Some Businesses Saw More Than 1,000 Percent Increase – Rates Will Climb Again Next Year

By Erik Smith

Staff writer/ Your Healthcare Today

OLYMPIA, Jan. 20.—Businesses across the state of Washington saw enormous increases in their state unemployment taxes this year, the result of the recession – some of them 1,000 percent or more.

            And now here’s the bad news.

            Next year the taxes will go up again. They’ll double. They'll keep rising until 2012.

            It’s the way the unemployment-insurance tax system works. But the severity of the last year’s recession has meant a dramatic increase in taxes even for those employers who managed to keep everyone on the payroll, and business is howling.

            Most of them found out about it last month when the state Employment Security Department mailed out notices of their 2010 tax rates. “Our profits are down 70 percent,” said Jeff Kirby, owner of a Bellevue security firm. “This rate increase took another 30 percent of it away. Next year, if another 30 percent goes away, what do we do?”

            The explosion in rates this year may not come as a surprise to those in Olympia who follow tax matters closely. Unemployment tax increases follow recessions as surely as night follows day. But this year there’s a twist: The severity of the recession has led lawmakers to consider taking one-time federal money now being offered for unemployment insurance programs. But the offer could require them to expand unemployment benefits – and that ultimately could drive rates up further. 

            Recession Creates Double Whammy

            In testimony before legislative panels over the last week, state officials and representatives of the state’s business lobby have laid out the story. The Employment Security Department presents statistics that show average unemployment tax rates nearly doubled for 2010. But the business lobby presents figures that show their members are paying as much as 16 times what they did last year.

            And the fact is that both sides are telling the truth.

            There are two elements to unemployment insurance – the basic rate, also known as the “social tax,” which keeps the unemployment fund solvent. Rates vary by industry. But an additional component of the tax is an employer’s experience. Any layoffs in the last four years mean a higher “experience rating.”

            Huge increases in unemployment last year prompted state officials to boost the basic tax rate this year, to keep the state’s insurance fund solvent. The average tax rate jumped from 1.55 percent last year to 2.38 percent, calculated as a percentage of payroll.

            But any business that laid anyone off as a result of the recession saw experience-rate increases on top of the basic tax rate. And that’s where the double whammy comes in. The Association of Washington Business and the National Federation of Independent Business have been polling their members to determine how big the actual increases were. Some of their findings:

n      A security firm saw its taxes go up 442 percent.

n      A Tacoma accounting firm saw a 403 percent increase.

n      A Goldendale auto-body shop saw a 538 percent increase.

n      A Burlington firm saw a 16-fold increase.

AWB lobbyist Donna Steward said some companies saw a tripling of the social tax, while the experience-rated tax increased 1,000 percent. And when the increases are considered in terms of actual dollars, she said they can make the difference between hiring a new employee or standing pat. She noted that one large employer in AWB’s survey will pay an additional $95,000 in unemployment taxes. “That’s two full-time employees for them that they are not going to be able to hire because they are experiencing these high tax increases,” she said.

Because of the way rates are structured, the taxes are expected to continue rising for the next two years and peak in 2012.

            Could be Worse

State officials say there’s good news – it could be worse. As long as the economy starts rebounding this year, they don’t expect the state’s unemployment insurance fund to run out of money. Twenty-six states already have been forced to ask the federal government for loans, and 40 states are expected to be in that position by the end of the year. Should that have happened in Washington, even larger increases in taxes would have been triggered.

Employment Security Department Commissioner Karen Lee said increases in payouts last year were enormous. “We simply broke records all over the place,” she said.

Last year the state paid out $4 billion in benefits, triple the amount paid out in 2008, and five times the amount paid out 2007. The federal government provided about one-third of the money. About 475,000 people received benefits, a 64 percent increase over 2008. Regular payments range from $133 to $560 a week for 26 weeks. Last year the federal government sweetened the pot with an additional $25 a week, and extended emergency benefits another 53 weeks.

One reason this year’s tax increases have been so large is that taxes in 2008 were at a 40-year low, department officials say. That’s because rates reflect the experience of the previous four years. Those particular four years had been a boom period for Washington and the national economy as a whole. Unemployment was low and individual employers saw little need for layoffs.

Department spokeswoman Sheryl Hutchison pointed out that Washington saw similar rate increases after the last recession, in 2002. “Nobody, including us, likes tax increases, but the rates for 2010 are lower than those for 2004 and 2005, and are about equal to what they were in 2006.”

            Bill Would Reduce Fluctuations

State Rep. Cary Condotta, R-Wenatchee, has introduced a bill that would level out the fluctuations in rates over a longer period of time. The idea that rates will decrease in the future isn’t much comfort to business today, he said:

“It’s going to be exceedingly hard on employers, especially when we’re in the middle of a recession. Taxes have gotten to the point where they have made it hard for business to rehire workers.”

 
Projected tax rates through 2016. Source: Employment Security Department