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Long-term unemployment has created decreased revenues and increased demand for services in many states, some of which are facing serious budget crises. To relieve a bit of that, the Obama administration will include in their proposed budget some relief for states and employers.

Rising unemployment has placed such a burden on states that 30 of them owe the federal government $42 billion in money borrowed to meet their unemployment insurance obligations. Three states already have had to raise taxes to begin paying back the money they owe. More than 20 other states likely would have to raise taxes to cover their unemployment insurance debts. Under federal law, such tax increases are automatic once the money owed reaches a certain level.

Under the proposal, the administration would impose a moratorium in 2011 and 2012 on state tax increases and on state interest payments on the debt.

In 2014, however, the administration proposes to increase the taxable income level for unemployment insurance from $7,000 to $15,000. Under the proposal, the federal unemployment insurance rate would be adjusted so that the new higher income level would not result in a federal tax increase, the person familiar with the plan said.

States, however, could retain their current rates, meaning employers could face higher unemployment insurance taxes beginning in 2014.

That will make up for a portion of the proposed budget cuts Office of Management and Budget Director Jacob Lew wrote about in a NYT op-ed this weekend. Halving the Community Service Block Grant and slashing Community Development Block Grants will take chunks of funding away from states and localities to do basic things like providing services in low-income communities, and "projects in areas like housing, sewers and streets, and economic development in low- and moderate-income neighborhoods." Which will probably result in more unemployment when all of those projects don't go forward.

It's possible, as Stan Collender blogged, that this was an opening gambit to scare Republican governors and mayors into helping the administration on the budget with the GOP House. But given how this administration has proven it's lack of ability to negotiate with Republicans, I wouldn't count on this strategy--if that's what it is--working.

The states will undoubtedly appreciate getting this break on unemployment benefits debt. They'd probably appreciate a jobs program that got their citizens back to work more.

Originally posted to Daily Kos on Tue Feb 08, 2011 at 05:32 PM PST.

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