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Seven months into the Pandemic, states are beginning to grapple with the ramifications for their 2021 budgets. The mandatory shutdowns enacted by many governors in March also shut down revenue streams such as gas and sales taxes. And of course, the dramatic spike in unemployment drained state unemployment insurance (UI) trust funds – the pool from which unemployment benefits are paid to claimants. Trust Fund solvency, an important but largely overlooked issue, needs immediate attention to avoid tax hikes that could hinder the ability of businesses to come back and succeed.
Most businesses are considered to be so-called “contributing employers.” This means they contribute to a state’s UI trust fund through State Unemployment Tax Act (SUTA) taxes, sometimes called reemployment tax or State Unemployment Insurance (SUI) tax. An employer’s SUTA tax rate is usually based off of the employer’s experience rating which reflects the number of former employees who collect UI after being laid off by said employer. Thus, the higher the number of layoffs, the higher the SUTA tax. Additionally, most employers must also pay a Federal Unemployment Tax Act (FUTA) tax. FUTA taxes become increasingly important during times of economic crisis. Specifically, if a state’s UI trust fund is depleted, a state can borrow money from the Treasury through Title XII grants. If a state does not pay the loan back within a certain time frame, FUTA taxes are imposed on employers within that state at a higher rate. Currently, 20 states have borrowed a combined $35 billion from the Treasury and more are expected to follow suit. These loans are interest free only through 2020.
In an effort to protect businesses from suffocating UI tax hikes, states have begun to propose legislation. For example, Louisiana introduced 5 new bills just last week. HCR 20 which would suspend tax hikes that are automatically levied onto employers if the state’s trust fund becomes insolvent; HB 70 which would repeal the state’s solvency tax; and HR 88 which would adjust maximum weekly benefit amounts depending on the trust fund balance, theoretically resulting in solvency longevity.
While these measures are helpful, they are not sufficient. Congress will need to act quickly to provide relief to businesses that had been forced to lay off workers. In particular, Congress should grant interest free Title XII loans to states and freeze FUTA taxes through 2021. In turn, states should provide relief to employers by either maintaining each employer’s experience rating score before the Pandemic through 2021 or by prohibiting UI tax hikes through legislation. This will help businesses recover more quickly and get Americans back to work.
Congress has already passed comparable relief for nonprofit organizations, which you can read about here. Without similar relief for American business, doors will continue to close, only prolonging our economic recovery.