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Tax shock ahead for employers
Oct 19, 2009 (06:10:09)
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State says layoffs drain jobless benefits trust fund
Recession-fueled layoffs have drained more than $550 million from Maryland's unemployment-benefits trust fund, which will trigger an automatic - and hefty - tax jump for businesses next year.
The state said Monday that it expects that its annual Sept. 30 calculation of the fund balance will show that the largest allowable increase is needed to replenish the fund, which paid out more in the first seven months of the year than it did in all of 2008 as unemployment soared. The increase will vary for employers depending on their history of claims against the fund, ranging from an additional $136 per worker in 2010 for companies that haven't laid off in recent years to an extra $383 per worker for employers with many layoffs.
That's a nearly fourfold increase for businesses at the bottom of the tax-rate scale, a group that includes just over half of Maryland employers.
"We've had an unprecedented amount of demand on the trust fund," said Thomas E. Perez, the state's secretary of labor. "In recessionary times, you do need these adjustments so the fund can remain solvent."
Maryland's unemployment rate jumped from 4.5 percent a year ago to 7.2 percent last month, the worst in 26 years. As more laid-off workers filed for unemployment benefits, the fund's balance fell from nearly $900 million a year ago to $341 million by the middle of this month.
But 21 states and the U.S. Virgin Islands have nothing left in their trust funds. They've had to borrow from the federal government to continue paying benefits to unemployed residents, according to the U.S. Department of Labor.
"It's safe to say that virtually all states will see significant increases in taxes for employers in 2010," said Ronald Adler, president of human resources consultant firm Laurdan Associates Inc. and the Maryland Chamber of Commerce's point man for unemployment insurance.
The Maryland tax rates are calculated every year using a formula based on the amount of money in the trust fund compared with total taxable wages, with six possibilities depending on economic conditions. It won't be official for a week or so, but Perez said "it's pretty clear" based on the current balance that employers will jump from the second-lowest rates to the highest on Jan. 1. All employers pay the tax, no matter the size of the company.
Adler, who sits on the state unemployment insurance oversight committee, said he had been warning his clients that such a shift was likely. The reaction, he said, has been "quiet shock."
"It's when you put it with everything else, that's the problem," he said. "For many employers, conditions haven't improved. If they're not laying off, they're not hiring. They're trying to keep a very tight control on labor costs."
Patricia M. Baldwin, treasurer of Reliable Contracting Co. Inc. in Millersville, said she understands why the rate is ratcheting up, but that doesn't make it any more welcome. Like businesses nationwide in the hard-hit construction industry, Reliable has been buffeted by the ripple impacts of the housing downturn and credit crunch. Baldwin expects the company's unemployment-insurance taxes to rise 50 percent.
Because Reliable has a profit-sharing plan for employees, extra costs aren't good for any of the workers. But that's just part of the story.
"We laid off 200 employees. We don't have work," said Baldwin, whose company's employment is down to about 330. "Now you add the additional costs, I may have to lay off more. So it's not helping."
The timing could not be worse, said Ellen Valentino, Maryland state director for the National Federation of Independent Business, a trade group for small firms. She's unhappy that the General Assembly approved a change this year allowing part-time workers to draw benefits when they're unemployed. She said that alone is not to blame for the big increase coming Jan. 1, but "it's a factor that should not have come into play."
The state Department of Labor, Licensing and Regulation, which said 16 other states extend benefits to part-time workers, estimates that the cost of that change has been about $500,000. That's a tenth of one percent of the reduction to the trust fund in the past 12 months. Still, noted Baldwin, the part-timer payouts started only in April.
Perez said letters will go out to every Maryland employer in the next two weeks to warn them of the increase. His department will work with businesses that need payment plans, he said.
There were just under 142,000 employers in Maryland this summer. That's down almost 3,000 from a year ago, a drop the state attributes to the recession.
The O'Malley administration intends to propose changes to the unemployment-insurance system that would make Maryland eligible for $126 million in incentives from the federal government. The changes would add costs - one possibility is increasing from $8 to $15 the weekly allowance unemployed workers get for each dependent - but Perez said the incentive money should allow the state to more rapidly work its way down the tax-rate scale in 2011.
The state used to levy a surcharge equally on all employers when its trust fund balance shrank too low, but businesses with no layoffs didn't appreciate being dinged as hard as those with lots of ex-employees drawing benefits. Zero-layoff employers have seen much more than fourfold increases during or immediately after some recessions, Perez said - 28-fold in 1976, for instance, and 23-fold in 1991.
The shifting tax tables, recommended in 2005 by a task force of businesses, labor groups and political leaders, are meant to avoid drastic increases while still keeping the state's fund solvent. Perez said he's "confident" that Maryland will not join the states going to Uncle Sam with hats in hand for money to pay unemployment benefits.
Poor planning paired with the rapid rise in long-term unemployment is what pushed many states' funds into the red, said George Wentworth, policy analyst with the National Employment Law Project.
"What states should be doing is building the reserves when times are good," he said. "Going into calendar year 2001, which was just before the last recession, states had about $54 billion in reserves. Going into calendar year 2008, just prior to this recession, states had about $38 billion in reserves."
The unemployment-insurance system was set up in the mid-1930s, during the Great Depression. In no recession except this one have so many state fund balances dwindled to zero, Wentworth said.
"Maryland's been better than other states in terms of still maintaining solvency, but it really is a national problem," he said.
Copyright © 2009, The Baltimore Sun
By Jamie Smith Hopkins | The Baltimore Sun
September 29, 2009
