Unemployment Comp Taxes to Increase

Everyone knows that the recession wreaked havoc on businesses and jobs in Connecticut. It also drained Connecticut’s Unemployment Compensation Trust Fund. That means even for companies that have retained jobs and had no unemployment compensation claims experience, every business’ unemployment compensation taxes are going to rise.

The question is: By how much and how soon? With the fund insolvent, state officials have had to borrow to keep paying benefit claim: and so far, Connecticut has borrowed more than a half-billion dollars from the federal government to keep making unemployment payments.

Now, employers in the state: who are the sole source of the UC Trust Fund: are facing the reality of higher unemployment comp taxes to:

• Pay back interest and penalties due on the federal loans
• Pay back the federal loans themselves
• Restore Connecticut’s UC Trust Fund to solvency

It is a quadruple-whammy whose financial impact and ultimate timing will be determined by state and federal policymakers.

Currently, for example:

• Federal law requires states to start paying back interest of 4% on the loans, starting in 2011. In Connecticut, that means a new $40 million unemployment compensation tax: $40 per employee: this year to pay back interest on federal loans. First payments would be due Aug. 1, 2011.
• Employers also face Federal Unemployment Tax Act (FUTA) penalties on borrowing to pay unemployment compensation. Without a waiver, FUTA taxes will increase by 0.3% in 2011, which will cost employers an additional $30 million.
• Connecticut’s Department of Labor has raised the issue of increasing the mandated amount of unemployment compensation reserves. This higher benchmark would also result in higher unemployment taxes in the long term. The department also raised the issue of increasing the taxable wage base. None of these suggestions address the spending side of the unemployment equation.
• President Obama has proposed to provide relief from unemployment tax increases for employers in 2011 and 2012. Interest owed by states that have taken federal loans would be eliminated for 2011-2012, meaning Connecticut employers would be spared a $40 million interest payment in 2011. It is not clear, however, if the president’s proposal will pass in Congress.

There are many developments taking place, and CBIA, through the HR E-News and Government Affairs website (gov.cbia.com), will be providing updates and explanations in the next several editions.

CBIA continues to remind state lawmakers of the reality of employers’ higher unemployment compensation taxes as the legislature grapples with fixing Connecticut’s budget deficit.