Conn. businesses spared from unemployment tax hikes, for now

Gov. Ned Lamont and legislators spared Connecticut businesses from a special unemployment tax hike next month — and effectively helped them dodge a federal business tax increase in January.

But business advocates say if state officials want to help businesses survive the next economic downturn, the government should give employers more help replenishing a state unemployment trust that was battered by the coronavirus pandemic.

“While we have seen some encouraging job growth over the last couple of months, we are really struggling still,” Eric Gjede a specialist in labor, employment and tax issues for the Connecticut Business and Industry Association.

Temporary closure orders and other state restrictions placed on many Connecticut businesses in 2020 forced layoffs during the worst of the pandemic, business advocates say.

State has borrowed nearly $1 billion to keep jobless benefits flowing

“The last thing they need is also to worry about paying for unemployment debt that they did not cause on their own,” Gjede added, referring to nearly $1 billion the state has borrowed since March 2020 to keep the jobless benefits flowing. At one point in May, more than 390,000 filers were receiving unemployment checks here.

Connecticut fuels its unemployment trust with a quarterly tax on businesses. When unemployment is high, Connecticut — and many other states — routinely borrow from the federal government to cover benefits and then repay that debt using their unemployment tax receipts.

But that debt creates other challenges for businesses.

States that borrow funds are billed for the outstanding interest each September — and that cost also is often passed on to businesses. Connecticut's interest bill next month is projected at about $8 million, according to the state Department of Labor's tax unit.

Businesses also pay an annual tax to support the federal unemployment trust. And if any state still owes principal on its unemployment loans by mid-November, it triggers a federal tax hike on businesses in that debtor state the following January.

Lamont and the legislature rejected calls from the CBIA and other groups to use the state's massive fiscal reserves to cover this $1 billion debt for businesses. Instead, state leaders dedicated the bulk of the $6 billion in surpluses from the last two fiscal years to pay down Connecticut's massive pension debt.

Lamont, lawmakers avert any immediate tax hike on businesses

But state officials did dedicate $195 million in federal COVID-19 relief aid to help businesses to bolster the unemployment program.

About $30 million was set aside to cover any special interest assessments that businesses would face in September 2022 — and potentially for a few years after that.

Another $165 million was used to reduce the unemployment debt. That, coupled with payments the state already has made using tax receipts from businesses, has whittled the $1 billion debt all the way down to $75 million.

The legislature and governor also ordered a one-time cut in the state's regular unemployment tax in early 2023. According to Lamont's budget office, that's enough not only to offset the federal unemployment tax hike businesses will face in January — but also to yield a modest cut.

The normal federal tax is 0.6% on the first $7,000 of payroll, a maximum of $42 for each employee. The anticipated January increase would bump the tax to 0.9%, or $63 — a $21 per employee increase.

The one-time cut in the state tax, according to the Lamont administration, will save businesses about $30 per employee, for a combined decrease in state and federal unemployment tax of about $9 per employee.

“Gov. Lamont and legislative leaders have been strong allies for the business community as employers have worked to recover from the pandemic,” said state Labor Commissioner Dante Bartolomeo. “Gov. Lamont and the legislature allocated federal funding that reduced state taxes, prevented special assessments and stabilized the trust fund to protect employers long into the future.”

Chris Collibee, spokesman for the governor's budget office, noted that Lamont and lawmakers also approved a $660 million tax relief package this year, one of the largest in state history.

“Families and businesses are directly benefiting from these tax cuts, including a reduction in unemployment insurance taxes,” Collibee said. “Our strong economy, low unemployment rate, and top quality public schools, are among the reasons businesses are moving, growing, and thriving in our state. Gov. Lamont's commitment to helping our business community is unmatched in our state's history.”

Businesses could face a big tax increase in 2024, unless state intervenes

Still, because the state's unemployment trust is depleted, and because many economists project the national economy to struggle in late 2022 and well into 2023, Connecticut is likely to borrow more funds to support unemployment benefits in the future.

Business advocates say the chances of Connecticut having no debt by Nov. 9 — the deadline that would trigger a federal unemployment tax hike on businesses here — are nil, unless the governor and legislators intervene more than they already have.

More importantly, if Connecticut still owes unemployment debt to Washington by November 2023, the federal tax on businesses here will jump to $84 per employee per year.

Restaurants are among the businesses hit hardest by the pandemic, and Connecticut Restaurant Association President Scott Dolch praised Lamont and legislators for taking “real steps” improve the health of the state's unemployment trust.

“At the same time,” Dolch added, “Connecticut must acknowledge that there is more work to be done on this front if we want to protect local small businesses from significant added costs in the years ahead.”

Republican gubernatorial nominee Bob Stefanowski has said Connecticut easily could add hundreds of millions of dollars to its unemployment trust to support businesses and to ensure no federal tax hikes happen in 2022 or later. Connecticut has $3.3 billion in its rainy day fund, and the current fiscal year's budget has a projected General Fund surplus of nearly $300 million.

“The governor has multiple ways to address this looming 50% tax hike on employers,” Stefanowski said. “Just take action and eliminate the balance. His delay will be another example of Ned Lamont making Connecticut pay for his lack of leadership.”

The decision, though, doesn't rest simply with the governor.

Lamont could not tap the rainy day fund or the surplus without legislative approval.

Sen. Cathy Osten, DSprague, co-chairwoman of the legislature's Appropriations Committee, also supports greater state relief for businesses by bolstering the unemployment trust.

But Osten also said the chances of the legislature coming into special session in the late summer or fall of a state election year are extremely slim.

“Everybody's in election mode — not necessarily interested in doing anything else,” she said.

Osten had urged state labor officials not to dedicate $30 million to cover interest charges on the debt.

Had that money instead been used to reduce the principal, and had the legislature and governor dedicated more state funding toward the problem, the entire debt might be covered already.

“We should have just looked at the principal versus anything else,” Osten said.