Opinion: New state overreach: A surprise unemployment tax for CT businesses

Gail Lavielle is the Republican state representative for the 143rd District, comprising parts of Norwalk, Wilton and Westport.

In 2015, businesses in Connecticut will have to pay a new unemployment tax that they would not have to pay if they were located in any other state. It’s a federal tax, but in an unusual turn of events, the decision to obligate businesses to pay it was made by the Connecticut state Department of Labor (DOL). The end result: Connecticut’s employers will have the highest federal unemployment tax rate in the country.

What happened, and how was it possible?

Connecticut’s Unemployment Trust Fund, which supplies required benefits payments to unemployed Connecticut workers, became insolvent in October 2009. To continue meeting its obligations, the state borrowed about $1 billion from the US DOL. Currently, the loan balance stands at $432 million.

The loan was interest-free until 2011. In that year, Connecticut began billing businesses for a scheduled annual assessment to pay off the loan. The average annual cost to businesses, which has varied due to interest rate fluctuations, has been in the range of $15 to $25 per full-time employee. In 2015, however, Connecticut will become subject to an additional federal “Benefit Cost Ratio” (BCR) tax, because its loan will have been outstanding for more than five years. This will lead to an increase of approximately $35 in per employee costs – in the form of a decrease in federal tax credits – for Connecticut employers.

Connecticut is not the only state subject to the BCR tax. California, Indiana, Kentucky, New York, North Carolina, Ohio, and the Virgin Islands all have, like Connecticut, unemployment trust fund loans outstanding for more than five years, but each has applied for and obtained a BCR waiver. Connecticut’s DOL, however, chose not to apply for the waiver in order to help the state pay off the loan more quickly, and it passed the costs along to employers. As a result, in 2015 the state’s businesses will pay an average of $161 per employee in federal unemployment taxes, the highest in the country.

It’s unfortunate that the state DOL didn’t consult with or inform the legislature or the business community before making the decision. And it’s even more disturbing that it did not inform employers of the change before they heard about it from other sources, like their payroll services companies.

This puts significant stress on employers, because businesses operating on the calendar year have already completed their budget planning for 2015 and won’t have taken the change into account. It also sends a loud and clear message that doing business in Connecticut is not predictable and that making it easier and less costly for businesses to operate here is not a high priority.

I hope that the DOL will work together with the General Assembly to find a better solution, particularly since employers are now bearing the burden of paying off the state’s debt obligations. Our state’s businesses, which have had to cope with both large tax increases and an economic recovery that has lagged behind the rest of the country, have not had an easy time in recent years. Many of my constituents who own small businesses are stunned by this latest development and are very concerned.

In the wake of this development, I think it is critical to improve oversight and communication of executive branch decisions that have a significant impact on the financial obligations of employers. I am working with colleagues to propose legislation that will require this during the upcoming legislative session that opens Jan. 7.