“Big surprise coming for small employers in particular”
ST. PAUL, MN—Even as Minnesota companies strive to recover from the deepest recession in decades, the total unemployment tax collections paid in by employers is climbing and set to double by 2014, the Freedom Foundation of Minnesota has learned. This increase will allow Minnesota state government to pay for hundreds of millions of dollars the state has borrowed from the federal government for extended unemployment benefits.
“This is unprecedented in the unemployment insurance program,” said Lee Nelson, chief counsel at the Department of Employment and Economic Development (DEED). “We’ve never had a recession like this one to get through.”
After posting a reserve of more than $700 million in 2008, the state unemployment trust fund, which is financed by taxes on employers, went into a freefall. Forced to borrow from the federal government to pay record unemployment benefits, the state unemployment trust fund is currently $539 million in the red and projected to be $1 billion in the hole by the end of 2011.
The state has already received notification that federal unemployment taxes on Minnesota for-profit employers will be increased for several years beginning in 2012 to pay back the unemployment trust fund.
The increased federal unemployment tax, combined with increased state unemployment taxes on companies that laid off workers during the recession, will result in an overall doubling of the unemployment tax collections from Minnesota employers at a critical time in the economic recovery, according to Nelson.
“I’d say unemployment taxes in 2014 are going to be twice what they were in 2009,” Nelson said. “The $836 million in unemployment tax revenue paid in by employers in 2009 is expected to reach $1.7 billion in 2014.” Currently, employers pay a federal unemployment tax of $56 per worker per year. The federal tax will increase by $21 to a fee of $77 per worker in 2012 and increase an additional $21 per worker in following years, until the state unemployment trust fund gets back in the black, now expected to be in 2015.
“This fund isn’t going to be healthy until after 2020,” Nelson said. “It’s just mind boggling. You’re looking at something that’s going to be a huge amount of revenue and all you can do is hope there’s not a downturn between now and 2020.”
Minnesota companies that laid off workers will get a double whammy in the form of a significantly higher state unemployment tax bill as well. In Minnesota, employers get the bill for unemployment benefits paid out by the state during a downturn well after the fact. The amount of the state unemployment tax increase is based on the company’s history of layoffs and the total benefits paid out over several years.
“There’s a big surprise coming for small employers in particular,” Nelson noted. “It’s formula driven, you’ve got to pay it over a period of four years. It’s going to be expensive. Employers are going to see increased taxes quite a bit. You’ve got to pay the bill. The money has to come from someplace.”
Minnesota’s unemployment rate, now 7.0 percent, is expected to remain above five percent through at least 2015, according to DEED projections. The $1.7 billion in unemployment benefits paid to Minnesotans in 2009 was almost double the previous record amount paid out. Unemployment payments are projected to remain at $1.2 billion through 2016. The increased cost of doing business due to higher unemployment taxes may be a factor in future budget discussions at the state legislature, according to Nelson.
“It’s something people ought to be aware of. It’s a cost that’s coming to employers,” he said. “Here’s what employers are going to be paying, we know these are increased costs, what else are you going to do?”
Minnesota is among 31 states and the Virgin Islands that have borrowed a total of $38.1 billion from the federal government as of June 15th to pay unemployment benefits. Congress is currently weighing a measure for another extension of the federal unemployment benefit program through November. Also deep in red ink, the federal unemployment trust fund is borrowing funds to loan states from the federal treasury.
Tips, comments or suggestions? Contact Tom Steward, FFM Investigative Director. 952-451-3684.