Taxes are a hot topic lately. Much of the conversation surrounds personal income taxes and unemployment benefits. But what about your business? Will it be paying more or less in taxes in 2011? The answer is most likely yes.
Paul Trause, Employment Security Commissioner, wrote this following article for the Employment Security Department’s newsletter. It is reprinted here with permission.
During these extraordinarily challenging times, it’s not welcome news to hear that unemployment-insurance taxes will increase again for most employers in 2011.
Our state’s unemployment-insurance system is set up so that rates usually are lower during tough times and higher during good times. Unfortunately, this recession has gone longer and deeper than any recession in decades, so tax rates are rising before the recovery has gained momentum.
In 2011, the average tax rate will be an estimated 3.26 percent, up from 2.39 percent in 2010. Rates in 2011 will range from 1.33 percent to 6 percent (not counting employers paying higher rates due to tax delinquencies), compared to a range of 0.95 to 6 percent in 2010.
Some employers will have rates above 6 percent (as high as 8.64 percent) because they are delinquent in filing reports and paying taxes, or they have not been in business long enough to establish their own rate.
The average tax rate in 2011 will be the highest since 1988 — a far cry from just two years ago, when unemployment tax rates were the lowest in 40 years.
The problem is twofold. First, more employers in our state have experienced layoffs during the recession, which has caused many of them to move into higher rate classes.
Secondly, benefit payouts have far exceeded tax collections (e.g., more than $2 billion paid out of the state’s benefits fund in fiscal-year 2010 compared to about $1.2 billion in tax collections).
When the benefit trust fund falls too rapidly, a component of the unemployment tax (called the social-cost tax) rises faster to help slow the decline and avoid insolvency. Since most unemployment taxes are capped at 6 percent, employers in the lower rate classes – the ones with the fewest benefit charges – end up paying more of this “shared” cost.
As we’ve seen during this recession, insolvency is a real threat. Nearly three dozen states have bankrupted their benefits funds in the past two years, and they’ve had to borrow more than $45 billion to cover unemployment benefits. Now the businesses in those states are facing enormous tax increases to repay the loans and replenish their unemployment trust funds.
As Washington moves into recovery, the social-cost tax that is climbing now will begin to subside. But the length and depth of this recession has exposed some room for improvement in our tax system, especially for employers who aren’t laying off workers.
Unlike the states with insolvent benefits funds, our fund remains healthy. And unlike those other states, the healthy state of our trust fund gives us flexibility to consider additional steps to make our tax system more equitable. We look forward to working with your representatives in Olympia to pursue those opportunities.
Is your business prepared?