A Vicious Cycle of Taxes and Unemployment

Higher taxes are bad news for employers and employees

A new study by the National Association of State Workforce agencies showed that at least 35 states will have to increase unemployment insurance taxes in 2010. The average hike will be a whopping 27.5%. That’s going to be tough for businesses still reeling from the recession. Although economic conditions are showing some signs of improvement, this new finding suggests that recovery is going to take some time.

State insurance trust-funds

States are worried about whether their unemployment insurance trust funds will be adequate to cover unemployment claims. To date, states with tapped-out insurance trust-funds have had to borrow over $30 billion from the federal government to cover claims. That number is projected to grow to $90 billion over the next two years. Employment taxes are the source of both federal and state unemployment funds, so if the federal loans made to states to cover claims aren’t repaid, huge unemployment-tax hikes are inevitable.

The ripple effect of increased unemployment taxes

Tax measures to replenish unemployment funds are bad news for both employers and employees. As business taxes go up, funds for job creation, hiring, and compensation increases will go down. President Obama’s goal right now is to create more jobs, and some employers were predicting they would start hiring in 2010. However, as employers’ dollars are diverted into loan repayments and higher unemployment taxes, hiring efforts will be stalled. At this point, anything that discourages hiring is a huge threat to economic improvement and the sustainability of government unemployment funds.

Take Hawaii, for example

When it comes to taxation, good intentions often go awry. Back in 2007, for example, Hawaii eased up on unemployment taxation as its unemployment rate hovered around 3%. That may have made sense in the short run, but now that the state unemployment rate is more than double that amount, Hawaii has a serious shortage of unemployment-benefit funds. This year, annual taxes are slated to increase from $90 to $1,070 per worker.

Although lawmakers hope to avoid such a tax increase and the additional unemployment claims that would be likely to follow, there may be no other option. According to an online article in The Washington Independent, Republican Governor Linda Lingle is urging lawmakers to limit the increase to 60% of the proposed hike, a $54-per-employee increase. Lingle believes anything higher will inevitably cause more joblessness in the state.

The need for unemployment taxes

Unemployment taxes are clearly necessary, but when not properly regulated they can be counterproductive. Because of the huge number of unemployed workers, unemployment pay is essential but funding efforts may pose insurmountable hurdles for many employers. Many businesses may be unable to create new jobs, and if that happens, current unemployment trends stand to worsen. Sustained, high unemployment rates in states struggling to fund unemployment claims could become disastrous for the nation as a whole.

The government’s response

Concerned lawmakers are watching the numbers and trying to minimize the discouraging economic effects of benefit-fund shortages combined with increased unemployment claims. A new council has been formed to strategize an increase in the taxable wage base and to allow employers to pay taxes in installments over the 2011 and 2012 tax years. These measures could help stave off disaster until the economy actually recovers and unemployment claims stabilize at more manageable rates.

Other recent posts by bryanh