Legislature and State Government and Income taxes and Taxes and Legislation and Indiana Chamber of Commerce and Unemployment Taxes and Government & Economic Development and Economic Development

Payroll tax hike looming

February 23, 2009

First the good news about Indiana's insolvent Unemployment Insurance Trust Fund: As part of its $787 billion stimulus, the federal government has just agreed to stop charging interest on its loans to pay benefits to the jobless.

President Obama's package allows Indiana to continue zero-percent borrowing for unemployment insurance through 2010, a provision that will save the state $30 million in interest costs this year.

Now the bad news: Indiana already is $371 million in arrears to the feds. By the end of the year, unemployment insurance debt is expected to top $1.2 billion—or almost as much as the state will spend this year for its whole Medicaid program. And that assumes Indiana's rising unemployment rate, now at 8.2 percent, doesn't spike into double digits.

Debate over House Bill 1721, which would start to address the problem, is stalled on the Statehouse floor. Its most recent version would raise $260 million in new money annually for the Unemployment Insurance Trust Fund by hiking employers' payroll taxes. Economists warn about the consequences of saddling business with more taxes during a recession.

But even if businesses can shoulder those costs, that won't stop the bleeding, let alone retire the debt. Back in 2000, the trust fund had a $1.6 billion balance. Indiana has spent more on benefits than it's drawn in taxes every year since. Last year, Indiana collected $579 million for the fund, but paid out $986 million.

That's an unsustainable equation, lawmakers acknowledge.

"It pretty much has to be solved. It's like the budget. We don't have the luxury to leave it unsolved," said state Sen. Dennis Kruse, R-Auburn. "The federal government is not going to continue loaning us money [indefinitely] unless we have a plan. And introducing a bill isn't sufficient. We have to do something meaningful this session."

Kruse chairs the Senate's Pensions and Labor Committee. His counterpart is state Rep. David Niezgodski, D-South Bend, who leads the House Labor and Employment Committee.

The two, who are spearheading the unemployment funding debate, agree the crisis can be solved only by a blend of unpalatable options.

"There's nothing we can do but face it, and face it in a way that has the least impact on business as possible," Niezgodski said.

"There's a time when the federal government will say, 'What are you guys doing? What plan do you have?' If we don't show that we're trying to fix it ourselves, at some point in time the federal government will come in and tell us exactly how we're going to do it."

Persuading their caucuses and business leaders to face up to the problem is another matter. Hoosier companies already pay taxes of up to 5.6 percent on the first $7,000 of every employee's annual salary. HB 1721 would increase the salary base to $9,000 and take the tax rate to 8.2 percent, raising $260 million.

At the behest of the Legislature, the Indiana Department of Workforce Development has quietly been analyzing far more extensive changes.

According to DWD records, those include hiking the wage base as high as $12,000 and the tax rate as high as 10 percent. DWD also has analyzed scenarios where benefit payments to the jobless would be cut as much as 10 percent. Also on the table is a surtax on taxable payroll of as much as 10 percent.

John Conant, an Indiana State University economist, warns that big cost hikes could devastate businesses already struggling. He said they would greatly undermine Indiana's competitive edge when companies outside state lines consider establishing or maintaining operations here.

"Anything that increases the cost of employment is going to have some kind of dampening impact. Clearly, this is a horrible time to do that," Conant said.

"You certainly don't want to have to tinker at the margins in such a way that a national company decides they have to reduce production because of the overall recession and decides to do it in Indiana."

But trimming benefits to the unemployed could have just as dire economic consequences.

Hoosiers who qualify for benefits—generally people thrown unexpectedly out of work for no fault of their own—can collect up to $390 per week for 59 weeks. The money is intended as a bridge to help recipients buy groceries and make mortgage payments while they look for jobs.

Conant pointed out that jobless people will take far longer than usual to find new work these days. That not only increases the cost of unemployment insurance, it also dampens demand for businesses' goods and services. And only a miser would fail to consider the humanitarian implications.

"This also is not a time to be getting stingy," Conant said.

Indiana is one of eight states borrowing from the federal government to make unemployment payments, though the number is expected to grow. The taxes assessed on Hoosier businesses to fund the state's unemployment insurance program are among the lowest in the Midwest.

Business leaders have begun to accept that tax hikes to shore up the trust fund are inevitable. Now, they're focusing on stretching the repayment plan out as long as possible and persuading legislators that employees should help carry the load.

The Indiana Chamber of Commerce is advocating a mix of tax hikes and benefit cuts, including a $90 annual tax paid directly by every Hoosier employee. The chamber also wants to exclude the temporarily jobless, such as manufacturing line workers who build the unemployment insurance payments into their household budgets in anticipation of annual plant shutdowns.

Finally, both the chamber and DWD hope a series of administrative changes will yield big savings. This summer, DWD is expected to complete a major computer-system upgrade, which should help it sort out which applicants truly qualify for unemployment insurance. Raymond estimates failure to properly process and challenge flawed claims costs the system $100 million annually.

"This is an issue we raised for years. Nobody wanted to address it. Now we're in the worst recession in 60 years and we have to address it," said George Raymond, the chamber's vice president of human resources and labor relations. "We'll certainly do everything we can to prevent all this being dumped on employers. That is very shortsighted."

"A lot of employers I've talked to ... they're going from day to day," he added. "To go in and hit them with a major tax increase could throw a lot of them out of business. I don't think that does anyone any good."

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