States Raise Payroll Taxes to Repay Loans

Demands on Depleted Unemployment-Insurance Funds Led to Borrowing of Nearly $41 Billion From Federal GovernmentState governments are borrowing heavily from the federal government to keep paying unemployment-insurance benefits and, even with the weak job market, most states are raising payroll taxes to pay off the loans.
Thirty one states, their unemployment-insurance funds empty, have borrowed nearly $41 billion from the federal government. California alone has borrowed nearly $8.8 billion as of mid-November, according to the Labor Department.

As states try to replenish the funds and begin to repay the loans, employers are facing increases in both state and federal payroll taxes, a potential barrier to new hiring.

"Employers were hit with these adjustments quite a bit last year," said Richard Hobbie, executive director for the National Association of State Workforce Agencies. A National Employment Law Project analysis found 41 states increased unemployment-insurance payroll taxes this year by an average of nearly 33.9%. The largest was a 168.5% boost from 2009 in Hawaii.
Payroll taxes levied by states fund unemployment benefits for up to 26 weeks—and longer in some states. The federal government requires states to pay benefits even if their unemployment funds run out of cash. As in past periods of high joblessness, the federal government has paid for extended unemployment benefits, this time for as long as 99 weeks.

The unemployment-compensation system, initiated during the Great Depression, was designed so most states build reserves when jobs are plentiful and few workers are receiving benefits, and then draw down the reserves in bad times. But few states were prepared for a recession as deep and lasting as the recent one, with unemployment remaining at a historically high 9.6% a year after the economy resumed growing.

During the 2008-09 fiscal year, states collected $31 billion of unemployment-insurance taxes and spent $79.4 billion on jobless benefits. Taxes are typically levied on a per-worker basis.

Arizona, which owed the federal government $172.8 million as of mid-November, increased its tax on employers by more than 50% at the beginning of this year to an average of $145.60 a year per employee. "The dilemma we face is, how do you do that without hurting the economic recovery we all hope is coming?" said Steve Meissner, communications director for the Arizona Department of Economic Security. "No one wants to do anything that would impose a new tax burden on businesses that are trying to come back in a tough economic time."
ndiana Gov. Mitch Daniels proposed cutting unemployment benefits earlier this month despite his state's 10.1% unemployment rate. Indiana has borrowed nearly $1.9 billion from the federal government to shore up its unemployment-compensation fund; next year, the state is to begin taxing businesses more to replenish the coffers.

Federal loans to states have so far been interest-free under a provision in the Obama administration's 2009 fiscal-stimulus law. But that waiver expires in January.

Texas, which has borrowed nearly $1.6 billion from the federal government and raised employer taxes, is offering $1.1 billion in tax-exempt bonds to repay loans before Washington begins imposing interest charges because, said Ann Hatchitt, a spokeswoman for the Texas Workforce Commission. The state, which employed the same strategy in the early 2000s recession, figures it will pay investors less than it has to pay the federal government.

The federal government also imposes a payroll tax on employers to fund unemployment compensation. In certain circumstances, Washington will increase its tax on companies in states that aren't repaying loans from Washington. Employers in as many as 26 states will face tax increases of between $21 and $84 per employee per year if their state governments don't repay Washington by November 2011. Employers in Michigan are already paying the added fee.

A business-advocacy group, Strategic Services on Unemployment & Workers' Compensation, is urging Congress to waive the interest on federal loans and delay the federally mandated tax increases until 2012. "This is something that is going to impose an additional payroll tax on businesses in almost all those states just at the time when we're trying to keep the cost of hiring down," said Douglas J. Holmes, president of the organization.
—Amy Merrick contributed to this article.