Businesses face rising unemployment insurance taxes as job market struggles to recover

Rising unemployment taxes could hinder hiring

WASHINGTON — As if small businesses needed another reason not to hire, consider their latest financial burden: The cost of rising unemployment itself.

Employers already are squeezed by tight credit, rising health care costs, wary consumers and a higher minimum wage. Now, the surging jobless rate is imposing another cost. It’s forcing higher state taxes on companies to pay for unemployment insurance claims.

Some employers say the extra costs make them less likely to hire. That could be a worrisome sign for the economic recovery, because small businesses create about 60 percent of new jobs. Other employers say they’ll cut or freeze pay.

— Chuck Ferrar, who owns a liquor store in Annapolis, Md., expects to pay $9,000 in unemployment taxes next year, up from $3,000 this year. Health care costs for his employees will rise by $8,000, or 17.5 percent. “When you start adding this up, it turns into real money,” he said. “If I lose an employee through attrition, I will not replace him. You can’t afford to do it.”

— Sam Schlosser, owner of Plymouth Foundry Inc. in Plymouth, Ind., said his unemployment tax bill could double next year. Revenue at the family-owned company, which makes iron castings for machine parts, has fallen about 50 percent, he said. In case of higher taxes, his company may have to consider layoffs, he said.

— Marjorie Feldman-Wood, president of Al’s Beverages in East Windsor, Conn., which makes soda fountain syrup, said higher taxes would make pay raises less likely. Connecticut is borrowing from the federal government, and employers fear the state will have to raise taxes soon to repay the loan. “There’s only so much money at the end of the day,” she said.

Bruce Meyer, a University of Chicago economics professor, said his studies show that higher unemployment taxes usually lead to lower pay for employees.

Behind the trend are widespread layoffs. The number of people claiming jobless aid has tripled since the recession began. The demand has drained the funds that many states use to pay jobless claims. Nearly half the states are borrowing from the federal government.

Now the bills are coming due. States reset their unemployment insurance taxes at the end of each year, and 33 states will raise them next year, according to the National Association of State Workforce Agencies. The states’ tax revenue in the last fiscal year fell $42 billion short of what’s needed for unemployment aid.

Most of the tax increases are being triggered by laws requiring higher taxes to make up for a decline in state funds to pay for benefits. In some cases, cuts in jobless aid are required, too.

Florida’s minimum unemployment tax, for instance, will skyrocket next year to $100.30 per employee from $8.40. The maximum will rise to $459 per worker from $378. Like most states, Florida taxes companies more if they’ve recently laid off workers who draw benefits.

Hawaii will raise its average unemployment tax 10-fold next year, from about $90 per employee to more than $1,000. And Maryland’s minimum tax will more than triple from $51 per employee to $187. Its maximum will jump from $765 to nearly $1,150.

Federal law requires states to build up unemployment insurance trust funds in good times so they can pay benefits during downturns. The idea is to avoid having to raise taxes or cut benefits in a recession.

But the severity of this recession has bankrupted many states’ trust funds and forced them to borrow from the federal government. States eventually must pay back the loans. Otherwise, the federal government can raise taxes on their businesses.

The tax increases will have “a small, negative effect on hiring” because they will raise employers’ costs, said Wayne Vroman, an economist at the liberal Urban Institute.

Contributing to the problem is that many states cut their unemployment taxes earlier this decade when the economy was healthier. That left them unprepared for the waves of layoffs that began last fall. Some experts say business groups pushed for the cuts and set the stage for tax increases.

States have been swamped by a jump in recipients, from 2.8 million in May 2008 to nearly 9 million now.

The federal government is paying for about 4 million of those beneficiaries. These people exhausted the 26 weeks states typically provide and are receiving extended federal benefits. The unemployed can get up to 73 weeks of extra aid, for a total of 99 weeks, the longest extension on record.

AP Writers Deanna Martin in Indianapolis, Bill Kazcor in Tallahassee, Mark Niesse in Honolulu, Melinda Deslatte in Baton Rouge, Jim Davenport in Columbia contributed to this report.