Businesses in Kansas face $209M increase in taxes to finance benefits for unemployed workers

Businesses in Kansas face $209M tax increase

TOPEKA, Kan. — Legislators questioned Tuesday how new corporate tax rates are being calculated to raise $209 million for Kansas unemployment benefits.

The state is automatically adjusting its tax rates because the Unemployment Insurance Trust Fund expects to run out of money by mid-February. The Department of Labor notified 69,500 businesses in mid-December; the changes took effect with the new year, and the first quarterly payments are due in April.

Some businesses are upset by the increases — and because they were notified only two weeks in advance of the changes taking effect.

During a hearing Tuesday, members of the Senate Business and Labor Committee noted that the biggest percentage increases would be paid by businesses with few or no layoffs in their recent past.

“It seems to me they’re being penalized,” said Sen. Julia Lynn, an Olathe Republican.

Labor Secretary Jim Garner said the problems were caused by the depth of the nation’s recession, the rapid acceleration last year of the state’s economic problems and how Kansas calculates tax rates for businesses.

Under a 2007 law, rates are cut automatically for most businesses when the trust fund appears to have more than enough money to pay a year’s worth of benefits. Rates for 2009 were set late in 2008, when trust fund balances seemed healthy, and some businesses paid no tax in 2009.

But the same law automatically increases tax rates when trust fund balances dip. The trust fund began 2009 with about $560 million, and the state raised about $198 million in employment taxes. The Department of Labor calculates that it needs to raise $407 million this year.

“Given the current recession, we’re not going to maintain solvency,” Labor Secretary Jim Garner told the committee.

The year-to-year changes in rates for many Kansas businesses are stark.

JR Custom Metal Products Inc., of Wichita, saw its unemployment taxes more than quadruple, from $10,800 in 2009 to $47,000 for 2010. The company, which manufactures equipment parts, has 73 employees.

“It means maybe not hiring an additional person,” said Patricia Koehler, the company’s president. “You can’t pass all these costs onto your customers.”

The tax is imposed against the first $8,000 of each employee’s pay, and JR Custom Metal saw its rate jump from 1.25 percent in 2009 to 5.4 percent. That’s the maximum rate for companies, like hers, that historically have paid more into the trust fund than has been claimed by workers it has laid off.

In Pittsburg, Midwest Minerals Inc., which operates 16 rock quarries, also has been told it must pay the maximum rate in 2010. The difference is about $35,000 for the company, which has about 100 employees.

“There really wasn’t any notification of this,” said John Clark, the company’s controller. “We knew there would be the increase — it’s just the magnitude of the increase.”

The tax rate varies for individual businesses, based in part on how many claims for benefits have been filed in the past by workers they have laid off.

The maximum tax rate is higher — 7.4 percent — for businesses that have a “negative” history, paying less into the trust fund than their laid-off workers have received.

Those businesses, about 25 percent of the total, also don’t receive a cut in rates when times are good and trust fund balances are healthy. Thus, their rate adjustments this year aren’t as drastic.

Garner said an advisory committee is reviewing such issues. The Senate committee plans to continue its hearings next week.