TERRIBLE TIMING

The pending Unemployment Tax increase is certain to make matters worse.

Ellen Sauerbrey for Maryland Business for Responsive Govenment

With many businesses struggling to survive the current recession, a significant increase in Unemployment Insurance (UI) taxes is a potentially ruinous prospect. Higher taxes in a recessionary climate will pressure employers to delay hiring/or increase the number of layoffs. The irony is that the hefty employer tax increase scheduled to begin in January 2010 is required to replenish the Unemployment Compensation fund which has been depleted by layoffs. Employers who have experienced more layoffs, and presumably are under the greatest stress, are also the ones who will pay the highest tax increase.

In January, Maryland employers will be assigned Unemployment Contribution rates using “Table F,” which is the maximum level for the mandated “contributions” or taxes used to cover employees for Unemployment Insurance. Employers will pay taxes that range between 2.2% and 13.5% of annual taxable wages of all their employees or the first $8,500 in wages paid to each employee. Depending on an employer’s underlying “experience rate,” the actual dollars amount will range from $187 to $1,147.50 per employee earning $8,500 or more per year. A company with no layoffs in the past three years will have the lowest rates increases.

This should not come as a surprise because the formula that mandates this increase was enacted in 2005 with support from the business community. In addition, some of the business community supported extending benefits to part time workers, significantly driving up the number of applicants.

This is an excellent example of how seemingly good public policy can result in adverse unintended consequences.

What is the purpose of the Unemployment Insurance Law in Maryland? The statute (8-102) indicates that the purpose is “to prevent the spread of involuntary unemployment and to lighten its burden…” Before we raise the UI tax on employers to the highest level, perhaps we should ask ourselves whether this will force employers to lay off more people.

Anyone who paid attention in Economics 101 knows the answer is yes. However, if we do not increase these taxes, the UI Trust Fund for Maryland may be depleted and forced to borrow from the federal government. Let’s look at the alternatives before we passively accept the higher fees.

Option I Do Nothing - Allow the increases to take affect and risk the possibility that many businesses will reduce payrolls or move production to other states or out of the country altogether.

Option II Limited Increase - Reduce the required increase (50% or more) and monitor the Trust Fund balance to see what, if any additional increases are needed.

Option III No Increase – Eliminating the increase in UI Tax and allow the Maryland Trust Fund to borrow from the federal government if necessary.

UI Trust Fund balances earn interest; however, unlike other forms of deposit, these amounts are not available for investment in the local economy for job creation. Balances in state UI Trust Funds are used to offset the Federal Deficit, which is an important reason why the federal government encourages states to impose higher taxes and maintain larger balances.

What happens if Maryland borrows from the federal government? Any money that Maryland borrows must be repaid with interest. Absent specific legislation to charge employers, the interest expense in question would be payable from the state’s general fund.

Which is better: impose higher UI taxes without borrowing or lower UI taxes and possibly need to borrow? The answer depends on what you value more – jobs or the UI Trust Fund.