Businesses Must Pay Recession Debt

Businesses across the state, from local mom and pops to national chains, face an increase in the 2013 federal unemployment tax thanks to an outstanding balance on money issued by the U.S. Department of Labor to the state of Arkansas to help it cope with the Great Recession.

The increase, levied in the form of credit reductions, affects Arkansas, 12 other states and the Virgin Islands. In the case of Arkansas, employers are having to pay a 1.5 percent unemployment tax instead of the usual 0.6 percent, a difference that amounts to an additional $63 per employee.

With about 1 million people working in the private sector in Arkansas — the credit reduction is not applicable to public-sector employees — the increase will generate about $63 million, enough to pay a little more than half of the $117 million the state owes to the labor department.

The Arkansas Department of Workforce Services announced that the loan would be satisfied before Nov. 10, the payoff deadline, thus quashing another increase for 2014 tax returns. But for 2013, the increase is entrenched and will affect bottom lines from Bentonville to McGehee.

Springfield-based The Payroll Co., in its December newsletter, reminded its clients, roughly 300 of which are in Northwest Arkansas, that the credit reductions were going to be a factor in 2013 returns.

“Even though we try our best, it seems like it falls on deaf ears,” said Gregory Kollmeyer, owner of The Payroll Co., referring to his firm’s use of email, mailers and phone calls to warn employers of the increase.

The warning, however, came on short notice. The federal government did not announce the increase for Arkansas and other states until November, midway through the fourth quarter, leaving many business owners in limbo as to whether the increase would or would not take effect.

One such businessman is Dave Godwin, owner of MarketPlace Grill, with locations in Springdale, Fayetteville, Fort Smith and Conway. Companywide, Godwin employs nearly 300 people and said the additional credit reduction cost him as much as $15,000 over what he budgeted for 2013 unemployment insurance.

“This is a classic example of how easy it is to spend someone else’s money,” Godwin said, pointing to the fact that business owners are paying a big share of the state’s unemployment debt.

“From a pure business perspective, if I know there’s a tax to be paid per employee, if I were with the state, I’d figure out a way to pay it off [without raising taxes on businesses],” he said. “This is just one more thing that gives us uncertainty.”

Dire Necessity

Under the Federal Unemployment Tax Act, or FUTA, a 6 percent gross tax rate is assessed on the first $7,000 paid annually from employer to employee. The federal government, however, offers a credit of 5.4 percent, making the effective unemployment tax rate 0.6 percent. But for states like Arkansas that have outstanding Unemployment Trust Fund balances, the credit is incrementally reduced.

Arkansas faced its first credit reduction of 0.3 in 2011, and an additional 0.3 in 2012, and another 0.3 in 2013, for a total reduction of 0.9 and an effective unemployment tax rate of 1.5 percent — a 150-percent increase from $42 to $105 annually per employee.

For Arkansas, taking out unemployment loans from the federal government was not a choice but a dire necessity. Becky Heflin, director of communications for workforce services, said weekly unemployment claims surged from $5 million per week in summer 2008 to $12.8 million per week by early 2009. The state unemployment account ran dry, and Arkansas was forced to turn to Washington for help and ended up taking out a total of $360 million in unemployment loans beginning in March 2009.

Since unemployment benefits are an entitlement, states are legally obligated to pay the claims, even if the state account is insolvent.

Another element in the unemployment crisis was the Emergency Unemployment Compensation act of 2008, which is now expired. When active, the EUC extended the time limit for unemployment benefits beyond the standard 26 weeks to as many as 73 weeks, according to research by the Washington, D.C.-based Center on Budget and Policy Priorities.

For Godwin, the next 10 months will prove interesting. Does the debt actually get paid off and do things return to normal, or do private businesses face yet another year of increases to pay down public debt?

“At first it doesn’t seem like a big deal,” Godwin said of the year-after-year hike in unemployment credit reductions. “But from a pure cash outlay, it could get serious.”