Businesses say looming unemployment tax hike goes unnoticed at the Capitol

With Connecticut businesses facing a General Assembly session fraught with proposed mandates and tax hikes, advocates say the legislature’s relative lack attention to an expensive new unemployment assessment is not a good sign.

As the legislature’s Labor and Public Employees Committee voted Tuesday to again raise a controversial measure to mandate paid sick leave for employees, the state’s chief business lobby reminded lawmakers that businesses were notified of a likely $40 million new tax just a few weeks ago.

“Businesses don’t look at things in silos. They look at the entire picture,” Bonnie Stewart, the Connecticut Business and Industry Association’s tax policy specialist, said. “Some Republicans and some Democrats are aware of this situation, but they are in the minority. If they look at every proposal in piecemeal fashion, it will be a tragedy for business in this state.”

The “situation” Stewart and others are worried about is a state unemployment compensation trust fund that has been insolvent since October 2009 and has relied on $530 million in interest-deferred federal loans to keep it afloat. The interest waiver expired on Jan. 1, and Connecticut must begin paying that interest this summer.

The state Department of Labor notified companies late last month that it tentatively expects to levy a $40 million assessment, equal to about $40 per worker, starting Aug. 1, to cover interest owed for the first nine months of this calendar year.

That $40 million assessment, which doesn’t even reduce the $530 million debt principal, is equal to roughly $53 million when projected over nine months. That’s about $12 million greater than the last tax hike the business community faced, a 10 percent surcharge on the corporation tax first imposed in 2009 and set to expire in 2012.

But with state government facing a $3.67 billion deficit built into the 2011-12 budget, many legislators from both parties have conceded they don’t expect that surcharge will expire on time.

Business advocates said the growing prospect of a fiscal double-whammy might have stopped the Labor Committee from raising the sick leave bill, had more lawmakers been aware of it.

“The problem is the legislature does not pay much mind to the severity of what businesses face,” Rep. Sean J. Williams of Watertown, ranking House Republican on the tax-writing Finance, Revenue and Bonding Committee.

“It’s not on people’s minds, but it should be,” said Sen. Gary D. LeBeau, D-East Hartford, co-chairman of the Commerce Committee. “I don’t think people are aware that this (assessment) is about to take place.”

But Sen. Edith G. Prague, D-Columbia, co-chairwoman of the Labor committee, said she hasn’t lost sight of the big picture.

All constituencies, not just businesses, likely will be asked to sacrifice this year, she said. “And I believe paid sick leave is good for business. Everyone gets sick. We should treat people like human beings.”

“I think at the end of the day you have to look at what the real cost drivers for businesses are,” said Jon Green, director of the Connecticut Working Families Party, which spearheaded the drive to mandate paid sick leave starting in 2007. Those looking to provide relief for business would be better off focusing their efforts on reducing electric rates and health care costs, he said, adding, “That would have a much greater impact on businesses.”

Sen. Tony Guglielmo of Stafford, ranking Senate Republican on the Labor committee and a veteran member of the Finance panel, voted against a paid sick leave measure last year and said Tuesday he is leaning against doing so again.

Guglielmo said that while it’s important to have a public hearing on the bill this year and listen to all sides, the likely tax hikes staring businesses in the face carry a lot of weight.

Guglielmo said the unemployment fund doesn’t attract as much attention from the news media or legislators as do other fiscal issues because it lies outside of the budget’s General Fund, but the impact of a $40-per-employee assessment on companies would be felt nonetheless.  “They still have to write that check,” he said. “The money still comes off the bottom line. And this problem isn’t even solved yet.”

State labor officials estimate the unemployment trust fund will need roughly $500 million more in loans over the next 12 months, despite two existing assessments on business that normally provide enough revenue to fund jobless benefits.

The first tax, which ranges from 0.5 to 5.4 percent, is levied against the first $15,000 in wages a business has paid to each of its workers over the prior three years. Typically called the “experience tax,” it applies higher rates to those companies that have laid off larger numbers of workers.

Connecticut also levies a “solvency tax” of as much as 1.4 percent – again on the first $15,000 of each worker’s wages.

But state government handed out more than 137,300 unemployment checks during the last week of December, Labor Department spokeswoman Nancy Steffens said Tuesday, adding that unemployment rate currently stands at 9 percent.

By comparison, when the state’s unemployment rate is closer to the 4 percent mark it usually enjoys in good economic times, about 60,000 checks are issued per week.

Economists estimate the state lost more than 100,000 jobs during the last recession and has regained only about 10,000 of them.

Gov. Dannel P. Malloy said Tuesday he hopes Congress would reconsider extending the interest waiver, given that nearly 40 states have unemployment compensation systems in deficit. “This is an issue of national calamity,” he said.

The new governor added his administration hasn’t yet settled on a specific assessment rate for the 2011 interest charges.