Unemployment Taxes Rise

20 states see federal tax rate increase this year.

The unemployment insurance benefits states have been providing to workers during the recession are likely to haunt businesses in the form of higher unemployment insurance taxes for years to come. Such taxes have already begun to rise and are projected to rise again this year, although some states have taken steps to mitigate the increases.

Employers pay both federal and state unemployment insurance taxes. The Federal Unemployment Tax (FUTA) is nominally 6%, but it’s offset by a 5.4% credit, making the effective tax rate 0.6%. That credit is reduced, though, if states have borrowed from the Federal Unemployment Account to pay benefits, as many have. The Labor Department shows that the Federal Unemployment Account was owed a total of $37.5 billion as of Jan. 12 by 27 states and the U.S. Virgin Islands, with California’s $10.1 billion representing about a quarter of that debt. Other states with big IOUs include New York with $3.5 billion, Pennsylvania with $3.3 billion and North Carolina with $276 billion.

If a state has had a loan outstanding for two years, its effective tax rate goes up by 0.3%, to 0.9%, and for every additional year, the rate goes up another 0.3%.

Michael O’Toole, senior director of publications, education and government relations at the American Payrolls Association, says that when employers pay their 2011 federal unemployment tax later this year, 20 states and the U.S. Virgin Islands will be paying additional tax, with all but two paying the 0.9% rate. Employers in Indiana will be paying 1.2% and Michigan’s rate is up to 1.5%.

O’Toole notes that the Michigan legislature late last year approved a bond issue to repay the state’s loan from the federal government, so Michigan businesses will go back to paying 0.6% next year.

Other states that issued bonds in order to pay off loans to the federal trust fund include Texas and Illinois. “They take control over the terms of the financing instead of leaving that to the federal government,” says Douglas Holmes, president of UWC, which provides research, consulting and advocacy on unemployment and workers compensation. Holmes says states may pay lower interest on their municipal bonds than they would on the money they’ve borrowed from the federal government.

At the state level, Thomson Reuters says 25 states have raised their taxable wage base for this year, which in effect raises what employers pay. It’s not yet clear how many states will boost their unemployment tax rate this year. But the state tax rates have been rising; the U.S. Labor Department’s Employment and Training Administration calculates that state unemployment taxes as a percentage of total wages stood at 0.97% in 2011, up from 0.8% in 2010 and 0.62% in 2009.

Holmes notes that when the U.S. economy went into recession in the early 1980s, state unemployment taxes as a percentage of total wages more than doubled, rising from 0.7% in 1979 to 1.41% in 1983, and stayed above 1% for another nine years before declining. “I think we’ll see a similar pattern,” he says, predicting state unemployment taxes as a percentage of wages will continue higher than that 1.41% peak and remain elevated for a decade or more.

“We’ve come through 20 years in which unemployment tax, state and federal, as a percentage of wages was small, and now it’s jumping up again,” he adds. “Now it’s becoming more significant to the bottom line of employers.”




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