State lawmakers will not prevent an increase in the unemployment insurance tax, a choice that will cost businesses $66 million for the next year but could strengthen the unemployment reserve.

The state Department of Labor and Industrial Relations had told lawmakers they needed to take action by March 8 to avoid the automatic rate increase. While the state Senate approved a bill last week that would have averted the increase, the House proposed changing the law so that businesses could make first-quarter unemployment insurance payments in May, relieving the need to act by early March.

"At this point, the House position is that we will not adjust the unemployment insurance rate," said House Majority Leader Scott Saiki (D, Downtown-Kakaako-McCully), acknowledging that the department’s deadline had passed.

Last year, the Legislature and Gov. Neil Abercrombie moved quickly during the session to prevent a scheduled unemployment insurance tax increase that would have cost businesses $107 million. But this year House lawmakers linked the tax break to a debate about raising the minimum wage. Senators had argued that the tax and the minimum wage were separate issues.

"We’re disappointed that the unemployment tax holiday couldn’t be executed in time," said Sen. David Ige (D, Pearl Harbor-Pearl City-Aiea), chairman of the Senate Ways and Means Committee. "But we knew that we were really in a tight window, and it would have been a challenge to go ahead and meet it."

Sherry Menor-McNamara, chief operating officer and senior vice president of government affairs at the Chamber of Commerce of Hawaii, said the tax break would have helped businesses.

"Obviously, we are disappointed," she said. "However, we thank both the House and Senate for making an effort to pass this important bill to support businesses especially as the economy slowly recovers. Every dollar helps put businesses back on track. which leads to a healthier economic climate."

The labor department is expected to send notices to businesses about the tax rates this week. The higher rate could cost businesses $150 more per employee on average, or about $66 million.

Dwight Takamine, the department’s director, has criticized lawmakers for what he considers their disregard for the state’s unemployment insurance system. The unemployment reserve was set up to grow during an economic expansion — when unemployment is low — to absorb higher costs during an economic downturn — when unemployment is high.

Automatic rate increases are imposed on businesses if the reserve drains.

But Takamine estimates that legislators have awarded businesses $350 million in tax breaks since 2008 by altering the rate schedules. The director has warned that while the changes delay rate increases, they also can trigger the possibility of steeper rate hikes in the future to sustain the reserve.

The unemployment reserve, which was insolvent in 2010, now stands at $125 million. The department maintains that the reserve should be $384 million.