Employers in 20 states will have to shell out more in taxes next year as a penalty for the states not paying back federal loans that kept unemployment programs afloat during the recession.
Altogether, states still owe $37.6 billion to the federal government that they borrowed when their unemployment insurance trust funds sank to zero. Most states have dealt with the problem by raising state payroll taxes on employers, making benefits to workers less generous; or a combination of the two.
A handful, though, have opted to issue bonds. Idaho did it earlier this year, and Texas did it last year. And just this month, Illinois lawmakers approved legislation allowing the state to issue bonds to pay back the $2 billion the state owes the federal government for unemployment relief. Illinois Gov. Pat Quinn has applauded the package and has indicated he will sign the measure. The state figures it will get an interest rate lower than the 4 percent it would have to pay the federal government, saving the state and businesses millions of dollars.
Laurence Msall, president of the nonpartisan Civic Federation in Chicago, called the move “reasonable and necessary” given the state’s budget problems and the extraordinary demand for jobless benefits during the recession and fragile recovery. Wayne Vroman, a senior fellow at the Urban Institute who specializes in unemployment issues, says the state is “borrowing from Peter to pay Paul,” noting that “it’s still a debt that they will have to pay back.”
California, which has received the most federal unemployment money of any state at $9 billion, has no plans to go that route, said Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer.
But relief for employers in Illinois won’t come until the state actually issues the bond, probably sometime in 2012. So for companies in Illinois, just as in the other 19 other states facing a similar predicament, higher taxes will kick in next year whether the state passes legislation or not. The federal law governing unemployment loans to states has an automatic repayment process for those that fail to pay back their loans within a certain time. The most recent deadline was Nov. 10.
Here’s how the system works: Unemployment compensation is financed in part by state payroll taxes and in part by federal taxes under the Federal Unemployment Tax Act, or FUTA. The FUTA tax rate is 6.0 percent on the first $7,000 of wages per worker. Employers, not workers, are responsible for paying the tax. But the employers usually get a credit from the federal government of 5.4 percent, so they end up paying a net tax of only 0.6 percent.
But if a state is forced to borrow from the federal unemployment account and doesn’t pay the money back in time, its credit is reduced by 0.3 percentage points in the first year. The result is that employers in states that are behind schedule will be required to pay an additional $21 per employee in federal unemployment taxes on 2011 wages. “We’ll get that bill” from the federal government, said David Vite, president of the Illinois Retail Merchants Association.
Employers in Illinois figure to save more than $400 million through 2019 by avoiding the higher tax that would apply if the loan is not paid off. Instead of paying $240 million in interest and penalties, Vite said, the state will end up paying only $80 million.
The recession and slow recovery have tested the country’s unemployment insurance system as never before. Of the nearly 14 million Americans without jobs, nearly half rely on unemployment insurance, said George Wentworth, senior staff attorney with the National Employment Law Project, an advocacy group. Before the recession, he says, 2.5 million Americans were collecting unemployment insurance.
Workers who exhaust their regular jobless benefits before they find a job can get additional weeks of benefits through temporary programs that the federal government pays for, but that states administer.
States have taken a variety of unprecedented actions this year to help pare down their unemployment insurance debt. Because they have wide latitude in determining who is eligible to receive benefits and for how long, many states have scaled back their programs. For the first time in more than 50 years, at least six states cut the maximum benefit to less than 26 weeks.
FACING HIGHER TAXES:
Employers in these 20 states will face an increased federal unemployment tax in 2012. Here’s the amount each state still owes the federal government:
—Arkansas: $330 million
—California: $9.2 billion
—Connecticut: $809 million
—Florida: $1.7 billion
—Georgia: $721 million
—Illinois: $1.9 billion
—Indiana: $1.9 billion
—Kentucky: $949 million
—Michigan: $3.1 billion
—Minnesota: $94 million
—Missouri: $725 million
—North Carolina: $2.5 billion
—Nevada: $706 million
—New Jersey: $1.2 billion
—New York: $3 billion
—Ohio: $2.3 billion
—Pennsylvania: $3.1 billion
—Rhode Island: $199 million
—Virginia: $243 million
—Wisconsin: $1.1 billion
Source: MCT Information Services