Businesses fear increase coming in state unemployment tax

State government has relied on $500 million in interest-free, federal loans to keep its unemployment compensation trust fund afloat since mid-October, and legislators made no changes this year to the system for providing aid to jobless residents.

But with that interest waiver set to expire at year's end and state labor officials still handing out 150,000 unemployment checks each week, the state's  business community is worried that it's being set up for a major tax hike after the November election.

"Businesses are going to get hit with a big punch, one-two," said Kia Murrell, assistant counsel to the Connecticut Business and Industry Association. "You've got a variety of factors out there and, when taken together, they make tax increases inevitable" if they are not addressed.

State Labor Department spokeswoman Nancy Steffens said the agency provided 157,000 unemployment checks to residents last week, and routinely has been providing more than 150,000 per week over much of the past year. 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.

Connecticut, like many other states, struggled to keep up with the demand for unemployment benefits as the jobless rate rose above 9 percent. Economists estimate the state lost close to 100,000 jobs since the recession began in March 2008 and has regained only about 10,000 of them.

Businesses pay two employment rates to generate the funds normally used to provide 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 can levy a "solvency tax" of as much as 1.4 percent – again on the first $15,000 of each worker's wages – when extra revenue is needed.

Even with that solvency tax, some state officials estimate Connecticut may have to borrow $900 million by 2012 to keep its trust fund fiscally afloat based on current tax rates and projected unemployment levels.

The state Department of Labor suggested earlier this year that increasing the taxable wage base from $15,000 to $20,000 would be necessary to make the fund solvent again.

Senate Majority Leader Martin M. Looney, D-New Haven, and House Majority Leader Denise W. Merrill, D-Mansfield, spearheaded a working group this past session that helped produce new tax incentives designed to spur job growth.

The group did not recommend any changes to the unemployment fund, and no legislation was sent to Gov. M. Jodi Rell's desk.

"That really wasn't part of the focus," Looney said, adding that majority Democrats in the legislature hope to relieve pressure on the unemployment fund over the long haul by creating new jobs. "The more jobs created, the more incentives that lead businesses to grow, the fewer people claiming benefits," he said.

Sen. Gary D. LeBeau, D-East Hartford, co-chairman of the Commerce Committee, said he believes the current unemployment compensation system "has served us pretty well. There may be a need for some reform, but I think the biggest problem we had was we faced the most severe recession since the Great Depression."

But Murrell said it's not that simple.

This isn't the first time the state fund has run out of money. It last went insolvent during the recession of the early 1990s, when, according to economists, Connecticut lost more than 150,000 jobs.

But a number of longstanding problems have developed since then and placed an additional drain on the fund, according to the CBIA.

These include: vague standards that allow too many claimants who lost work through their own fault to receive benefits, and a lack of safeguards to ensure recipients are actively seeking new employment. Eligible residents can receive up to 99 weeks of benefits. Another concern, according to business community leaders, is increasing use of trust fund dollars to support state jobs normally financed through the annual budget.

Further complicating matters, the federal government's interest-free borrowing program expires on Dec. 31. There are proposals pending on Capitol Hill to extend the waiver program through June 30, 2011.

But regardless of whether there is an extension, there is a problem that Connecticut eventually must address without the benefit of federal financing, Murrell said. "You're not going to make the inevitable go away," she said.

Connecticut borrowed on the private market to keep its unemployment fund operating in the early 1990s.

But because emergency federal loans were available interest-free, state legislators took advantage of an opportunity to push a sticky fiscal situation off until after the November elections, said Rep. Vincent J. Candelora of North Branford, ranking House Republican on the Finance, Revenue and Bonding Committee.

"They will not deal with a crisis even if it is square in front of their face," he said, adding that many of the concerns raised by the business community could lead to immediate cost-savings if addressed now. "The federal loans gave them a license to ignore the issue."

Looney added that Connecticut is not the only state that has taken advantage of federal relief. A congressional research service report indicated 25 states had unemployment funds that had gone insolvent by January. "I think the federal government realizes a lot of states are grappling with this," he said.