Jobless insurance deficit to spark tenfold tax hike


POSTED: Sunday, November 29, 2009

Natalie Iwasa, a self-employed certified public accountant, paid $90 in state unemployment compensation taxes last year.

Iwasa's bill will rise to $1,100 in March to make up for a shortfall in the fund, which pays benefits to out-of-a-job workers.

The state expects its unemployment trust fund, which is being tapped for $31.7 million per month, to run dry next year. The projected deficit has triggered a tenfold increase in unemployment insurance taxes, with the first installment due in April unless Hawaii legislators pass a new law or Gov. Linda Lingle makes an administrative rule change.

Under the new schedule, unemployment insurance taxes will range from $180 to $2,100 per employee based on a company's unemployment experience rating, which is determined by a company's longevity and employment track record. Employers, who are currently paying an average of $90 per employee a year in unemployment insurance taxes, can expect to pay an average of $1,070 per employee.

“;When you have a small business, every dollar counts,”; Iwasa said.

While some may not consider a thousand-dollar increase substantial, Iwasa has had to reduce expenses and work more to offset added costs. And, when the tax is spread across larger Hawaii businesses and industries, the negative impacts are multiplied, said Dave Rolf, executive director for the Hawaii Automobile Dealers' Association.

Understandably, the hot topic in Hawaii's business community is what to do about the soaring unemployment compensation tax rates. When nearly every Hawaii business is trying to do more with less, few are comfortably positioned to meet increased tax burdens.

“;Our No. 1 priority is to reduce the impact on businesses,”; said Jim Tollefson, director of the Chamber of Commerce of Hawaii. “;We are aware that there will be an increase in the unemployment tax, but we are trying to find ways to alleviate the impact.”;



The state could bring relief by adjusting coverage, eligibility, benefit levels, wage base, tax rates or triggers; however, the lowest average increase would still be about fivefold, said Darwin Ching, director of the Hawaii Department of Labor and Industrial Relations. State legislators, including Rep. Karl Rhoads and Sen. Sam Slom, are working on legislative relief and the DLIR has identified about 10 alternatives, which can be reviewed online at http://www.hawaii.gov/labor/ui/taxalternatives.

; “;People understand and recognize that we have to replenish the trust fund, but the theory underlying this drive to reduce the increase is that there are a lot of businesses on the edge,”; Ching said, adding that DLIR is vetting alternatives with Hawaii businesses and lawmakers.

If all parties agree on relief, efforts will be made to fast-track legislation or effect an administrative rule change, he said.

“;But nothing is set in stone and there is no guarantee that the Legislature would go along with the proposals,”; Slom said.

Two of the most popular alternatives require the state to borrow millions from the federal government, Ching said. Loans are interest-free the first year, but 4.76 percent interest is charged if repayment takes longer, he said.

“;There's no free lunch; you have to pay it back,”; Ching said.

Rhoads said Hawaii businesses and the state must decide whether they want to “;pay up now or run a debt and pay later.”;

“;If I were in business now, I'd probably want to take the mitigating option,”; he said. “;It's probably the next year or so that will be most difficult.”;

Given the anticipated holiday downturn, Hawaii retailers are anxious about the timing of the increase, said Carol Pregill, president of the Retail Merchants of Hawaii.

“;If the holiday proves as bad as the National Retail Association has predicted, what resources are going to be there when this hits in April?”; Pregill said.

Hawaii businesses benefited from government intervention in 2007 when the Legislature passed a tax holiday, which included a provision to raise the tax rate if the trust fund dipped too low.

“;When the law was enacted, it put more money in people's pockets,”; Pregill said. “;It was a good run.”;

When the state's unemployment trust fund swelled to a record $552 million in 2007, few could have anticipated the magnitude of the current downturn, said Rhoads, who supported the measure. Now, he is working with the chamber, the state and fellow lawmakers to devise a fair solution before time runs out.

“;It's difficult to fast-track a bill or get a special session unless everyone is singing from the same song sheet,”; Rhoads said.

Even if a bill passed in mid-February, taxes probably would be due before the new rates applied, he said.

Trust fund variables such as business contribution, interest and claims complicate the issue, Ching said.

If business contracts and unemployment grows, the fund will need more money, Ching said. A provision that allows qualifying nonprofits to self-insure also could reduce collections, he said.

An estimated increase of $30,000 in the state's unemployment insurance for 2010 is cost-prohibitive for Holy Nativity School's tight operating budget, said school head Dr. Robert Whiting.

“;After we carefully weighed our options, and given our historically low unemployment claims, we decided to self-insure,”; Whiting said.



While benefits from the unemployment trust fund have put food on many Hawaii tables during this economic slump and helped keep the economy afloat, increasing the burden on state businesses could eliminate jobs, cut into capital improvements and cause teetering businesses to go under, said Ben Godsey, president of finance and operations for ProService Hawaii, which handles human resources for about 9,500 employees at various companies statewide.

“;The real risk is that this is a big economic shock right as our economy stabilizes,”; Godsey said. “;Expansion will shut down and businesses will be very conservative about hiring new employees.”;

A $3.8 million unemployment compensation tax bill next year could break Hawaii's struggling auto industry, which expects annual sales to drop to an unprecedented low of 34,000 this year, Rolf said.

“;Many (dealers) have felt the cuts that they have made have gone through muscle; this actually breaks bone,”; Rolf said.

When the taxes comes due in April, Hawaii's auto dealers will have to cut expenses, absorb the costs or pass them to the consumers, Rolf said.

Some 75 dealership jobs islandwide would have to be cut to make up for the tax increases, or $115 added to the purchase price of every car, he said.

To get the state's fund balance back up to an adequate amount of nearly $400 million, Hawaii businesses would need to cut 10,000 jobs, Rolf said.

Without intervention, Outrigger Enterprises, which developed the Waikiki Beach Walk and runs the Outrigger- and Ohana-branded hotels and resorts, will see a seven-figure increase in their unemployment compensation taxes, said David Carey, president and chief executive officer of Outrigger Enterprises LLC.

“;Although it will hurt a great deal, we'll be OK as a company,”; Carey said. “;But many of our tenants and restaurants have said that it will be a devastating hit.”;

Unless taxes drop, businesses will close, he said.

“;We need to slow down the pace of the payment and we may need to reduce unemployment compensation benefits,”; Carey said. “;Otherwise, it's literally going to kill small businesses.”;





        As Hawaii's unemployment rate has increased, more workers have drawn unemployment compensation, sending the state's fund toward the red:


2008$430 million
2009$125 million
2010-$14.9 million
2011-$61.4 million


        Source: Hawaii Department of Labor and Industrial Relations





        As of Nov. 19, about half of the states and territories had bankrupted their unemployment compensation trust funds and had borrowed money from the federal government to make them solvent. Hawaii has estimated its fund balance will drop to $125 million by the end of the year. Here are the amounts borrowed from the federal government:


Alabama$85 million
Arkansas$157.5 million
California$4.9 billion
Connecticut$81.3 million
Florida$649 million
Idaho$75.3 million
Illinois$781.6 million
Indiana$1.34 billion
Kentucky$506.5 million
Michigan$2.86 billion
Minnesota$168.3 million
Missouri$353.2 million
Nevada$16.3 million
New Jersey$789.9 million
New York$1.65 billion
North Carolina$1.34 billion
Ohio$1.48 billion
Pennsylvania$1.45 billion
Rhode Island$110.4 million
South Carolina$610.7 million
South Dakota$1.2 million
Texas$918 million
Virgin Islands$5.6 million
Virginia$28.3 million
Total$21.1 billion


        Source: U.S. Department of Labor





        Without intervention, Hawaii employers will pay much higher taxes next year. Here's a comparison of what Hawaii employers would pay under the status quo and what they would pay per employee under two of the most popular alternatives that are being discussed.




        ;Because of low trust fund levels, the tax schedule moves from A to F, the average tax rate moves up to 2.75 percent, and the tax wage base is increased from $13,000 to $37,800




        » Pro: The state would not have to borrow federal funds to get its unemployment compensation tax fund back on track by the second quarter of 2011.

        » Con: The dramatic increase in costs could force employers to pass the costs along to customers, cut staff or spending, absorb the costs at the risk of lower margins or go out of business.



        ;The average tax rate is adjusted from 1.5 percent to 1.0 percent, the tax schedule moves to E in 2010 and G in 2011




        » Pro: Tax relief and adjustments are balanced

        » Con: The state will have to borrow $3 million from the federal government, which will have to be made up through the general fund or by a special assessment paid by business owners.



        ;The taxable wage base is reduced from 100 percent to 50 percent




        » Pro: The across-the-board employer costs of this plan are lower than any other option that is being discussed.

        » Con: This option will leave the state $18 million in debt to the federal government. The money will have to be repaid through the general fund or a special assessment paid by business owners. Also, low-wage employers will not benefit from this plan.

Source: Hawaii Department of Labor and Industrial Relations