TANGO Partners Perspective – December 2020

Pandemic-related unemployment claims will force Connecticut to raise taxes

Mac Smith, Director of Communications, 501(c) Services

Fiondella Milone & Lasaracina (FML)

Pandemic-related unemployment claims will force Connecticut to raise taxes

States across the country are draining their unemployment benefit trust funds and borrowing billions from the federal government to continue to pay out unemployment benefits during the ongoing COVID-19 pandemic. However, the loaned money will have to be paid back eventually — and states, like Connecticut, may do so by raising taxes on employers and/or cutting jobless benefits for workers.

State Unemployment Trust Funds Are Running Dry

The COVID-19 pandemic has placed unprecedented strains on state unemployment trust funds, emptying them in a matter of months and forcing states to take out billions in loans from the federal government to keep unemployment benefits flowing to millions of newly unemployed workers.

According to the U.S. Department of Labor, Connecticut had about $700 million in its unemployment trust fund in February before the pandemic hit. It ran out of funds in August.

When a state runs out of funds for unemployment benefits it is forced to borrow money from the federal government. That money is paid back via higher unemployment taxes.

As of December 8, 21 states have borrowed more than $34 billion in Title XII loans from the federal government. The biggest borrowers include states that are highly populated and have been hit hard by the COVID-19 pandemic. To date, Connecticut has borrowed $438 million to prop up its trust fund.

The Repayment Question

After receiving the federal loans, states are faced with the question of how to pay back the debt and replenish their own trust funds. Many states will do so by increasing unemployment taxes.

Unemployment tax rates fluctuate based on industry and an individual employer’s history of layoffs. Each state has a varying tax rate schedule that changes year by year based on the amount of money in their unemployment benefit trust funds. These rate schedules have been temporarily suspended in many states – like Connecticut – so employers are not penalized for pandemic-related layoffs. But the trust funds must be replenished, and federal loans repaid. That means higher tax rates.

This is all a familiar scenario to the one that played out during the Great Recession, when Connecticut borrowed nearly a billion dollars from the federal government to pay jobless benefits. It took seven years of higher unemployment tax rates to repay that funding.

Currently, Connecticut Governor Ned Lamont has used emergency powers to prevent rates from going up in 2021 for state employers. Several states, such as South Carolina and Colorado, are also putting off unemployment tax increases through dedicated legislation. But many observers believe that type of effort will only delay the inevitable.

Historically, states pass legislative changes to increase tax rate tables to re-fund the system. In a good economy, the national replacement rate is roughly $1.28, which means you will pay approximately $1.28 in taxes for every dollar you pay out in unemployment benefits. In the last recession, employers saw that average replacement cost reach as high as $2.04. They should expect the same over the next few years.

Nonprofit Employers Unemployment Tax Options

The above applies to many employers except 501(c)(3) organizations. 501(c)(3)s do not have to pay state unemployment insurance taxes – high or low. Connecticut nonprofits can save as much as 40 percent or more on their unemployment costs by opting out of the unemployment insurance tax system – an advantage provided to them by the IRS.

Avoid the coming rate increases! Contact us today for more information concerning your nonprofit unemployment insurance options.

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