Connecticut employers this year paid the highest federal unemployment (FUTA) taxes in the nation, but the state Labor Department is expected to propose an increase in state unemployment taxes in 2015 despite several ways those costs could be reduced--and with Gov. Malloy stating he doesn’t intend to raise taxes.  

The double-crisis of high federal and state unemployment taxes is made worse by state’s history of having more lenient rules for claimants than most other states..

When the recession hit in 2007, Connecticut, like many other states, had to borrow heavily from the federal government to shore up their rapidly depleted unemployment compensation trust funds.    

Connecticut in fact borrowed nearly $1 billion to be able to keep paying regular and extended benefits to unemployment claimants during the wave of high unemployment. 

Who’s Really Paying

But while the state may have borrowed the money, it’s the employer community that is solely responsible for funding the unemployment compensation system—and for paying back the debt.   

Now, for every year the state still owes the federal government, the U.S. reduces the credit applied to their FUTA unemployment taxes by 0.3% until the debt is repaid. That means the federal taxes Connecticut employers must pay increases by 0.3% each year. 

What’s more, after five years of debt repayments—and unless the state asks for and receives a waiver—the feds can apply an additional penalty of 0.2%.

That means the total increase this year will be 0.5% more than last year. These tax increases go directly toward repaying the state’s debt, and Connecticut businesses should expect even more increases in the coming years.

Seven states and one jurisdiction won’t have fully repaid their federal debt by the end of 2014—California, Connecticut, Indiana, Kentucky, New York, North Carolina, Ohio and the Virgin Islands.

Wage Base Increase?

Officials at the state's Labor Department argue that had Connecticut businesses been paying higher state taxes all along, the state's unemployment compensation trust fund would have been solvent and therefore wouldn’t have needed to borrow as much from the federal government.

So the DOL has been working on a proposal that would increase the state's taxable wage base from the current $15,000 to $26,000--a whopping 73% wage base increase.

Advocates for higher unemployment taxes on employers claim Connecticut employers should pay more since they also pay high wages.

Of course, that argument falls apart when you look at our neighboring states, all of which have the same high costs and wages that Connecticut faces: Maine has a taxable wage base of $12,000, New Hampshire's is $14,000, New York is $8,500, Massachusetts is $14,000, and Vermont is $16,000.

Rhode Island is higher than Connecticut, with a taxable wage base of $20,200 (and they are the only state in New England that ranks worse than Connecticut in terms of economic competitiveness). 

Every one of these states either did not have the need to borrow as quickly as Connecticut did, or has already repaid its balance in full. 

In other words, our state unemployment tax revenues aren't the problem—rather, it's the amount of benefits Connecticut is paying out.     

Reforms Needed

Connecticut's indebtedness is a direct result of its historical failure to control unemployment costs through commonsense benefit reforms.

Thankfully, for the first time in recent history, the DOL is also considering some minor benefit modifications, but not without a package deal that includes permanent tax hikes on Connecticut businesses.    

Among the changes DOL is considering include an increase in the minimum earnings to qualify for unemployment compensation (a number that has not been adjusted since 1982), the disqualification of any individual during the period they are receiving a severance package from their previous employer, and freezing increases to the maximum weekly benefit rate for three years.

However, these changes won’t go far enough to address the historical, systemic problems with Connecticut's unemployment system. More should be done, and can be done. For example:

  • While 41 states, at the urging of the federal government, imposed a one-week waiting period for benefits, Connecticut chose not to, at a compounding expense of $30 million out of business' pockets each year.
  • Connecticut also should base individual benefits off annual wages, instead of the two highest quarters, to avoid unfairly rewarding seasonal workers
  • Finally, the state needs to help claimants return to work by making sure they post their resumes as a condition of receiving benefits after six weeks--a move that’s reduced the number of weeks of unemployment collected in the states that have implemented it.

If Connecticut is going to increase its economic competitiveness, it must control the cost of unemployment compensation and other costs. 

For far too long we have avoided making tough, fiscally prudent choices and only increased the pain on employers and reduced the opportunities for individuals.

It's time to end business as usual in Connecticut and make some practical reforms to unemployment benefits. 

For more information, contact CBIA’s Eric Gjede at 860.244.1931 | eric.gjede@cbia.com | @egjede