State’s failure to repay unemployment loan means higher tax for employers

State employers are being billed this month for an additional $21 per employee in 2011 federal unemployment tax as a result of the state’s failure to pay back a $1.7 billion loan from the federal government.

The tax, which will total more than $80 million for state employers, is a result of the state’s failure to repay a federal government loan granted to New Jersey to help foot the bill for unemployment insurance.  The tax increase is charged only to employers in states that have had a loan balance for two consecutive years.

The federal tax hit is in addition to a tax increase levied by the state this year in an attempt to restock the nearly insolvent Unemployment Trust Fund.  All told the boost in unemployment taxes will average nearly $180 per employee for employers throughout the state.

New Jersey is one of 20 states nationally that failed to repay the federal loan and so employers will be forced to foot the bill.  The loan balance stands at $1.4 billion, according to a state Treasury spokesman. 

Before July, employers paid federal unemployment tax – known as FUTA – on the first $7,000 of income at a rate of 6.2 percent.  In July, the rate dropped to 6 percent.  In order to help offset the cost, the federal government credits states back at a rate of 5.4 percent, making the effective rate .8 percent prior to July and .6 percent after.

To further aid states flooded with unemployment claims, the federal government makes available loans to help bolster dwindling or insolvent unemployment funds.  The feds, however, require repayment of the loan.  Any state that that has an outstanding loan balance on Jan. 1 for two consecutive years and fails to repay the loan by Nov. 10 of the second year faces a reduction in the 5.4 percent credit.

The result is a tax hike for employers, who cannot pass the costs on to employees. 

And the number is likely to grow.

Treasury spokesman Andy Pratt said the loan is unlikely to be paid back before late 2013 and business leaders said initial estimates put the payback of the loan further out.  Each year the state fails to repay the loan, the feds cut the credit by another .3 percentage point, which would effectively double the hit in 2012 and triple it in 2013.

This year, Michigan is in its third year of failed repayment forcing employers to pay an additional $63 per employee while Indiana is in its second year, forcing that state’s employers to pay $42 per employee.

The history behind the forced loan from the federal government is a sordid one.

According to the state Treasurer, who included the numbers in last year’s ‘Budget in Brief,” between 1992 and 2007 the state’s unemployment insurance fund was gutted in an effort by former governors to keep taxes down.  The $4.7 billion in diverted money left the fund lacking when the economy crashed in 2008, forcing the state to take the loan to help pay spiking unemployment insurance claims.

The resulting insolvency in the fund would have sparked a tax increase of as much as $683 per employeeas the state seeks to repay the $2 billion federal loan and restock the fund. But in an effort to soften the blow, the legislature passed a bill spacing out the payments over three years. 

Gov. Chris Christie has several times said he will institute “no new taxes,” yet this is the first time employers will foot this bill.  In addition, the unemployment tax on employers in the state is higher than at any point in at least the past five years.

The tax has not been on many employers’ radar, said Michael Egenton, V.P. of Government Affairs for the state Chamber of Commerce.  Not knowing the bill is coming will make the cut deeper, he said.

“Some of our members are aware of this but I wouldn’t be surprised if there are some out there who won’t see it coming,” Egenton said.  “These kinds of costs add up and that’s where I think it begins to have an impact on businesses both large and small ”  

Melanie Willoughby, a senior vice president at the New Jersey Business and Industry Association and a member of the state’s unemployment task force that convened in 2010, said the additional federal tax is not a surprise and was part of the calculation used by the task force in recommending the three-year phase-in.

Without the phase-in, New Jersey employers as a whole would have been hit with a crippling $1 billion dollar tax bill last year but instead are paying the freight over three years. The additional tax will not only restock the state fund but also allow the administration to repay the loan.

By extending the increase, Willoughby said, the state took the risk that the overall payout by employers would be more than if it was paid in a one-time shot, but the risk is so far paying off, she said.

“What the phase-in gives you is the flexibility of having to pay less because your economic conditions improve which is why we took the risk,” she said.

So far unemployment claims have decreased as has the number of weeks the average person collects, making the gamble, at least in the short term, pay off.

And while the solution was the best available, it has not set well with all of the agency’s members.

 “We do have people who say ‘this is terrible, why should we pay for a loan that wasn’t our fault’” she said. “The past is history. We can’t change what’s happened, but what we were able to do is make sure that it will never happen again and make sure that businesses are not paying a huge sum.”

State’s failure to repay unemployment loan means higher tax for employers