Connecticut employers are facing a barrage of unemployment insurance tax hikes from both the state and federal government that could boost employer costs by more than 50 percent over the next few years.
The increases will vary from company to company based in part on the number of workers each has laid off since the onset of the economic downturn. But all employers will be hit with higher fees, likely draining hundreds of millions of dollars from Connecticut’s private sector over the next few years.
On the state level alone, the average total unemployment tax rate is projected to jump 42 percent by 2012, state officials said.
“It’s a major concern,” said Kia Murrell, a lobbyist for the Connecticut Business & Industry Association. “These extra taxes are going to dampen economic and capital development at a time when businesses are already hurting.”
The federal tax hikes are a result of the state’s unemployment insurance fund going broke last fall. Connecticut has been borrowing hundreds of millions in federal funds so jobless residents can continue to collect unemployment checks.
The state has already received $310 million in loans. But it could be forced to borrow as much as $900 million over the next few years, as unemployment insurance premiums — paid for solely by Connecticut businesses — continue to generate insufficient revenue to cover jobless claims, said Carl Guzzardi, tax director for the state Department of Labor.
In order to repay the loans, Connecticut employers will face an automatic increase in federal unemployment insurance taxes beginning January 2012. That tax rate is currently 0.8 percent of the first $7,000 of wages for each employee. The rate will increase annually by 0.3 percent until the loan is fully repaid, generating an extra $30 million in revenue each year.
Additionally, the state will charge employers a special assessment beginning in 2011 to pay interest on the loans, a cost estimated at $35 million in the first year alone, Guzzardi said.
Also, on the state level, employers who have laid off workers since the onset of the recession are facing additional tax increases.
In Connecticut, businesses are subject to two separate unemployment taxes: the “experience rating tax,” and the “fund solvency tax.” Both are assessed on the first $15,000 of an employee’s wages.
The fund solvency tax ranges from 0 to 1.4 percent and is applied evenly to all companies when the state needs extra revenue to maintain the fund’s target balance. It’s currently at its highest level.
The experience tax ranges from 0.5 to 5.4 percent and is set annually based on a company’s past history with layoffs. The more layoffs a company orders, the higher its tax.
Guzzardi said the average experience rate this year rose from 1.8 percent in 2009 to 2.3 percent, generating $160 million in revenue. Next year the average rate will likely rise to 3.1 percent.
The average total state unemployment tax rate is projected to go from 3.19 percent to 4.53 percent by the end of 2011 — a 42 percent increase, Guzzardi said.
About 30 other states are also borrowing money from the federal government to pay out jobless claims. Connecticut’s fund ran out of money in October, and in 2009 the state collected about $640 million in unemployment taxes, about half of the $1.3 billion needed to cover jobless benefits, Guzzardi said.
Connecticut’s unemployed are currently eligible for up to 99 weeks of jobless benefits, and the average payout is $307 per week with a maximum of $527 per week.
Since the onset of the current recession, Connecticut has lost 95,000 jobs. That number is expected to rise to more than 100,000. By comparison, Connecticut lost about 159,000 jobs during the 1989 recession and 61,000 jobs during the early 2000 recession.
The unemployment insurance fund last went insolvent in the early 1990s.
Guzzardi said he believes the state’s unemployment insurance system “is broken and needs fixing,” and last fall his agency pitched a plan to fix it.
The plan called for a “substantial” tax increase on employers over the next few years by gradually increasing the taxable wage base from its current $15,000 level to $20,000 in 2011, and then eventually up to $26,000 by 2017.
The taxable wage base has not increased since 1999, Guzzardi said.
Under the plan, employers paying at the average tax rate would see their cost per worker jump from $565 in 2010 to $1,048 in 2012. After that, the tax burden would begin to subside as unemployment levels are expected to decrease.
Guzzardi said the plan has not been made into an official legislative proposal, but it was showcased to top state officials last year.
