Business Faces Taxes to Offset Unemployment Insurance Debt

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

While much attention is focused on Governor Jerry Brown’s initiative tax proposal to fund education and public safety, a tax increase on business is included in the governor’s newly proposed budget. Brown wants to tax business on a per employee basis to make initial down payments in the debt created by the state’s Unemployment Insurance Fund.

Last week, Fox and Hounds ran Greg Lucas’s complete analysis in Capitol Weekly concerning the $10-billion hole in the unemployment insurance fund. As Lucas pointed out, “absent change in the status quo, five years from now – when the administration says the fund will still be insolvent – employers will be paying some $1.8 billion more than they do now, about $135 more per employee.”

With California businesses already facing an unfriendly business climate and the threats of new taxes pushed by different interests, a tax increase proposal that may go under the radar is another knock against business.

The debt in unemployment insurance is part product of job loss during the great recession and part due to doubling in weekly benefits mandated by the legislature over a four year period starting in 2001. The fund was already in financial trouble by the time the state hit the $450 weekly benefit in 2004, well before the recession.

The governor has proposed raising business taxes to help pay the interest on the money borrowed from the federal government to pay unemployment claims and repay funds borrowed from the state’s disability fund.

California is not the only state in this fix. Twenty-seven other states have a debt to the federal government to fill the hole in their unemployment funds. States have responded by raising state payroll taxes, making benefits to workers less generous or a combination of the two.

Some states including Idaho, Texas and Illinois issued bonds to pay back the money they owed the federal government. The state of Illinois issued a $2 billion bond figuring the interest rate it got on the bond would be better than the 4% it had to pay the federal government saving both the state and businesses money.

Still a bond is paying off debt with a new instrument of debt. Officials in the California treasurer’s office said they have no plans to consider a bond to satisfy the federal loans.

So the focus is on the governor’s budget tax proposal. The tax surcharge would start at $39 per employee in 2013 and increase to an average $61 in 2014. But the state tax will not be the only burden if the refund of the federal loan money is not made in time.

Employers receive a credit from the federal government for federal taxes paid under the Federal Unemployment Tax Act. If the state does not repay its debt in time, the credit is reduced meaning the employer federal taxes also go up an additional $21 per employee.

As I have argued on this site before, the answer to California’s budgetary problems is not to weigh business down more but to free business up to create jobs. It is common sense that the more jobs that are created by California businesses, the fewer citizens are in need of unemployment insurance and the more revenue the state will collect from these employed taxpayers.

Requiring a new tax on business on top of other business restraints without seeking major reform is just bad for business and that makes it bad business for the state.

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