Employers face a new tax

The fallout from the great recession that began in 2008 is still being felt in many quarters. One is in the realm of unemployment taxes. Connecticut employers will see an increase in what they pay next year.

State Rep. Gail Lavielle (R-143) says she has serious concerns about the additional tax that is designed to help the state pay off money owed to the federal government. Some $432 million remains of more than $1 billion Connecticut borrowed from the federal government in 2009 to keep its unemployment compensation trust fund solvent. Connecticut is the only state where employers will have to pay this tax, Ms. Lavielle noted, resulting in Connecticut’s employers having the highest federal unemployment tax rate in the country.

Carl Guzzardi, director of tax information at the state Department of Labor (DOL), said it is a case of paying it now or paying it later.

The tax in question is known as a Benefit Cost Ratio (BCR) tax. It is assessed when states have loans from the federal government that are outstanding for more than five years.

“Unemployment tax revenues are paid by the state’s employers and are deposited into the state’s Unemployment Trust Fund,” Mr. Guzzardi told The Bulletin last week. “Those funds are used for one purpose and one purpose only: to pay benefits to workers who are unemployed.

“When the recession hit in 2008 and 2009 we quickly became insolvent because the revenue from employers was being outpaced by paying out benefits.”

In October 2009, the state began borrowing money from the federal government to cover the shortfall in revenue. Mr. Guzzardi said at its peak, the state was receiving 175,000 claims a week for unemployment benefits and making $60 million a week in payments.

The federal loan to the state was interest-free for the first two years. In 2011, the federal government increased the federal unemployment tax on employers by 0.3%. This was on top of the 0.6% employers typically pay on the first $7,000 a worker earns. Connecticut was not alone in this regard; many states had to borrow to pay unemployment benefits.

The federal tax went up by 0.3% in 2012 and again in 2013. During those years, Mr. Guzzardi said, the state was still making high benefit payments and there was no excess state revenue to apply to the loan.

“Within the last couple of years we got to the point where revenues are keeping pace and even exceeding payouts,” he said. The state has been taking that excess and applying it to the loan balance.

This year, 2014, was the fifth year of the outstanding loan, and in addition to the 0.3% surcharge — collectively 1.2% over the four years — the federal government added the BCR tax.

Ms. Lavielle says the tax comes as a surprise to employers.

“This puts significant stress on employers,” Ms. Lavielle said in a press release, “because businesses operating on the calendar year have already completed their budget planning for 2015 and won’t have taken the change into account. It also sends a loud and clear message to employers that doing business in Connecticut is not predictable and that making it easier and less costly for businesses to operate here is not high on the state government’s priority list. Surely it’s possible to do better.”

Mr. Guzzardi disagrees and said, “The notion it came as a surprise is a bit misleading in my opinion.” He said his department has notified employers of the tax increases for the past four years.

When all is said and done, in 2015 state employers will pay an average of $161 per employee in federal unemployment taxes. These are the highest in the nation, Ms. Lavielle pointed out.

Connecticut is not the only state subject to the BCR tax. California, Indiana, Kentucky, New York, North Carolina, Ohio, and the Virgin Islands all have unemployment trust fund loans outstanding for more than five years, but each has applied for and obtained a BCR waiver.

Mr. Guzzardi said the state analyzed the data and decided not to seek a waiver, which simply delays repayment of the loan. Delaying, he said, would tack on additional interest costs to employers in the long run.

“The federal indebtedness is going to be paid by the state’s employers, either by federal or state taxes,” Mr. Guzzardi said. “The only variable is how long it will be outstanding.”

Mr. Guzzardi said if things stay the way they are, and revenues at the state level continue to outpace benefit payouts, the state should be able to pay off the loan by 2016 or 2017. Once the loan is repaid, unemployment taxes paid by employers will revert to pre-recession levels.

Ms. Lavielle said state Rep. Themis Klarides, incoming House Republican leader, has asked the Department of Labor commissioner to explore ways of stopping the BCR increase and of preventing similar increases in the future.

“I hope that the DOL will be willing to work together with the General Assembly to find a better solution,” said Ms. Lavielle. “Our state’s businesses, which have had to cope with both large tax increases and an economic recovery that has lagged behind the rest of the country, have not had an easy time in recent years.

“Many of my constituents who own small businesses are stunned by this latest development and are very concerned. At the very least, the legislature needs to consider improving oversight and communication of executive branch decisions that have a significant impact on the financial obligations of businesses.”