The bill is finally coming due for Connecticut employers.
Beginning Aug. 1, the state will start charging businesses a special assessment to cover interest payments on federal funds that Connecticut had to borrow — and is still borrowing — after the state unemployment insurance trust fund went broke in 2009.
The total special assessment will be about $40 million, equating to an average cost of about $40 per employee, said Carl Guzzardi, tax director for the state Department of Labor.
The special assessment will be charged annually to employers until the state repays what could be more than $1 billion in funds borrowed from the federal government to help provide paychecks to jobless residents
Total interest costs are projected to be about $100 million.
But the pain doesn't end there. The special assessment will be in addition to the regular unemployment insurance taxes businesses are already paying, which have also been on the rise both on the federal and state level.
"For those businesses that have been teetering on the edge of survival, having the additional tax increase is going to hurt," said Kia Murrell, a lobbyist for the Connecticut Business & Industry Association.
Connecticut's unemployment insurance trust fund, which is funded solely by employers, became insolvent in October 2009, which has forced the state to borrow $580 million so far, Guzzardi said. But that amount will likely grow to over $1 billion as Connecticut's economic recovery continues to languish.
The state's unemployment rate is 9 percent. As a result of the continued high number of jobless residents, unemployment insurance premiums are not generating enough money to cover jobless claims.
Since 2007, the average number of workers filing for unemployment benefits has grown from 40,000 to about 130,000 in October and the maximum weekly benefit for new claims is $555.
The $40 million assessment will only cover interest payments on the borrowed funds. Prior to Jan. 1, states were allowed, under the stimulus law, to borrow from the federal government interest free. That no longer is the case.
The underlying unemployment insurance taxes that fund the pool are also on the rise.
In Connecticut, businesses are subject to two separate unemployment taxes: the "experience rating tax," and the "fund solvency tax." Both are assessed on the first $15,000 of an employee's wages.
The fund solvency tax ranges from 0 to 1.4 percent and is applied evenly to all companies when the state needs extra revenue to maintain the fund's target balance. It's currently at its highest level.
The experience tax ranges from 0.5 to 5.4 percent and is set annually based on a company's past history with layoffs.
Guzzardi said the average total state unemployment tax rate has gone from 2.6 percent of wages in 2008 to 3.75 percent at the end of 2010, a 44 percent increase.
And that rate will likely grow to 4.65 percent at the end of 2011. That will drain about $925 million out of the coffers of Connecticut businesses.
Combined with other tax increases that businesses are likely to face to help cover the state's $3.6 billion budget deficit, the situation could create a "perfect storm" for employers, Murrell said.
In addition to state tax increases, businesses are also feeling pressure from the federal government.
In order to begin to repay principal balance on the loans, Connecticut employers will face an automatic increase in federal unemployment insurance taxes beginning January 2012. That tax rate is currently 0.8 percent of the first $7,000 of wages for each employee. The rate will increase by 0.3 percent until the loan is fully repaid, generating an extra $30 million in revenue each year.
Thirty-five other states have also borrowed nearly $41 billion to help pay jobless claims as well. And that number is expected to reach 40 states with more than $65 billion in total borrowing.
Some state officials have called Connecticut's unemployment insurance system "broken" and in need of fixing, but no action has been taken thus far.
The state Department of Labor has pitched various proposals in the past to try to get the fund to accumulate more cash during good times.
One prior plan included gradually increasing the taxable wage base from its current $15,000 level to up to $26,000 by 2017. It's not clear if that plan has ever gained traction.
Ben Barnes, secretary of the Office of Policy and Management, said Connecticut needs to address the long-term solvency issues surrounding the fund. But he said the state also must tread carefully to not put additional burdens on employers, who are still grappling with a tough economy.
He also suggested that the federal government should "strongly consider" waving the repayment of the borrowed funds, or at least extend the moratorium on interest rates.
"It would be a great way to support employers," Barnes said.