Graphic illustration by Emily Metcalf
Graphic illustration by Emily Metcalf

BY JIM DOOLEY – Legislators and state officials may increase unemployment taxes next year to the highest levels allowed under state law.

The higher taxes, paid by employers, would be imposed to replenish a trust fund that held a $552 million reserve three years ago but was bankrupted after the recession hit and thousands of new benefit claims were made on the fund.

The higher tax rates would kick in as the state’s overall jobless rate, which had been in steady decline, has notched up again in recent months.

“For the past two years or so, it’s been on the decline and we were hoping that the decline would continue,” state Labor Department Director Dwight Takamine told legislators in a recent briefing.

Over the past four months, the unemployment rate has risen from 6 to 6.5 per cent.

“The recovery rate has come to a standstill this year,” Takamine said.

Rhoads noted that tourism, bolstered by the recently completed APEC conference here, remains a strong sector of the economy. And holiday season hires should also improve the employment picture, at least temporarily he said.

New unemployment benefit claims made on the trust fund would further drain any reserves created by higher tax revenues. State and federal laws require that the trust fund reserves be maintained at certain levels or new tax increases would follow.

If reserves fall below federally-set levels for protracted periods of time, the IRS can cancel tax exemptions now claimed by employers on state unemployment tax payments.

The unemployment benefits system was designed to withstand cyclical changes in the local economy. In good times, the reserve is built up to levels capable of weathering bad times. But the recent bad cycle was particularly vicious and, combined with legislative tinkering in recent years, put the entire system in the red.

The fund was bankrupted in December 2010, but the state borrowed federal funds last year and again this year to cover its unemployment obligations

The state managed to repay the federal loans but this year began borrowing other money internally to continue meeting its obligations and to avoid paying interest which would have been due if more federal money was borrowed.

Now the state is looking again at a possible increase in tax rates to refill the unemployment trust fund.

“Unless we change the law, the rates will go up again next year,” said Rep. Karl Rhoads, D-28th (Palama, Downtown, Chinatown, Sheridan), chairman of the House Committee on Labor and Public Employment.

Tax rates paid by employers now are already artificially low because of amendments to the system enacted by lawmakers first in 2007 and again in 2010.

“Before the recession, in 2007 businesses came to us for assistance on lowering taxes, pointing out that the trust fund reserve

Karl Rhoads

was more than $500 million and the unemployment rate was under 3 per cent,” said Rhoads.

“We agreed, perhaps foolishly, and we dropped the wage base (on which taxes are levied) to an artificially low level,” Rhoads said.

“In retrospect, that was a mistake,” he said

After the recession struck and the trust fund was drained dry in 2010,  state law mandated “drastic increases” in the unemployment tax rate, but lawmakers balked at that prospect, said Rhoads.

“The increases would have been especially painful to employers” at a time when the local economy was rebounding, so lawmakers approved lesser tax increases that left the trust fund well below legally-mandated levels, Rhoads said.

Takamine and other officials from the Labor Department told Rhoads’ committee earlier this month that the tax rates should be increased an average of 1.2 per cent per employer.

Rates actually paid vary widely because the law contains complex formulas that take into account individual employers’ histories with the unemployment fund.

Rhoads said increases are not a sure thing next year.

“There is some thought at keeping them artificially low for a year or two more,” he said.

But at some point the rates will have to be raised and the trust fund reserve must be built back up to levels required in federal law, Rhoads said.

“The feds are not all that thrilled with states that are playing these games,” he said.

Under federal formulas, the state’s unemployment trust fund reserve should be $368 million. At the end of the year it is projected to be 11 million.

Those figures were calculated under an assumed unemployment rate of 6 per cent.

And early next year, the fund is expected to go into deficit again because of a lag in receipt of tax payments, which are paid quarterly.

The state pays 26 weeks of unemployment benefits and the federal government covers another 47 weeks of benefits. But funding for those extra federal payments can be cut off by Congress.

In the last three years, the extra federal unemployment payments have brought almost $685 million into Hawaii’s economy, Takamine said.

That’s on top of the more than $500 million paid to the jobless from the state reserve fund during the same period, Rhoads said.

 

 

 

 

 

 

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Jim Dooley joined the Hawaii Reporter staff as an investigative reporter in October 2010. Before that, he has worked as a print and television reporter in Hawaii since 1973, beginning as a wire service reporter with United Press International. He joined Honolulu Advertiser in 1974, working as general assignment and City Hall reporter until 1978. In 1978, he moved to full-time investigative reporting in for The Advertiser; he joined KITV news in 1996 as investigative reporter. Jim returned to Advertiser 2001, working as investigative reporter and court reporter until 2010. Reach him at Jim@hawaiireporter.com