WASHINGTON — As U.S. employers brace for higher state unemployment insurance taxes next year, business groups are urging Congress to delay interest penalties on $42 billion states have borrowed to continue paying jobless benefits during the recession.
Thirty states and the Virgin Islands have exhausted their unemployment insurance trust fund reserves and are using U.S. treasury funds to maintain benefit checks for millions of workers who lost jobs through no fault of their own.
So far, only Maryland, New Hampshire, South Dakota and Tennessee have paid back their loans in full, according to the National Conference of State Legislatures. California, with an unemployment rate of 12.4 percent, leads all borrowers with more than $9.1 billion owed. Hard-hit Michigan is a distant second and owes more than $3.8 billion.
A provision of the stimulus bill waived interest on the loans for the past two years, but that respite expires on Dec. 31 and interest begins accruing on the outstanding loans in 2011.
Unless Congress intercedes, states that don't pay off their loans by Sept. 30, must either pay interest on their average daily loan balance for the first nine months of 2011 — or give back their federal grant that is used to administer their state programs.
The federal government estimates the collective interest on the outstanding loans will total about $2 billion in 2011, while continued state borrowing is expected to stretch the outstanding loan amount to $65 billion by fiscal year 2013.
In addition, employers in about 25 states could face additional federal tax penalties of $21 to $84 per employee if state loans aren't paid by November 2011. Unemployment insurance programs are run by the states, but financed by federal and state taxes on wages.
Since most borrowing states are starved for general revenue, they'll have to pay down the loans and interest by raising state unemployment insurance payroll taxes, which are levied on employers.
Many fear these higher taxes will slow job creation and prompt employers to add more hours for their current workers rather than hire new ones.
This year alone, 41 states increased unemployment-insurance payroll taxes by an average of about 34 percent, according to the National Employment Law Project. More of the same is coming next year.
In Indiana, which has borrowed $2 billion, many businesses will see state tax increases ranging from 71 percent to 130 percent. Employers in Nevada, whose trust fund account became insolvent in October 2009, will pay about $180 more per employee next year.
After the New Jersey state legislature killed a measure that would have increased employer taxes by an average of $400 per worker this summer, lawmakers replaced it with an increase of about $130 per employee. But another increase is expected in 2011 to help pay down the state's $1.7 billion federal loan balance.
Gary Hough, president of Hough Petroleum, a lubricant and motor fuels supplier in Trenton, N.J., said higher state payroll taxes alone won't keep him from hiring additional workers. But they do add another layer of uncertainty for employers who are already skittish about expanding their work force. Instead of hiring a new full-time account manager, Hough said he decided to make the position part-time.
"You don't really know what the business environment is going to be, so it creates an atmosphere where you operate with caution," Hough explained. "You're cautious before you hire someone and you've got to make sure you have the revenue to cover that cost."
Much of the cash problems with state unemployment insurance programs stem from the recession and record numbers of people who claimed benefits after losing their jobs. But poor planning and management of state UI funds before the recession cannot be overlooked.
Traditionally, states fattened their unemployment insurance funds when the economy was strong to pay more benefits when a recession hit. But as the economy boomed in the 1990s, that "forward financing" model gave way to a "pay-as-you-go" system, in which lawmakers cut employer payroll taxes, leaving many state insurance trust funds collecting just enough money to pay benefits each year.
When the recession officially began in December 2007, only 17 states and the District of Columbia and Puerto Rico had enough UI funds to weather an economic downturn, according to Department of Labor statistics. That's down from 30 at the start of the 2000 recession, said Andy Stetner, deputy director of the National Employment Law Project.
Nevertheless, groups such as the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Retail Federation want Congress to extend the interest waiver on state loans through 2012.
"At a time when we want small businesses to create jobs to reduce the unemployment rate and get the economy moving, this is a tax directly on the employers who we're hoping can create jobs" said Bill Rys, tax counsel for the National Federation of Independent business.
The groups also want a two-year delay on the federal tax penalties facing employers in 25 states next year.
"An additional federal penalty tax on these states would be on top of what is already a difficult situation," said Douglas Holmes, the president of President UWC Strategic Services, a policy and research organization dedicated to workforce compensation.
But not everyone agrees.
Profits and prospects for businesses will improve next year and beyond, "so why should there be a holding off of these taxes in that kind of an environment? It doesn't make sense," said Wayne Vroman, an economist with the Urban Institute who specializes in unemployment insurance.
Vroman said the business lobby is making more of the job-killing impact of higher UI taxes than is merited by the facts.
The average cost of labor in the U.S. is about $30 an hour, of which unemployment insurance accounts for only about 18 cents an hour, Vroman said. That's less than what employers pay for workers' compensation, Social Security Disability Insurance and retirement contributions.
Stetner, who supports extending the interest waiver on loans for 2011, said Congress should make the relief contingent on states not cutting benefit levels or tightening eligibility rules. States should also be required to impose payroll taxes that gradually steer their bankrupt programs back to solvency, said Gary Burtless, an economist with the center-left Brookings Institution.
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