Grim Reality of Unemployment Taxes

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In this space, we have been doing a lot of guessing on possible legislative proposals.  We will find out for sure what they are on or before January 25, the date of Governor Ige’s State of the State address.

In the meantime, there are realities we will have to deal with, such as paying for unemployment benefits.  Our unemployment system, as of January 8, 2021, has paid out $3.4 billion in unemployment benefits.  About half of it was funded by the federal government through various programs such as the $300 “plus-up,” but Hawaii employers and/or taxpayers are on the hook for the other half. 

At the end of 2019, the unemployment taxes that Hawaii employers had paid were sitting in a trust fund of about $600 million.  It’s now gone, and the State took out a $700 million loan from the federal government to keep the unemployment trust fund afloat.  There are several immediate consequences.

First, as we have written about before, our unemployment tax laws are designed to be self-sufficient:  if our unemployment trust fund is running dry, the tax rate ramps up to make employers refill the pot more quickly.  Because our fund hit the “empty” mark at the end of last year, the unemployment tax on businesses is supposed to go up to the highest statutory rate.  The Grassroot Institute of Hawaii has calculated that unemployment tax will triple in 2021 unless lawmakers change the system.  We hear that the Administration will propose legislative action to limit this impact, and the legislation, if proposed, may be considered and amended in the current legislative session.

There are other consequences under federal law that our legislature will not be able to fix.

First, if our State is borrowing money from Uncle Sam, interest may be charged.  The interest rate for “Title XII advances,” which is what these borrowings are called, is expected to be 2.2777% in 2021.  If we are unable to repay the $700 million, then, we as Hawaii taxpayers may be on the hook for around $16 million in annual interest.  Our State’s Director of Finance testified that this debt is “not legally an obligation of the state,” but the law does not seem to support that conclusion.  Federal law prohibits passing the interest cost to employers through the state unemployment tax system, which means it will need to be paid for by other funds such as collections of tax revenue.  Of course, there is a possibility that Congress could forgo interest because of the pandemic.  The Families First Coronavirus Response Act of 2020 did just that, waiving interest for all of last year, so Hawaii didn’t owe any interest to Uncle Sam on the $700 million as of the end of 2020.  Relief under that act ended, and the interest clock started ticking again, on New Year’s Day, at the rate of about $43,700 per day.

Second, federal unemployment tax will increase for those employers in a State that hasn’t fully repaid its loan by November 10 of the second year in which the loan was outstanding at the beginning of the year.  That is, if we can’t repay the $700 million federal loan by November 10, 2022, federal tax increases will kick in beginning January 1, 2023.  The additional tax is 30 basis points on the first $7,000 of wages to an employee, or roughly $21 per employee in 2023.  The tax ramps up in subsequent years.  It would be $42 per employee in 2024 and gets progressively worse in later years until the debt is repaid.  None of these dollars go to or are set aside for the State.  Again, Congress could change these consequences if it wants to, but it’s not something over which any one State has control.

Absent a spectacular miracle, like the federal government forgiving Title XII advances (our Congressional delegation has told us not to hold our breath for something like this to happen), the grim reality of our unemployment taxes is something we can’t avoid.  We paid a staggering amount of money in unemployment benefits in 2020, borrowing funds in the process.  Our state government will need to be accountable for that money somehow, and the 2021 Legislature will be debating whose backs will bear that burden.

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