INDIANAPOLIS (WISH) – A new tax increase is poised to hit Hoosier businesses this month. It’s known as the “Federal Unemployment Tax” and I-Team 8 discovered employers in Indiana will be paying more of it in 2013 than anywhere else in the country.
In 2001, Indiana’s Unemployment Trust Fund began inching toward insolvency. By 2007, the system was paying out far more than it was taking in and was barreling toward bankruptcy.
As the economy sank the following year, Indiana—and many other states—began borrowing money from the federal government in order to continue paying unemployment claims. By 2010, Indiana’s debt on that borrowed funding had ballooned to more than $2.2 billion. This month, the Department of Labor lists the state’s debt as nearly $1.8 billion.
It is money the federal government wants repaid, and Hoosier business owners are being asked to help foot the bill.
Cindy Hulen is one of them.
Inside her Northeast side office, the signs are hard to miss. They contain words or numbers in every color, shape and size. They’re all made from scratch inside her warehouse at Essential Architectural Signs.
Like many businesses, she’s seen growth slow since the recession. But, recently, she’s seen signs of improvement.
“We’re still clawing our way back,” Hulen said. “But, last year, we saw a big improvement. It was one of our best years in some time.”
But, when Hulen got a call from her payroll accountant this week, she suddenly saw signs of something else: trouble ahead from what’s become known as “FUTA.”
“We are a small business. We have 17 employees. Last year we paid $2,792 [in FUTA taxes]. This year we’ll pay $3,863.”
The FUTA tax burden on businesses has gone up each year since 2011.
It’s all due to debt.
Indiana has borrowed from Washington since 2008, and new projections out this week show the state expects to continue borrowing to pay unemployment claims until at least April of 2013. At $1.8 billion, just four states—California, New York, North Carolina and Ohio–now owe the federal government more than Indiana.
Until the state complies with a repayment plan on that debt, a federal unemployment tax “credit reduction” given to Hoosier employers will be reduced by $63 per employee.
That’s a higher rate than any other state.
Each employer’s taxes by $63 per employee, per year, until the debt is fully paid back. And, unless the state still can’t pay the debt down by next year, the credit reduction would go down by $84 per employee in 2014, increasing the tax burden on businesses once again.
“The amount of money [at $63 per employee] is going to boil down to a raise for a person for the year,” Hulen said. “And, we already have not been able to give raises to most people for the last probably two years. ”
Asked what the increase might mean to Indiana’s business climate, National Federation of Independent Business Indiana Director Barbara Quandt didn’t hesitate.
“Well, it can mean that they don’t hire, or they have to lay off someone because they can’t afford the charges,” Quandt said.
Some businesses with more employees, and larger payrolls, have even been forced to borrow money simply to meet the increased tax burden.
“It is frustrating,” said Rob Chinsky, a small business owner and franchisee of 17 Indianapolis area Penn Station Subs shops, with around 250 employees. “Taxes are going up. But, there are ways to avoid this. They are balancing this on small business because they know we have to pay it, and we’re getting hit on their debt.”
It’s not a new concept.
Employers have always paid into the unemployment system as they use it.
But, this tax hits all employers equally.
“Normally, if you don’t lay off workers, you pay lower premiums. If you lay off workers, you pay a higher premium. But, this is a flat rate. So, it doesn’t matter if you use the system or not, and most small businesses do not lay off,” Quandt said.
The state’s Department of Workforce Development says it’s working to avoid higher premiums in the future.
“We have projected this out and done our cash flow modeling so we can avoid any future FUTA credit reductions on Indiana employers,” DWD Chief Financial Officer Randy Gillespie told I-Team 8. “So, it appears from our projections that Indiana employers will see that increase in taxes capped at $63 per employee for the remainder of the life, until the loan is paid back. ”
Gillespie also says this is the best option Indiana has at the moment.
“We were the third state to take an advantage [of borrowing] from the federal government. It was Michigan, then South Carolina, then Indiana. And, the way it works is: once you’ve had an outstanding loan for two consecutive Januarys, is when those FUTA penalties kick in. So, because we were once of the first ones in, we’re ahead of most of the other states who are borrowing,” he said.
He also stressed that employers have a role to play in keeping the system solvent.
“Unemployment insurance is an employer financed system. Because our state trust fund did not have sufficient revenue to
pay for benefits, because it’s an employer financed system, Indiana employers, under law, have to make up that difference,” Gillespie said.
Indiana isn’t projected to fully pay back its loan until 2018.
And, there’s no guarantee that credit reductions won’t get worse.
“It’s frustrating. That’s an understatement. It affects everyone, and it just seems they’re doing everything on the backs on small businesses,” Hulen said.
At least 10 other states have already repaid their unemployment loans by issuing bonds to avoid additional tax increases on businesses.
“That’s the frustrating part,” Chinsky said. “Why isn’t Indiana doing the same thing?”
I-Team 8 took that question to the lawmaker who crafted Indiana’s debt repayment plan.