Nebraska hikes unemployment tax to replenish fund

AP News
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Posted: Dec 06, 2009 1:33 PM

Nebraska businesses will be hit with a sharp increase in their tax bills next year to replenish the state's unemployment fund after a year in which state jobless benefit payments more than doubled to $190 million.

Nebraska is one of 33 states expected to increase its unemployment tax in 2010 in response to the sharp increase in the number of people claiming jobless aid over the past year. But the tax hike comes at the worst possible time: when a fragile economic recovery is taking shape.

And some Nebraska businesses could be surprised by the increases because this is the first recession since the formula for the state's employer-funded unemployment fund was revised in 2005. At the end of the state's 2009 fiscal year ended in June, the unemployment fund had dipped to $222.7 million, and that amount was low enough to trigger the increase under the formula in Nebraska law.

Tax notices will go out to businesses over the next week, with the first payments due April 30.

"This is a job killer," Rick Poore said after seeing an estimate of how much more his screen-printing Design Wear business will have to pay next year.

If businesses do scale back hiring and other investments in 2010, that could be worrisome for the economic recovery because small businesses create about 60 percent of new jobs.

The state's higher joblessness is the primary driver of this increase in the unemployment tax even though Nebraska's rate remains one of the lowest in the nation. The 4.9 percent rate reported for October is still much higher than the 3.6 percent unemployment in Nebraska in October 2008.

Nebraska's unemployment fund paid out $188.9 million in benefits between September 2008 and September 2009. During the previous year, only $90.3 million in benefits were paid.

Nebraska Labor Commissioner Cathy Lang said the tax increase will affect each individual business a little differently because the formula adjusts the rate businesses pay based on their history and industry, but she didn't try to downplay the potential impact.

"It is a significant tax increase," Lang said.

States are required by federal law to build up unemployment insurance trust funds in good times, so they'll be able to pay benefits during recessions. The goal is to avoid raising taxes during an economic downturn.

But the length and severity of the recession that struck the nation over the past couple years depleted many states' trust funds and forced them to borrow from the federal government. Nebraska's constitution doesn't allow it to borrow, so Lang said the state's formula is designed to make sure the unemployment fund remains solvent.

More than 8,000 of Nebraska's roughly 47,000 employers actually pay no unemployment tax under the formula because those mostly small businesses have little or no experience with layoffs.

At the other end of the rating scale, is a group of about 3,000 Nebraska businesses, like construction firms, that often have layoffs because the work tends to be seasonal. Those businesses will see their unemployment tax rate go from 5.4 percent to 8.66 percent.

And what the state calls its average unemployment tax rate will jump from 1.25 percent to 3.33 percent. That means the nearly 1,100 businesses in that category will go from paying $112.50 per employee to $299.70 per employee.

Poore said he'll have to pay between $2,700 and $5,500 more in unemployment taxes in 2010 for his 28 full-time employees in Lincoln. That'll be hard to absorb at Poore's business because of the size of the increase and the relatively short notice.

"This isn't going to help anything," Poore said.

Ron Sedlacek, general counsel for the Nebraska Chamber, said anyone who understands how the unemployment tax formula works and saw all the headlines about surging unemployment in the past year should have expected an increase in the tax.

"Hopefully employers have been preparing for this, but it will be a surprise to some," Sedlacek said. "It really just depends on how much they've been monitoring that situation."

The Department of Labor is just applying a formula in the law that dictates how much is collected. Still, that doesn't mean businesses will welcome this news.

"We kind of knew it was coming, but any additional costs right now are unwelcome," said chamber president Barry Kennedy.

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On the Net:

Nebraska Department of Labor explanation: http://www.dol.nebraska.gov/nwd/resources/dspresource.cfm?id(equal sign)435