A legislative proposal that would nearly double the reserve of Connecticut’s unemployment insurance fund to $1.1 billion is raising red flags from the business community, which says the measure will lead to long-term higher taxes for employers and hurt future job growth and capital investment in the state.
The state’s variable unemployment tax is a significant business expense, and could cost some employers as much as $1,160 per employee by 2015. Passage of the bill could mean employers end up with an elevated unemployment insurance tax rate for the rest of the decade.
The bill has been proposed by the state Department of Labor as a fix for Connecticut’s unemployment insurance trust fund, which blew through its reserves in 2009 as a result of the state’s high jobless rate. Connecticut has borrowed $727 million from the federal government so far in order to continue to pay out jobless benefits and the borrowing continues.
To prevent future fund insolvencies, which have occurred during past recessions, state officials want to raise the trust fund’s reserve level from $626 million to $1.1 billion.
The legislation would accomplish that by keeping the fund solvency tax — one of the two taxes employers pay to fund jobless benefits — at its current highest level of 1.4 percent for the foreseeable future, likely at least through the rest of the decade.
The idea, labor officials say, is to build up adequate reserves during good economic times, to minimize the need for borrowing during recessions.
“Whenever you borrow money from the federal government you pay interest and that is a cost tacked onto employers,” said Carl Guzzardi, tax director for the state Department of Labor. “It costs more money in the long run.”
But business officials say the proposal would grow the reserve to inordinate levels, resulting in sustained higher unemployment taxes for employers, who shoulder the full burden of funding jobless benefits.
“We don’t want to set the fund reserve goal at a level that may never come around again,” said Kia Murrell, a lobbyist for the Connecticut Business & Industry Association. “We want to create a rainy day fund that is reasonable, but doesn’t necessarily plan for a tsunami.”
She said the fund should be increased to around $750 million, rather than the $1.1 billion the bill mandates.
Connecticut’s unemployment insurance trust fund became insolvent in October 2009, which has forced the state to borrow about $727 million so far, Guzzardi said. But that amount will likely grow to over $1 billion as Connecticut’s economic recovery continues to languish.
The state’s unemployment rate is 9 percent. As a result of the continued high number of jobless residents, unemployment insurance premiums paid by employers are not generating enough money to cover jobless claims.
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 experience tax ranges from 0.5 to 5.4 percent and is set annually based on a company’s past history with layoffs.
The fund solvency tax ranges from 0 to 1.4 percent and is applied evenly to all companies. The tax level is adjusted when the state needs extra revenue to maintain the fund’s target balance. It’s currently at its highest level.
Under its current structure, the maximum amount of money that can be retained in the unemployment insurance fund is about $626 million. But that wasn’t enough to handle the demands of the ‘Great Recession.’ Labor officials have asked to raise that reserve goal to approximately $1.1 billion, which is the average amount of money the state paid out in jobless benefits during the last three recessions in 2009, the early 2000’s, and the early 1990’s.
That level would be accomplished by keeping the fund solvency tax rate at the maximum of 1.4 percent until the reserve reaches that billion-dollar plateau.
Guzzardi said he projects the fund solvency tax will have to stay at its highest level until at least 2018 just so the state can pay back funds it has been borrowing from the federal government and to attempt to reach the existing reserve goal.
As a result, the proposal to increase the reserve will not have any impact on employer’s taxes for the next seven years, since the rate can’t be increased any higher from its current levels. But it would likely mean the fund solvency tax rate stays at 1.4 percent for a period beyond 2018 to help build up that $1.1 billion buffer.
Leaving the fund solvency tax at its highest level for the foreseeable future creates uncertainty for employers, and negatively impacts their ability to add full time workers, Murrell said.
Andrew Markowski, Connecticut director of the National Federation of Independent Business, said reform to the unemployment insurance fund should go beyond increasing the reserve. Instead he said the state should focus of making changes to the eligibility and administration of the unemployment benefits system, including tightening work search requirements to ensure unemployed people are actively seeking out new job opportunities.
Since 2007, the average number of workers filing for unemployment benefits has grown from 40,000 to about 135,000 in October and the maximum weekly benefit for new claims is $555.
Murrell also noted, as a result of the state borrowing money from the federal government, employers are being hit with higher taxes and extra assessments.
Beginning Aug. 1, for example, the state will start charging businesses a special $40 per employee assessment to cover interest payments on those borrowed funds, an amount that will be charged annually until Connecticut repays Uncle Sam what could be more than $1 billion.
A legislative proposal in Congress would defer those interest payments to a later date.
Additionally, in order to begin to repay principal balance on the loans, Connecticut employers will face an automatic increase in federal unemployment insurance taxes beginning January 2012. That tax rate is 0.8 percent of the first $7,000 of wages for each employee. The rate will increase by 0.3 percent until the loan is fully repaid, generating an extra $30 million in revenue each year.
Employers will likely be footing their biggest bill in 2015, when the average cost for state and federal unemployment insurance taxes will be $760 per employee. Companies that have the highest possible experience tax rate of 5.4 percent will have to pay $1,160 per employee in 2015, according to labor department projections.
