State legislators are considering an overhaul of the state unemployment system that includes a major reduction in benefits for laid-off workers.

The potential cutbacks, unveiled Wednesday, are included in a draft bill that takes a broad-brush approach to dealing with the state’s $2.48 billion debt to the federal government. The money was borrowed to pay for unemployment benefits, which soared during the recession. Of the 19 states still indebted to Washington for funding jobless benefits, North Carolina has the third-largest debt.

Republicans control the legislature and their leaders are portraying the proposal as spreading the pain among employers and the unemployed.

“It ain’t kind. It ain’t nice. But it’s important,” said Rep. Julia Howard, a Republican from Mocksville and co-chair of the Joint Revenue Laws Study Committee that produced the legislation. “No one loves this bill.”

But advocacy groups for the poor contend the unemployed, who already are reeling from the effects of a struggling economy, would be hit disproportionately hard.

Bill Rowe, director of advocacy for the N.C. Justice Center, told the committee that the proposal “is crafted to keep taxes as low as possible for businesses.” He said curtailing benefits creates a ripple effect that hurts businesses as well when the unemployed can’t pay their mortgages and their bills.

Rowe said in an interview after the meeting that he understood the need for some adjustments in benefits, but called the current bill “too severe.”

The bill could change in the give-and-take that accompanies the political process that comes before a vote. It is expected to be introduced when the legislature convenes in January.

The bill calls for reducing the maximum weekly benefits from $506 to $350 – which is the level the N.C. Chamber, a powerful business lobby, recommended in a report issued earlier this year.

Fewer weeks, lower benefits

It also would reduce the maximum weeks of benefits from 26 to a sliding scale of between 12 and 20 weeks. Under the bill, the higher the state’s unemployment rate, the higher the weeks of benefits allowed. Currently, North Carolina has one of the highest unemployment rates in the nation, at 9.3 percent.

Several unemployed workers addressed the committee, urging them not to curtail benefits.

“I think that we are much more important than paying off an old debt quickly,” said Bridgette Burge, 39, who lost her job as a manager at the YWCA of the Greater Triangle when it closed in February.

Burge, like others who spoke during the meeting, was limited to a minute.

In an interview afterward, she said, “To make those who are suffering the most in the state suffer more because of short-sightedness is ... immoral.”

The biggest impact on businesses is what the bill doesn’t do – address the higher federal unemployment taxes that employers are paying.

This year the federal government required North Carolina businesses to pay higher federal unemployment taxes – known as FUTA for Federal Unemployment Tax Act – to help pay off the unemployment debt. Going forward, FUTA taxes will continue to rise $21 per worker each year until the debt is fully repaid. (Employees don’t pay unemployment taxes; employers pay both state and federal taxes.)

Business owners across the state have been howling that the higher taxes are hurting their finances and could hinder the state’s ability to recruit companies.

Chamber lobby

The Chamber had been pushing for the state to issue bonds so that it could pay off the federal debt and avoid serial FUTA increases. But state Treasurer Janet Cowell advised legislators that the amount the state would need to borrow would exceed the state’s borrowing capacity and jeopardize its AAA credit rating, which enables the state to borrow at lower interest rates.

Under the current system, the debt is owed by North Carolina employers rather than the state.

If the measures in the bill are adopted, the committee’s staff estimates the state would accelerate repayment of the debt – erasing it by 2015, instead of in 2018 if the state does nothing. That acceleration would eliminate three years of paying higher FUTA taxes.

Small bump for employers

The bill also calls for a bump in state unemployment taxes for some employers and expands the group of employers required to pay those taxes.

Gary Salamido, a lobbyist for the Chamber, said the business community recognizes that “the road to solvency is going to mean higher taxes.”

“Nobody can say this is good,” he said. “It’s not good for any of the stakeholders.”

Under the bill, the maximum state unemployment tax rate would rise from 5.7 percent to 5.76 percent on employee wages up to $20,900.

In addition, employers who currently are exempt from paying state unemployment taxes because they don’t have a history of layoffs would have to pay a minimum rate of six-hundredths of a percent on wages up to $20,900.

The state unemployment taxes would be unchanged for the approximately 70 percent of businesses sandwiched between those two extremes.

“It’s not a significant increase on employers,” said Alexandra Forter Sirota, project director for the Justice Center.

1990s tax cuts blamed

Groups like Sirota’s blame the massive debt on a series of cuts in state unemployment taxes implemented in the 1990s.

Rep. Howard said of the magnitude of the contemplated increase in the state unemployment tax: “There is a limit to how much employers can continue to be taxed and remain in business.”

Nonprofits and local governments, which currently don’t pay state unemployment taxes but do have to reimburse the state 100 percent for the benefits received by their laid-off workers, also would have to contribute to the state unemployment trust fund.

Officials with the N.C. Association of County Commissioners and the N.C. League of Municipalities said they were still calculating how the proposal would affect local governments.

“We aren’t going to be reactionary and say it is a good or bad proposal,” said David Thompson, executive director of the county commissioners’ group.

“Any time the state is asking localities to pay (more) money, it invariably creates a hardship – especially in these times,” said Paul Meyer, chief legislative counsel for the municipal group.