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Joblessness triggers tax increase for businesses

December 12, 2009 12:36 am

BY CHELYEN DAVIS

Despite talk about easing burdens on businesses to encourage them to create jobs, companies in Virginia will be paying more in taxes come Jan. 1.

The state unemployment tax that businesses pay on each employee will be going up, from an average of $95 per employee per year to an average of $171 a year in 2010, $234 in 2011 and $263 in 2012.

The tax goes into the fund the state uses to pay unemployment benefits. The increase is not the result of any decision in Richmond, but rather is written into the law. When the unemployment fund gets low, it triggers an automatic increase in the tax. The increase is determined by a formula.

Virginia Employment Commission research director Don Lillywhite said there are some worries about the impact of the tax increase on businesses.

"There has been concern expressed in meetings and so on, 'You're raising our taxes at the very time we need to create employment,'" Lillywhite said. "The taxes go up automatically. We don't sit here and decide--it's based on legislation."

The fund is not just low, it's virtually empty. Unemployment claims have gone up about 80 percent this year over last year. The state is now borrowing money from the federal government to pay unemployment benefits and is likely to keep doing so through 2012, Lillywhite said.

The good news is that the amount of money Virginia is paying out in benefits weekly has been going down, from $25 million a week earlier this year to about $18 million a week more recently.

But Lillywhite said unemployment claims will probably rise after the holidays, as temporary workers get laid off.

He anticipates having a negative balance in the unemployment fund for 13 quarters. The state expects to borrow about $1.3 billion total.

Lillywhite said unemployment-tax revenues in 2010 are expected to be about $570 million, while the state anticipates paying out about $900 million in benefits for the year.

In January of 2009, the fund had $546 million, Lillywhite said; by Jan. 1, 2010, it is expected to be $178 million in the red.

Bill Cheatham, vice president for government affairs at the Virginia Chamber of Commerce, said the chamber hasn't heard much from businesses concerned about the tax increase--yet. He thinks most businesses are aware of the increase and why it's happening.

"They certainly know that the recession has taken its toll on the state trust fund, and any time that happens, taxes go up," he said.

Cheatham said the chamber isn't advocating any changes in the system, nor would it support an increase in benefit payments to unemployed workers.

"Hopefully the economy will improve, the unemployment fund will replenish, and the taxes will drop," he said.

The state will borrow money quarterly; the first request to the federal government, sent in September, was for $252 million. Lillywhite said Gov. Tim Kaine is expected to send a letter requesting another three months' worth of money next week. Unemployment taxes that come in will go toward paying back the money.

While borrowing can be repaid from unemployment taxes, the interest on the money borrowed cannot be. A VEC report from September estimated the interest would be nearly $37 million total, money that will have to come from elsewhere in the state's coffers.

The unemployment taxes that employers pay don't come in to the state all at once, Lillywhite said. The tax is paid on the first $8,000 of a worker's salary, so the rate at which employers pay it depends on how much workers are paid. The first payments would be due in May, because businesses pay taxes quarterly.

Employers' tax rates are also based partly on their use of the system--how often they lay off employees who then need to draw from the unemployment fund. Companies that have had layoffs recently--Virginia looks at the last four years--will pay more than companies that have not. It's similar to car insurance, where rates go up if you have more accidents.

Lillywhite said there will be another issue of concern for some workers starting in January.

That's when a Social Security "offset" begins, again because the unemployment fund is so low.

The offset means that for unemployed people who draw Social Security benefits as well as unemployment benefits, their unemployment will be reduced by half of what their Social Security income is.

So a worker receiving $500 a month in Social Security and $1,000 in unemployment would lose $250.

Lillywhite said he's not sure yet how many people would be affected by that.

The state's Unemployment Compensation Commission will meet Dec. 17 to discuss some of these issues.

Chelyen Davis: 540/368-5028
Email: cdavis@freelancestar.com





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