Saturday, February 20, 2010

Michigan's unemployment taxes going up 775%?

At a time when Michigan employers can least afford it,they are going to be paying more in unemployment taxes.This scenario looks to be essentially an annual increase as far as the eye can see.Our unemployment trust fund is insolvent and constantly borrowing more.Let's take a look at the program.

Each employer is charged with a 6.2% payroll tax to fund the unemployment insurance program.However,if that employer's state is current on any federal loans,they receive a tax credit,otherwise known as FUTA,of 5.4%.Taxes are paid on the first $7,000 of income in Michigan.So a $434 tax is reduced by $378 leaving the employer to actually pay $56 per employee each year.

That was until 2009.Michigan became the first state to be assessed a FUTA penalty.This is due to the fact that we have an outstanding loan balance as a state.Under Title XII of the Social Security Act,states are authorized to borrow money to fund unemployment benefit payments when their state's reserve fund has become insolvent.And boy,are we borrowing.As of Feb. 18th,we are currently in hock for $3,485,282,333.32.We are authorized advances of up to $350 million per month and we have borrowed $113,900,000.00 in February so far.Our total outstanding balance is only exceeded by California,a state just a tad larger and with the same problems only magnified.Oh,and that Treasury program the states are borrowing from?It had a balance of nearly $80 billion in June of 2008.It was down to just over $16 billion at the end of 2009.The Feds will need to step in real soon and get some money appropriated here or the states will be up the creek without a paddle.I'm absolutely sure they will,but where will it come from?

Due to the A.R.R.A.,otherwise known as the stimulus bill,the interest payments on the loan have been eliminated for 2009 and 2010 which saved Michigan $41 million in 2009.That will return in 2011.Oh,and that FUTA penalty.Every year in which we have an outstanding balance,employers will be penalized .3% of their tax credit.That amounts to $21 per employee for 2009.It doubles to $42 this year.This schedule will increase for 19 years.That's how long it will take for the entire FUTA credit to evaporate and employers will pay the full tax of 6.2%.The employer contribution may go from the original $56 per year to the full $434,an increase of a whopping 775%!

Michigan employers also pay a SUTA tax to the state.This varies from 2.7% during the first two years of business to a maximum of 10.3% based on formulas.This is the fund that is insufficient and forcing the state to borrow from the Federal government to cover paying out unemployment benefits.There are always proposals on modifying this system as well which will almost certainly result in employer paid increases to help balance the deficit.It's currently based on the first $9,000 of income,but that would seem certain to rise in light of our deficit.Regardless,I'm not even calculating this factor into the 775% potential increase.

You may say that's only a worst case scenario.True,but with our trust fund insolvent and with our outstanding loan balance now over $3 billion and growing,how long will it take us to repay the entire balance to get out from under the FUTA penalty?Our state faces a $2.8 billion shortfall for the remainder of FY2010 and FY2011.We only have a $47 billion budget annually,so this means our unemployment loan balance already exceeds 7% of the annual state budget.Not only do we need to return to positive growth in Michigan to escape the recession (depression here as far as I'm concerned),we need to have massive growth over a long period to pay off this debt.And this also doesn't take into account any future increases on the tax base.And let's not forget the interest the state will have to resume paying annually in 2011 on the entire balance.Michigan employers had better get accustomed to annual increases for years and years.More to come...

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