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updated 2/9/2011 2:28:35 PM ET 2011-02-09T19:28:35

Employers could face higher taxes in 2014 under an Obama administration budget proposal designed to help states hard hit by the recession and the weak recovery to refill their unemployment insurance funds and repay money borrowed from the federal government.

The proposal would give states the choice of increasing tax payments from businesses, altering their benefits or a combination of both.

White House spokesman Robert Gibbs said the administration's plan "would help states make up for the shortfalls they have and give them time to rationalize what they offer and how they pay for it."

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Businesses would be the most likely to be affected by the increase, but some economists say workers could also feel the change if businesses pass on the costs of the tax to their employees through wage freezes or smaller pay raises.

The administration plan would increase the income level that is subject to unemployment insurance taxes from $7,000 to $15,000. The federal tax rate used for unemployment insurance would be cut in half, meaning the federal government would not see an increase in revenue from the adjustment.

But states would be allowed to use the new income level to raise more money from employers. Congress would have to approve the recommendation.

Business organizations recoiled at news of the proposal. The National Federation of Independent Business, which represents mostly small business operators, said that putting off a potential tax increase to 2014 would still affect decisions that employers make now.

"When you're a small business owner and you're thinking about long-term business decisions — hiring a worker is one decision, keeping a worker on is another — and you see in a few years that your costs are going to go up, that inhibits your decision," said Chris Walters, manager for legislative affairs at NFIB.

Unemployment insurance programs are run by state governments and are paid for by the state and federal governments through a tax levied on employers. States determine their benefit amounts and eligibility. Unemployment benefits vary from state to state.

Rising unemployment has placed such a burden on states that 30 of them owe the federal government $42 billion — money they borrowed to meet their unemployment insurance obligations. Three states already have had to raise taxes to begin paying back the borrowed money. 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 to the federal government reaches a certain level. The Obama administration proposal, however, would halt those automatic increases in 2011 and 2012. States also would not be required to pay interest during those two years on the money they owe the government.

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"It's not a fair trade off, to say that no tax increases in the next two years and then expect a huge tax increase in 2014," Walters said.

Still, the proposal raises the prospect of business tax increases in 2014, just as President Barack Obama is trying to court business leaders with pledges of removing uncertainty from the private sector.

The joint federal-state unemployment insurance program has been strained during the past two years. States must provide 26 weeks of benefits to the unemployed, a requirement that has depleted many state funds and forced them to borrow from the federal government.

A person familiar with the plan, who described it on the condition of anonymity because the budget was not completed, said only 13 of the 30 states that owe the $42 billion would be expected to repay their share of the money in the next nine years under current conditions. The administration's plan would allow 15 more states to repay the money, this person said.

The proposal is not new a new idea.

Last year, the Government Accounting Office, Congress's auditing arm, suggested raising the taxable wage base as an option for helping states improve their unemployment insurance financing.

The GAO said the advantages of the plan are that it would reverse years of erosion in the unemployment insurance tax base and would cause states to raise their own wage bases while reducing tax rates. But the report also noted that higher unemployment insurance taxes could discourage hiring and that a higher federal wage base could represent different tax burdens to different states.

The federal base has remained at $7,000 since 1983.

Critics of the unemployment insurance program say the president's plan would be simply a Band-Aid at a time when more structural changes are needed in how government deals with jobless benefits.

"Continuing to patch this model up doesn't deal with the fact that the program has these sort of bad incentives and doesn't really function all that well," said Eileen Norcross, a senior research fellow at the Mercatus Center at George Mason University.

Republicans pounced on the plan as ill advised.

Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said that by increasing the level of income subject to taxes "either employers will have less money to hire or workers will face reduced wages.

"Neither makes any sense and runs counter to our shared goal of getting the American people back to work," he said.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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