UC Taxes also on Fiscal Edge

If you thought your business tax burden related to unemployment compensation had reached its peak–think again. 

Like many other states, Connecticut borrowed heavily from the federal government to cover its share of costs for the extended unemployment benefits it was required to pay as a result of prolonged high unemployment.  For Connecticut to pay back this $710 million dollar loan, employers in the state are paying additional state unemployment taxes. 

Now, the federal government is also experiencing deep deficits as of result of paying its share of extended benefits to the tune of $20 billion.  With high national unemployment persisting and the extended benefits set to expire, there is growing pressure to further increase spending and add to this deficit.   

Congressional Democrats want any upcoming “fiscal cliff” deal to include a continuation of federal unemployment insurance, which is set to expire at the end of the year.

President Obama also recently proposed shoring up the federal account by increasing the tax wage base of the Federal Unemployment Tax Act (FUTA) from $7,000 to $15,000, followed by additional automatic increases indexed to yearly employee wage increases. 

There is also the possibility that in addition to the tax wage base increasing, Congress could also consider increasing the tax rate.  Regardless, both options would result in a net tax increase on Connecticut employers already facing unemployment tax increases at the state level.     

The Congressional Budget Office (CBO)has reviewed options to extend the Emergency Unemployment Compensation (EUC) and regular Extended Benefit (EB) provisions that were included in the ongoing stimulus provisions originally enacted back in 2009. CBO’s options range from $3 billion to $30 billion in new costs.

CBO also considered another alternative that would provide temporary fiscal relief to states  by delaying for one year the repayment of funds they have borrowed from the Unemployment Trust Fund, which is funded by a federal payroll tax on employers.

Under that option, the federal government would forgo about $3 billion of revenue in 2013 but would collect roughly that same amount in subsequent years.

Increasing payroll taxes on employers often decreases prospects for job creation. That’s why business leaders are expressing their concerns about the two- fold tax increases to congressional leaders. 

The situation remains fluid, especially as high-stakes negotiations on the fiscal cliff continue in Washington, D.C. We’ll have updates as decisions are made.

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