some estimates, an infusion of at least $2 billion over the next year—and perhaps another $2 billion in 2011. That will nearly double unemployment taxes on Texas businesses, according to recent Workforce Commission estimates. The federal stimulus money can only shave off a fraction of that tax increase.

If Texas takes the stimulus money and expands its benefits eligibility laws, taxes on employers will be slightly lower during the recession and slightly higher in the long term. If Texas doesn’t take the stimulus money and doesn’t expand eligibility, the opposite will be true: Taxes on employers will be slightly higher during the recession and slightly lower (with fewer people getting benefits) in the long term.

The key word is “slight.” How slight? The estimated difference in the 2010 business-tax rate between the two scenarios works out to $11 per employee. In 2020, it works out to about $4.50 per employee.

Of course, no one is really bickering about a few dollars’ difference in employer taxes, which rise and fall for many other reasons. While the stimulus money makes a great political football to kick around, in reality it’s little more than a small bribe to make Texas bring its unemployment system into the 21st century. That’s the real issue, and the real reason Perry wants to reject the stimulus. (And it is good Republican politics.) Perry and big business want to keep the state’s unemployment system unchanged. Many others argue that Texas should be more generous with its benefits. It’s a debate that’s long overdue.

For years, Texas has been a terrible place to lose your job. No state in the country is stingier with its unemployment benefits, with only about 20 percent of unemployed Texans receiving them. That’s slightly more than half the national average of 37 percent, ranking Texas second-worst in the nation. Many workers who don’t qualify—part-time employees, victims of family violence, people who were working for less than a year before they lost their jobs—would be covered in other parts of the country. Only South Dakota pays out benefits to a smaller percentage of unemployed people. Officials there have accepted the federal stimulus money and will soon expand eligibility.

The issue isn’t just that Texas’ approach to paying unemployment excludes so many laid-off workers. The state also relies on an outdated funding system that has drained the unemployment fund. The business tax structure that fuels the trust fund hasn’t been updated in 20 years, says Don Baylor, a policy analyst with the liberal think-tank Center for Public Policy Priorities.

Texas pays for unemployment by taxing a small percentage of the first $9,000 paid to every employee. It doesn’t matter if a worker earns $20,000 or $120,000; a business pays unemployment taxes on only that first $9,000. Because that figure has remained static for 20 years, even as salaries skyrocketed, Texas’ unemployment trust fund is perpetually underfunded and ill-prepared for a recession.

“Every single time we have a downturn in the economy and rising unemployment, the fund is going to go broke,” Baylor told Dunnam’s House stimulus committee on March 10. When the fund goes broke, Texas ends up borrowing money and raising taxes on business “during downturns, when they can least afford it” to cover the increase in unemployment claims. Baylor recommends raising the cap on “taxable wages” above $9,000 and expanding the maximum amount of money allowed in the trust fund. That would mean raising the trust fund’s so-called “ceiling” and ending transfers to such programs as Perry’s Enterprise Fund. Banking more money would help the fund weather recessions.

The unemployment insurance reforms required by the stimulus act do not include revamping the trust fund, but the recent attention has led legislators to file bills that would decrease its volatility. Having a more stable trust fund would make it less painful for the state to give unemployment benefits to more people. By the National Employment Law Project’s estimates, an additional 45,000 Texans would be available for benefits if Texas expands eligibility.

Worker advocates want Texas to accept the federal stimulus, not necessarily because the $555 million would make a huge difference this year, but because the system badly needs to be modernized. But to right-wing, pro-business advocates like Texas Association of Business President Bill Hammond, who has testified at nearly every hearing on unemployment insurance, permanently expanding unemployment benefits sounds like a nightmare. In February, Hammond compared Texas’ taking the stimulus money to the beginning of a drug addiction: “The dealer gives you your first hit for free to get you hooked, and then you are addicted and are paying the consequences for a long, long time.”

On March 10, Hammond told Dunnam’s committee that the Texas Workforce Commission didn’t do enough to ensure people are looking for work while they’re receiving benefits. “The commission is allowing [unemployed] people to sit on their laurels,” he said, portraying the system as riddled with fraud. And on March 30, testifying before the Senate Economic Development Committee, Hammond said he didn’t think people compelled to leave their jobs because of domestic violence should receive unemployment benefits. “[Abuse] is a tragedy,” he said, “but the question is, you know, is that the intent of the unemployment fund?”

Inflammatory rhetoric aside, Hammond and the big business interests he represents simply don’t want to expand unemployment benefits because they don’t want to pay for it.

Such reluctance to pay for government programs is a Texas tradition. It’s also self-defeating. That’s because unemployment isn’t an entitlement program. It isn’t welfare. In fact, many economists say, paying more unemployment benefits boosts the economy. It helps potentially productive workers get by long enough to find another job. By doing so, it lightens the burden on the real entitlement programs like Medicaid.

Workers who don’t receive unemployment aid are more likely to end up on permanent government assistance. As Rep. Garnet Coleman, a Houston Democrat, put it at a recent committee hearing, most people on unemployment aren’t loafers. “You can’t get on unemployment if you never had a job,” he pointed out. “These are folks who were working. They didn’t want to lose their job.”

Spending on unemployment is actually a terrific economic stimulus. Every dollar spent on unemployment benefits creates $2.15 of activity in the Texas economy, according to the Center for Public Policy Priorities. By keeping people off real entitlement programs, the benefits save all taxpayers money in the long run.

That is the essence of the debate, no matter how Perry and his allies want to frame it. When workers are laid off, will employers be responsible for the cost? Or will it fall to everyone else?