To Get People Back to Work, Some States Opt Out of Federal COVID UI Program

May 07, 2021

A worker shortage has prompted Montana to end distribution of supplemental federal unemployment benefits and instead grant bonuses to unemployed workers who return to the labor force.  Meanwhile, employers prepare for UI payroll tax hikes throughout the U.S.

The extra federal unemployment income is “doing more harm than good” said Montana Governor Greg Gianforte (R).  Under the new Montana program, workers receiving unemployment benefits can receive a one-time $1,200 bonus after completing four weeks at a new job.  The program will be funded through federal COVID relief allocated to the state.  

Montana’s March unemployment rate is 3.8%—down from 11.9% in April 2020 and similar to the unemployment rate of 3.6% in March of 2019, according to the Department of Labor.  However, both the national unemployment rate, at 6.1 percent, and the number of unemployed persons, at 9.8 million, were little changed between this April and March.

South Carolina Governor Henry McMaster (R) has also ordered an end to the state's participation in federal UI benefits, citing an “unprecedented labor shortage” in several industry sectors.  Gov. McMaster tied the labor shortages to the federal program, claiming that “In many instances, these payments are greater than the worker’s previous paychecks.” 

The move highlights an ongoing debate on the utility of COVID relief UI benefits going forward.  The White House has maintained that the continuing pandemic and relatively unmoved economic indicators such as wage growth at the bottom of the income distribution warrants a continuation of the program while many Republicans and several industry leaders contend otherwise. 

Meanwhile, benefits advisors predict employers can expect the average state unemployment tax rate of 1.78% to double over the next few years.  Funded through employee payroll taxes, state unemployment benefits have been depleted by the pandemic, with states taking out over $50 billion in federal loans to replenish state insurance funds.  

Outlook:  Under the American Rescue Plan Act, workers who exhaust their regular state benefits may continue receiving benefits of $300/week into September 2021.  Congressional lawmakers are already attempting to extend these and other COVID relief benefits, or in some cases make them permanent.  However, assuming unemployment rates improve, the countervailing examples of states such as Montana and South Carolina may undercut some of these arguments—particularly those tied to unemployment benefits.