Surge in Jobless Claims Spurs Tax Hikes

35 states increase unemployment taxes after huge benefits outflow

Businesses will get hit this year with the bill for the unemployment benefits paid to out-of-work employees, as hard-pressed states hike taxes on companies to fund those benefits. A recent survey found 35 states expect to collect more unemployment taxes this year than last, with states citing increases ranging from 2.5% to 600%.

"A few states have doubled or more than doubled their tax collection," says Rich Hobbie, executive director of the National Association of State Workforce Agencies (NASWA). In addition to Hawaii, which expects a 600% increase, he cited Nebraska, at 150%, South Dakota (140%), Idaho (115%) and Alabama (90%).

As the U.S. jobless rate hit a 26-year high of 10.2% in 2009, sending millions of workers to file for unemployment benefits, the states' unemployment trust funds took a beating. In fact, 26 states have borrowed from the federal government to pay unemployment benefits; as of Dec. 29, loans totaled $26 billion. And the Department of Labor is predicting that by 2012, 40 states will have borrowed a total of $90 billion.

As states race to keep up with the demand for unemployment benefits, this year seven are increasing the amount of wages subject to unemployment insurance tax , according to the NASWA survey, while 28 states plan to increase their tax rate. NASWA notes that in many states, a tax hike occurs automatically if the state's reserves get low enough.

It's not just the widespread nature of the tax increases that's notable, but the size of some of the increases, says Jeff Pretsfelder, senior tax analyst in the tax and accounting business of Thomson Reuters. "There are certain enormous numbers here that I don't think I've seen before."

Pretsfelder cites Hawaii's expansion of the amount of wages subject to its unemployment tax from $13,000 in 2009 to about $38,000 this year. Hawaii's tax ranges from 1.2% to 5%, so a company could owe about $2,000 for a single employee, he says. Pretsfelder notes, though, that it's more typical for state unemployment tax to come to hundreds of dollars per employee.

NASWA's Hobbie says the U.S. Department of Labor estimates that in 2009, state unemployment taxes averaged 0.7% of total wages. "The increases seem very large compared to existing unemployment taxes in states in 2008 and 2009," he says. "But a very large percentage increase in a relatively small tax is still relatively small."

The employment picture seems to be brightening, with jobless claims dropping to a 17-month low in late December. Despite that improvement, Hobbie says historical patterns suggest state unemployment insurance taxes will remain under upward pressure for a few years.

"What you'll find is taxes going up for employers for three to four years after a recession," he says, as employers see their experience ratings rise and as states struggle to rebuild their reserves and repay loans from the federal government.

For example, as a result of the 1970 and 1973-75 recessions, the average state unemployment tax rate as a percentage of total wages rose from 0.64% in the early 70s to about 1.4% in the late 70s, Hobbie says. "If the future resembles the past, what we'll see is this average tax rate on total wages rising again, heading to 1.4% of total wages in three to four years."

For a look at other tax issues facing companies this year, see Overseas Tax Watch.

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