INDIANAPOLIS (WISH) – Businesses across Indiana are about to be hit by another new tax hike. It’s known as the Federal Unemployment Tax—or FUTA—and for the second year in a row, its percentage increase will be greater in Indiana than in any other state.
Last year, I-Team 8 was the first to expose why the tax rate was rising in the wake of an overdue unemployment trust fund loan from the federal government. Now, with the debt on that loan still not fully paid, Uncle Sam is charging another round of penalties, and Hoosier business owners are being forced to foot the bill.
PAYING THE PENALTY
Indiana began borrowing from the federal government to keep its unemployment trust fund afloat in 2008. By 2010, the state’s debt on that borrowed funding had ballooned to more than $2.2 billion. The U.S. Department of Labor now lists the state’s debt from that fund at about $1.4 billion.
It is money the federal government wanted repaid nearly five years ago. Until it is repaid in full, businesses will face rising penalty rates, assessed as a percentage of their unemployment tax.
Local business owners like Richard Arnold aren’t happy about it. Arnold, President of Castleton Estates Neighborhood Association, said he learned of the tax from his accountants earlier this month.
“They explained to me that Indiana is in default of paying their FUTA tax to the federal government. And, that’s a penalty charge. So, I said–this helps reduce the total FUTA? And, they said, oh no! This is on top of that. This is a penalty,” Arnold said.
Castleton Estates, a neighborhood of about 300 homes, only employs 12 people, Arnold said, meaning the dollar impact on his bottom line will be low.
“It will be a few hundred dollars,” he said. “But, it was a total surprise to me. And, I’m paying for our legislature’s mistakes. And, that’s a problem.”
It’s a problem Hoosier businesses have dealt with before.
A HIGHER RATE
At $1.37 billion in total unemployment fund debt, just four states—California, New York, North Carolina and Ohio–now owe the federal government more than Indiana. But, because Indiana began borrowing before other states did, employers here are paying the highest FUTA rate in the nation at 1.8 percent.
For employers, that means an additional $84 in taxes for every employee in the state this year. That money must be paid by the end of January.
The state’s penalty rate has now doubled in just two years. Last year’s penalty was $63 in additional taxes for each employee.
Because Indiana’s debt is now five years overdue, Hoosier employers also faced an additional penalty, known as a Benefit Cost-Ratio—or BCR—add-on. The state requested, and was granted, a waiver on the additional penalty because it has a repayment plan in place, the Department of Workforce Development said.
And, it’s likely the financial pain won’t be short lived. If the debt isn’t fully repaid by the end of 2014, the rate will jump to $105 per employee next year.
Some state business advocates are worried about the growing impact the penalty rates are having in Indiana.
“Every year, it’s going up. And, each year it catches a lot of people by surprise. It’s clear this is a hardship for small businesses. It’s a hardship for a lot of businesses. And, we’d like to see us really address that if we can,” said Barbara Quandt, Indiana Director of the National Federation of Independent Business.
A BONDING DEBATE
Sen. Karen Tallian (D-Portage) filed bills in each of the last two legislative sessions that would have allowed the Indiana Finance Authority to study the debt obligations, and potentially issue bonds to pay them off and avoid federal penalties.
At least six other states—Idaho, Kansas, Texas, Illinois, Michigan and Pennsylvania—have taken that approach, paying off their entire unemployment trust fund debt to the federal government in one chunk.
But, Tallian’s measures were never heard at the Indiana Statehouse. The Department of Workforce Development did not support them either.
At least one State Representative says that’s because they wouldn’t work.
“The federal government’s interest rate to the state has been less than the bond issues would be. So, businesses are actually saving. The federal government’s interest rate to us is now around 2.5 percent. We can’t bond for that amount. If we bond and pay the federal government off, we’re going to be at least 3 percent. And, businesses are going to have to pay that back,” said Rep. Dan Leonard (R-Huntington).
Leonard, who authored legislation four years ago that ushered in sweeping changes to the unemployment trust fund system, says the burden for the debt is rightly placed on businesses. Even though the state borrowed the money from Uncle Sam to keep its system solvent, businesses are the ones that pay for unemployment benefits.
“It is administered by the state, but there are no state tax dollars involved in the unemployment program. The businesses are the ones that actually owe the debt to the federal government. So, to say we should use our state’s $2 billion surplus–the unemployment insurance is not a part of the budget. It’s a totally separate issue. It’s over on the other side,” he said.
Leonard also says Indiana’s nation-leading FUTA rate is misleading.
“Take Michigan that bonded for over $3 billion,” he said. “Add up their [State Unemployment Tax] (SUTA) rate, add up their surcharge, add up their interest rate [on bond repayment], and then put the FUTA tax with it, and look at the total you’re paying. Indiana is below that.”
MORE TAX HIKES AHEAD
That’s little comfort to those like Arnold, whose bottom lines are at risk. Current projections show Indiana’s debt to the federal government won’t be paid off until 2017.
For Quandt, the NFIB Director, that paves an uncertain business climate ahead, both for businesses and consumers, who could see the cost of the additional taxes passed on.
“It is impacting small businesses, and it is impacting their ability to grow,” she said. “Our research shows that small businesses are really still in recession. Big business has kind of moved on in this economy. But, small businesses are not growing at this point.”
Additional taxes ahead will ensure that doesn’t change, Quandt argued.
“That’s a huge concern,” she said. “Small businesses create the majority of the net new jobs. And, if they hold back because of this tax or other problems, what’s going to happen to our Indiana economy?”