Still slammed by unemployment, states try to avoid tax hikes

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Exterior of the closed Illinois Department of Employment Services office at 2444 W. Lawrence Ave. in Chicago on Tuesday, July 14, 2020. - Chris Sweda/Chicago Tribune/TNS

As a historic wave of layoffs continues, states are grappling with evaporating funds for unemployment benefits that could force cuts to those payments or hikes in business taxes.

Thirty-one states already are dipping into federal CARES Act dollars or seeking federal loans to keep money in the unemployment coffers. Those and other states also are considering legislation or other actions to fend off business tax increases triggered by high jobless payouts.

Unemployment insurance trust funds are paid for by business taxes and pay out benefits to laid-off workers. If the funds start to run out of money, state and federal law triggers tax increases to replenish the accounts.

“It is a big deal for states and businesses,” said Shelby Kerns, executive director of the National Association of State Budget Officers. “States generally do not want to increase taxes on businesses in an economic downturn, and borrowing only pushes those increases to the future, which can make the economic recovery more difficult.”

Twenty states have asked for federal loans to tide them over, ranging from California to Texas, according to U.S. Treasury Department records. Most recently, Louisiana borrowed $5 million Oct. 7 as a special legislative session drafted measures to suspend automatic tax hikes and benefit cuts.

More than a dozen mostly Republican states have opted to use federal CARES Act money to supplement unemployment trust funds, according to Emily Maher, a policy associate who monitors CARES Act spending for the National Conference of State Legislatures. Some Democrats have criticized the strategy, saying CARES Act money should be used for more immediate needs such as food banks and rent support.

Among states with Democratic governors, only Hawaii, Maine and Montana have dipped into CARES Act funds. Montana Gov. Steve Bullock set aside $200 million Oct. 7.

In a recent move among Republican states, Wyoming Gov. Mark Gordon allocated $25 million in CARES Act funds for unemployment on Oct. 8.

Hawaii and West Virginia are the only states to put both loans and CARES Act dollars toward the unemployment kitty. Hawaii has the nation’s highest rate of workers on benefits — 18% as of Oct. 3.

Jobless claims have decreased sharply since March but remain stuck at a historic high, creating unprecedented demand for help. In the week ending Oct. 3, 840,000 Americans applied for benefits, compared with pre-pandemic highs below 700,000 in relatively brief periods of the Great Recession and the debt crisis of the early 1980s.

Other states with more than 1 in 10 workers already getting unemployment benefits are California (15%), Louisiana and Nevada (11%) and New York (10%).

Other states are turning to legislation to try to avoid raising taxes. Michigan has not run out of money to pay unemployment benefits, but a 2015 state law triggers tax increases when reserves hit $2.5 billion, as they did in June. Now legislators are considering a bill to suspend that requirement during the pandemic.

The consequences of business tax increases are hard to predict, because they’re based on a complex formula that depends partly on how much money the trust fund needs and how many layoffs a company has made. But on average, unemployment taxes were at 3.5% in 2012 after the Great Recession and fell to 1.9% this year before the pandemic struck, according to an Equifax report.

The increases would hit Michigan businesses such as movie theaters and arcades the hardest, because they’ve been mothballed longest by closures and the formulas will ding them for the long and numerous layoffs, said Wendy Block, a vice president of the Michigan Chamber of Commerce, which backed the proposed legislation to postpone tax hikes.

“These businesses have been forced into closure for months on end, and there’s no end in sight,” Block said. “I could see this being the last straw for a business that’s already having trouble paying other bills including property tax.”

Louisiana took steps in September to delay automatic tax hikes and looked for alternatives to borrowing, but found no other way to supplement funds as depletion loomed.

State laws like those in Michigan and Louisiana triggering tax hikes can hurt employers struggling to recover from the pandemic, said Jared Walczak, vice president of state policy at the libertarian-leaning Tax Foundation based in Washington, D.C.

“Laws like this are intended to increase taxes precisely at the time businesses are least able to pay them,” Walcack said, “which is why states so often wind up creating exceptions to prevent the laws from doing what they were designed to do.”

States should be using boom times to set aside unemployment money for the next recession, so they don’t punish employers just as they need a break to reopen and rehire, he added.

Others say the pandemic was such an unpredictable disaster that states could not have avoided it, and so they need more federal help.

“States actually started this recession in better shape than the last one, but it was just so steep,” said Michele Evermore, a senior policy analyst at the National Employment Labor Project, which has advocated for at least three years of interest-free federal loans to help states get through the unemployment crisis without raising business taxes immediately.

Currently federal loans are interest-free only through 2020. Although a proposal passed by the Democratic-controlled U.S. House of Representatives would extend it through the middle of 2021, that provision is not in the Republican “skinny” stimulus bill.

Employer taxes could rise quickly again, especially in 2022 when the full impact of the pandemic is reflected in formulas used to determine taxes. New Jersey estimated in September it would take $919 million in new business taxes to balance the unemployment books.

Workers might also suffer when states facing hard times cut benefits.

To help state coffers recover from the Great Recession, Florida created complications for unemployment applicants widely seen as meant to discourage people from applying for benefits. That contributed to a backlog of cases that persisted into September.

After the Great Recession, 10 states cut unemployment benefits by shortening the maximum period to receive them below 26 weeks. North Carolina had some of the most severe cuts, in 2013 reducing the maximum benefits to as little as 12 weeks, according to a National Employment Labor Project report.

“North Carolina’s cuts were some of the deepest,” Evermore said, “although in fairness since the start of this recession North Carolina really turned some things around, worked to increase access and even recently increased benefits by $50 a week.”

North Carolina lawmakers approved the $50 increase in September, though the checks have yet to go out.

One bright spot is Washington state, which announced in September it would not have to raise business taxes by $200 million next year as anticipated. State law requires a “solvency tax” increase if the fund can’t pay seven more months of benefits, but brighter revenue forecasts made the tax unnecessary and the state will not have to borrow federal funds for now.

However, Washington likely will have to borrow money next year when the fund is projected to drop below three months’ worth of benefits, according to a report this month by the state’s Employment Security Department.

In some ways, laws like Michigan’s that force tax hikes early can be good for long-term fiscal health and prevent more catastrophic increases in the future, said Debera Salam, an associate director for employment tax at Ernst & Young. Michigan’s unemployment tax can be as high as 10% for some businesses, she said.

Postponing business tax increases “has a short-term impact of keeping employer taxes low and that keeps employers happy,” Salam said. “But it does not take into the account the long-term consequences.”

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