Employers Face Tax Hikes As Unemployment Fund Goes Broke

Issues & Policies

Connecticut businesses may soon see the first of a series of hikes in unemployment taxes this January—and more increases could follow. 

As a result of the 1.1 million claims for unemployment benefits filed since March, $5.5 billion in state and federal benefits were paid out to Connecticut residents.

The state’s unemployment compensation trust fund entered the pandemic with a balance of approximately $700 million, only half of the fund’s solvency goal, and well short of what was needed to cover the unprecedented number of claims. 

Even with additional federal stimulus dollars funding many of the extended benefit weeks, the state Department of Labor borrowed hundreds of millions dollars from the federal government to ensure all benefit claims were paid.

Already $402 million has been borrowed, with arrangements to borrow hundreds of millions more in the coming months.

Experience Rating

While the state takes out the loan, Connecticut’s business community is exclusively responsible for paying it all back—with interest. 

For now, those federal loans are interest free, but will be subject to a 2.4% interest rate beginning Jan. 1, 2021.

Absent the federal government providing an additional interest free grace period, or turning the loans into grants, it will mean higher federal unemployment taxes on employers in the state.

In addition to higher FUTA taxes, it could also result in annual per employee special assessments like those levied on employers to repay the federal loans taken during the 2008-2010 recession.  

Unfortunately, the pain may not end there, as federal taxes make up only half of a business’ total unemployment tax liability. 

State unemployment taxes are based on a business’ experience rating, or, in other words, how often current or former employees collect unemployment.

Emergency Powers

Considering the number of unemployed individuals would result from shutting down the state’s economy, Gov. Ned Lamont used his public health crisis executive order powers to freeze experience ratings at pre-pandemic levels.

However, this experience rate freeze ends when the governor’s emergency powers end in February.

Lawmakers must heed calls for long overdue reforms that will result in a healthier unemployment trust fund.

Even with an additional extension of the governor’s powers, at some point, experience ratings will be increased to reflect the pandemic related layoffs.

Businesses that rarely, if ever, had individuals collecting unemployment will likely see higher state unemployment taxes on top of higher federal unemployment taxes.

Connecticut businesses did not cause the pandemic nor the resulting massive levels of unemployment, nor should they be exclusively saddled with paying for it.

Reforms Needed

Lawmakers must seriously heed calls for long overdue reforms that will result in a healthier unemployment trust fund in the future without any reduction in existing benefit levels.

These reforms include: 

  1. Increasing the earnings threshold to qualify for unemployment benefits from $600 of earnings in a year to $3,000 in earnings in a year. Most states are already at this earnings level and Connecticut hasn’t changed its threshold since 1968. 
  2. Requiring individuals in all cases to exhaust their severance payment before collecting unemployment benefits, and
  3. A three year freeze on the maximum unemployment benefit rate. 

These small steps would help ensure benefits are available in the future for the workers that become unemployed through no fault of their own. 

For more information, contact CBIA’s Eric Gjede (860.480.1784) | @egjede


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