Unemployment tax hike will harm already struggling businesses

Unemployment tax hike will harm already struggling businesses
Although the state Unemployment Trust Fund remains solvent, the taxes paid by employers to replenish it could increase dramatically over the next several years. Photo: freepik.com

After a year of historic layoffs and unemployment claims that threatened to bankrupt the state Unemployment Trust Fund, businesses that managed to survive could soon face a fatal blow in the form of a massive hike to the unemployment insurance tax directly tied to loss of workers.

“Any cost increase right now is throwing heavy rocks at a drowning person,” Washington Hospitality Association CEO and President Anthony Anton said. The hospitality industry has been disproportionately hit by the economic shutdown; Anton estimates that 35 percent of association members will go out of business as a result.

Although the state Employment Security Department (ESD) anticipates the trust fund will remain solvent moving forward, two taxes are set to take effect in the coming years that will triple the amount of unemployment insurance taxes paid by employers.

“People just are going to be really wary about hiring people back,” said Bruce Beckett, a lobbyist for the Washington Retail Association. “It’s just going to raise the cost of hiring people. It’s going to put a damper, particular when we’re at 30 percent occupancy restrictions.”

The unemployment insurance tax paid by employers is composed of three pieces:

  • Experience-rated tax broken into 40 different classes based on prior worker unemployment history;
  • A .2 percent solvency tax triggered when the trust fund has less than seven months’ worth of benefits; and
  • A 1.22 percent social tax paid by all employers and used to cover benefit payments when unemployment reaches a certain level in a specific industry.

The trust fund’s situation is far less grim than it was earlier this year when record unemployment claims reduced it from $4.8 billion at the beginning of 2020 to $3.13 billion by June. State lawmakers during this year’s legislative session passed a COVID-19 relief bill providing $25 million from the rainy day fund to cover some of the unemployment payments. The trust fund was also hit by Nigerian scammers who stole $576 million through fraudulent unemployment claims.

The latest ESD report shows the trust fund now has around $2.3 billion and estimates that at the end of the year the fund will have $1.2 billion. It’s $300 million more than estimated in the June forecast, and a sufficient amount to avoid triggering the solvency tax – at least until 2022 when it takes effect. In the meantime, employers starting in 2021 must pay the 1.22 percent social tax for the next two years.

On top of that, industries forced to lay off workers due to financial strains will now have to pay a higher experience-rated tax, which is determined by the four-year average amount of benefits the employer has paid out. An Oct. 13 presentation to the Senate Ways and Means Committee forecasts that the average experience-rated tax will increase from .78 percent of an employee’s wages in 2020 to .97 percent in 2021 before jumping to 1.52 percent in 2022 and 1.73 percent in 2022.  All in all, these tax hikes are forecasted to double the amount that employers pay in annual unemployment tax revenue next year and triple it by 2022.

Anton said the tax hike will be especially felt by small employers who are in the lowest experience-rated tax class, with little unemployment history prior to this year.

In an interview with TVW, Senate Ways and Means Committee member Sen. Randi Becker (R-2) said that unemployment tax payments for certain businesses could increase by as much as 700 percent “for something that these employers did not have any control over,” adding that if the tax hike happens “that will close many more small business stores.”

Washington Policy Center Small Business Director Mark Harmsworth told Lens that another alternative for those businesses is to not rehire employees, or to only bring them back as part-time, to avoid paying unemployment insurance. “If you’re paying $100 a month and now (it’s) $700 per employee, that becomes a significant amount of money.”

Although the future tax revenue is expected to bring the trust fund up to $5.3 billion by 2025, in the short-term the fund’s balance is expected to drop down to $130 million by the end of 2021. As a result, the state will be required by federal law to request a federal line of credit to keep the fund solvent, though ESD doesn’t anticipate needing to borrow that money. If the state did have to take out debt, it would have to be paid by 2023 or risk federal tax penalties, but that debt would not accrue interest.

ESD Commissioner Suzi LeVine said in a statement that “having one of the nation’s strongest unemployment trust funds is helping us weather this crisis better than many states. Coupled with a stronger than expected state revenue forecast last week, this means an improved outlook overall and a break for employers when they most need it.”

Beckett said “the way to solve this problem is get people back to work. That’s what happened between June and September. The system has worked well, but no system was ever designed to have a pandemic-related shutdown of business to the degree that we did.”

He added that “the legislature could step in and adjust these taxes and accept a lower trust fund balance, but in the end there still needs to be money to pay unemployment insurance benefits.”

“We do believe there’s a solution on the table somewhere,” Anton said. “It’s just finding the right idea that helps most people.”

A final report on the trust fund’s balance will be released in December.

 

 

 

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