Connecticut businesses will dodge a federal unemployment tax hike of roughly $30 million next year.
Gov. Ned Lamont’s administration averted the increase by paying down the full $1.2 billion Connecticut borrowed from Washington during the first two years of the coronavirus pandemic to keep jobless benefits flowing.
“It was a promise we made,” the governor said Wednesday. “I didn’t want small business to have a backdoor increase in taxes.”
Businesses in all states are taxed to support the federal government’s unemployment trust. Connecticut employers currently pay 0.9% on the first $7,000 of payroll, a maximum of $63 for each employee.
Had Connecticut not dodged the tax hike, the federal rate would have jumped up to 1.2%, or no more than $84 per worker. State labor officials estimated last August that such an increase would cost businesses in total roughly $28 million to $30 million in 2024.
States also levy their own unemployment taxes but routinely have to borrow from the federal trust during economic downturns, such as the first year and a half of the pandemic, which began here in March 2020.
Despite paying back everything borrowed so far, Connecticut will almost certainly have to borrow again from the federal trust — probably later this month. That’s because it has only about $10 million in the state’s unemployment fund and is disbursing about $9.5 million in benefits per week.
State officials hope a series of unemployment system reforms enacted a year ago will help to bolster the state fund over the long haul.
But all that matters — for now — is whether Connecticut will owe any money on the mid-November date when the federal government sets the tax rate for next year. Debt balances in 2023 are being checked on Friday, and the state Department of Labor reports the state fund will be in the black — albeit by the slimmest of margins.
State labor officials said last August that Connecticut was trying to pay off its debt, avoid any more borrowing until after the mid-November test date — and therefore avert a federal tax hike — but added it was too early to predict success or failure.
This is latest in a series of steps state officials have taken to contain unemployment taxes on Connecticut businesses following the worst of the pandemic.
In 2022, it was clear Connecticut still would owe money to the federal unemployment trust by mid-November of that year — and that businesses would see their federal tax rate climb in January 2023.
So Lamont and legislators dedicated $40 million in state resources to finance a one-time drop in the state unemployment tax for 2023. That not only offset the entire federal hike last January but also helped businesses save another $9 per employee.
And in 2021, Connecticut officials used state funds two other ways to help businesses with the unemployment trust dilemma.
They deposited $120 million in federal pandemic grants into the state fund so the entire burden of repaying pandemic borrowing wouldn’t fall on Connecticut businesses.
State officials also set aside another $30 million to spare businesses from a special temporary federal tax. Washington orders a special assessment each September on businesses in debtor states to cover the interest on that unemployment debt. That $30 million reserve has shielded businesses from more than $9 million in special assessments since 2021.
The business community as a whole also is expected to benefit next year from a huge package of reforms to the state’s unemployment system — changes endorsed by Lamont and legislators from both parties, as well as by the Connecticut Business and Industry Association and labor groups.
These reforms, enacted in 2021, actually would reduce state unemployment taxes starting in 2024 on about three-quarters of all businesses. Those that lay off high numbers of workers, though, would pay more.
“Those reforms should, in the long term, end the constant threat of unemployment tax hikes and allow employers to invest that capital in areas that will grow jobs and the economy,” said Chris DiPentima, CBIA’s president and CEO, who welcomed news of the averted federal tax hike.
Lamont said he believes these reforms not only would assist most businesses but would improve fairness in the state unemployment tax, since companies that lay off the most workers would have to pay more.
Those reforms, coupled with the other steps state officials have taken, “should give our businesses much more confidence we’re on more stabile footing,” the governor added.
“Even after the public health crisis began to ease, employers still faced years of fiscal uncertainty due to pandemic borrowing,” said Department of Labor Commissioner Dante Bartolomeo. “These initiatives, and a clear path towards trust fund solvency, have allowed us to retire our pandemic-era debt, protect the business community and prioritize continued economic opportunity for the workforce.”