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September 11, 2009

No good options — 09/13/09

Unemployment fund deficit may force a business tax hike

Anonymous The Daily Independent Fri Sep 11, 2009, 02:30 PM EDT

As if state government did not already have enough economic headaches comes the not-too-surprising news that the state’s fund that pays unemployment benefits is gushing red ink.

Like most other states, Kentucky currently is borrowing money from the federal government to continue providing assistance to unemployed residents, but barring an economic recovery that includes the creation or restoration of thousands of jobs, the federal unemployment tax on businesses could be automatically increased to start paying back what the state owes the federal government.

With scores of small businesses in this state already eliminating jobs and making other costs in a continuing struggle to survive, an increase in taxes is about the last thing they need. In fact, forcing businesses to pay more to the government is a sure way of curtailing an already weak economic recovery.

Last week Gov. Steve Beshear sent a letter to Kentucky’s congressional delegation asking them to support an extension of emergency unemployment benefits. The emergency benefits are for people who have exhausted tradition unemployment benefits without finding a job. Beshear said almost 123,000 people in Kentucky have claimed emergency unemployment benefits in the past year. The number continues to grow by between 800 and 1,200 each week, the governor said.

Meanwhile, a task force the governor appointed to recommend how to shore up the state’s unemployment insurance trust fund was told things aren’t expected to get much better any time soon.

Kentucky’s unemployment rate stands at 11 percent, according to July data, and averaged 10.1 percent for each month of 2009. Unemployment is up in all 120 Kentucky counties.

Kentucky’s unemployment trust fund indebtedness is likely to grow, Dr. Wayne Vroman of the Urban Institute told the task force last week. It could find itself short by as much as $1 billion over the next several years. The state takes in about $700,000 in taxes annually on employers but has been paying out around $1.2 billion in benefits since the prolonged economic downturn began.

Even if the economy dramatically improved and the unemployment rate fell to 5 percent in 2015, Vroman said the state’s trust fund will still be short by $400 million in 2015 and $100 million by 2020. Higher unemployment rates would only increase the fund’s red ink.

One option would be for Kentucky to increase the taxable wage base on which employers pay taxes. Presently, Kentucky taxes only on the first $8,000 of wages, the lowest of surrounding states. In comparison, Tennessee and Ohio tax the first $9,000, Indiana the first $9,500 and Illinois and Missouri the first $12,000. West Virginia taxes the first $12,000 but that will go back down to $9,000 when certain benchmarks are met.

Kentucky has no good options. Hiking taxes on businesses would at the very least slow the economic recovery, but could bring the recovery to a complete halt or throw it into reverse. Nevertheless, the state must continue to provide help to those who are willing to work, but through no fault of their own, can’t find a job.

The best option is to hope for a rapid and robust economic recovery, but Helen Mountjoy, secretary of the Education and Workforce Development and chairperson of the governor’s task force, said, “Doing nothing and hoping for a good outcome is not an option.” With the amount the state pays out in unemployment benefits each month continuing to exceed the amount of revenue, the debt continues to grow.

The day of reckoning is near. This is a problem that can’t be ignored.

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Unemployment fund deficit may force a business tax hike

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