Spike in Federal Unemployment Tax Ahead
Though the recession is technically over, a high rate of unemployment still plagues Connecticut—and costs employers. And things could get much worse for them very soon.
Many states, including Connecticut, have outstanding loans to the federal government for their unemployment compensation system that will trigger a special rule this year that calls for increasing employers’ FUTA tax rate by an additional 0.5%, an increase that will be applied to pay down Connecticut’s debt.
The special benefit cost ratio (BCR) increase is tied to a formula that figures states’ unemployment tax efforts compared with average benefit payouts over five years.
Before the recession, Connecticut employers were annually charged with a FUTA of $42 per employee in addition to their regular state unemployment taxes and their experience rate charges.
However, the FUTA tax is automatically increasing by $21 per employee every year in states that have not repaid the loans. In January, Connecticut businesses faced their third annual increase in a row, which amounted to a payment due of $105 per employee.
With a fourth regular increase expected this year, Connecticut businesses are likely to see their 2014 payment jump to $126 per employee. But with the BCR surcharge, that figure could rise next January to $161 per employee.
The state can apply for a waiver on the rule, which includes also ensuring that there is not a “net decrease in solvency” in Connecticut’s Unemployment Compensation Trust Fund between Oct. 1, 2013, and Sept. 30, 2014.
If the state applies for a waiver before July 1—and absent another downturn in the economy—Connecticut businesses could avoid this additional tax.
How We Got Here
Connecticut had to borrow nearly a billion dollars from the federal government to shore up our unemployment compensation trust fund during the recession.
Employers are required to repay this debt through increased federal unemployment taxes (FUTA taxes) as well as special assessments. The federal unemployment tax on states with outstanding loans to the federal government increases by 0.3% each year the debt is outstanding.
Additionally, the special assessment imposed on employers each July 1 is an extra tax for each employee. In 2013, that tax was $15 for each employee.
The threat of this added tax burden makes it all the more urgent that we help Connecticut businesses trying to dig themselves out of the recession. With each year since the recession began, employers have shouldered higher unemployment taxes and special assessments.
Any effort by the General Assembly to use funds from the projected state budget surplus to pay down a portion of the interest on the debt owed to the federal government to shore up our Unemployment Compensation Trust Fund would go a long way to help the business community and get businesses hiring again.
CBIA encourages legislators to understand the threat faced by businesses as they continue to pay down the huge debt created by the recession. Businesses didn’t create the problem, but they could use a hand from the state in helping to resolve it.
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