Employers face UI tax increase

By CMTA Staff

Capitol Update, Feb. 11, 2011

Unemployment continues to soar above 12% in California and 1.7 million residents received Unemployment Insurance (UI) benefits in 2010.

The State has borrowed up to $9.8 billion from the federal government to pay out a record $23 billion in unemployment benefits.  Now the Obama administrations’ budget contains a proposal that would give states the option to increase taxes on employers to fund their UI shortfall.

Obama’s plan would increase the minimum tax wage base from $7,000 to $15,000. These federal minimum tax wage base has remained at $7,000 since 1983. The federal tax rate used for unemployment insurance would be cut in half, meaning the federal government would not see an increase in revenue from the adjustment. The proposal gives states the choice of increasing taxes, cutting benefits or a combination of both.  Although these proposals would not go into effect until 2014, their approval will impact future decisions employers make regarding hiring and salary increases.

In addition, the Obama budget proposal would halt the automatic tax increases imposed on employers when the money borrowed reaches a certain level. This trigger is based on a State’s effort to pay the interest and principle of a federal UI loan.  California has accrued a debt of $9.8 billion dollars from loans they have received from the federal government of which interest is due September 2011.  Governor Brown has proposed that the interest be paid by borrowing money from the State Disability Fund, which is paid by employees.

These proposals fall far short of addressing the massive UI deficits that over 20 states are facing. Tax increases in the middle of a recession will only prolong efforts for a true economic recovery. Instead of federal UI extensions and tax increases, the federal and state government should focus on improving the business climate and foster job growth. Permanent high-wage jobs are key to turning this economy around.

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