State lowers payroll tax

Some 37,000 Hawaii businesses will save $50 million in taxes next year due to a reduction in unemployment insurance contribution rates.

The state Department of Labor and Industrial Relations said Monday it would cut by 22 percent the rate employers must pay into the Unemployment Compensation Trust Fund that distributes jobless benefits.

The average payment for employers would be $400 per employee, saving them an average of $100 per worker. Businesses pay into the fund quarterly.

"This is welcome news to many small businesses throughout the state who can now consider investing the savings in their businesses and personnel," Gov. David Ige said in a statement. "The Trust Fund is designed to replenish its balance when times are better so the taxes on employers do not rise when the economy falters and when employers can least afford higher taxes."

Hawaii’s unemployment rate has dropped to 4.1 percent from 6.8 percent in December 2010. As of October, Hawaii’s civilian labor force reached a record of 667,750 people and as of that month, the Aloha State had the sixth-lowest unemployment rate in the nation.

"Unemployment benefits play a major role in stabilizing the economy during recessions by maintaining the purchasing power of those without income from employment," DLIR Director Dwight Takamine said in a statement. "DLIR’s duty is to protect employers against the double ‘whammy’ of diminishing profits and rising unemployment taxes during recessionary times."

Nalani Holliday, owner of Red Pineapple at Ward Centre, said she was "psyched."

The decreased taxes "show that unemployment is down and that’s good for everyone," she said.

Holliday’s shop, which has five employees, sells packaged foods, baby items, tote bags, bath and body products, home fragrances and a melange of various gift items.

The tax cut also "tells me that the state’s doing the right things, paying its bills, and shows that our government is also healthy," she said.

The savings likely will be small, Holliday said, but "everything adds up … and any little bit that doesn’t go out helps us" to grow and keep employing people.

The tax-cut news is positive for employers, but is drawing a wary eye from economists.

The rate reduction is "favorable particularly because a lot of other costs are going up, (such as) health insurance, and so forth," said Clayton Kamida, president and chief executive officer of the Hawaii Employers Council.

The nonprofit council, with hundreds of member businesses, offers professional services to management relating to human resources and labor relations, employment law, research and training.

The tax cut should still be "good for business, and good for employers; it puts money back into the economy," Kamida said.

However, he remembers the "precarious position" the state was in four years ago.

The Unemployment Compensation Trust Fund went bankrupt due to recession-era job losses and payouts in 2010. The state borrowed $183 million federal dollars to pay unemployment benefits.

The money was repaid and by the end of 2012 the fund balance was up to $104 million.

The fund balance has now reached nearly $400 million, and the goal of the financing strategy is to maintain the fund at what officials call an adequate reserve level, or the balance necessary to pay out one year of benefits that is equal to the highest one-year payout during the previous 10 years.

In 2014, businesses were taxed on the first $40,400 of each worker’s wages, a cap that will rise to $40,900 in 2015.

Should that worker become unemployed, the maximum weekly benefit would be $551, while workers paid less receive a smaller benefit amount.

The 22 percent tax cut follows a nearly 35 percent reduction for 2014 from 2013.

"Cutting the rate is a useful measure during a strong economy, but it is also really important for the state to keep in mind the past problems that the fund has had," said Sumner La Croix, a professor of economics at the University of Hawaii and with the UH Economic Research Organization.

"The cuts in the (mid-) 2000s were reckless," he said. The idea that Hawaii would see "prolonged prosperity" was quickly dashed by the recession.

While the Hawaii and U.S. economies are showing strong signs of recovery "from the long recessionary period we’ve had, the world economy today is still a dangerous and risky place in which an international event could cause major disruption," La Croix said.

"We could easily see 10 good years, or we could see a crisis next year," he said.

Cutting the rate is not bad "if the state still believes it can continue to build healthy levels of reserves. Those kinds of reserves are absolutely necessary," La Croix said.