Local businesses are bracing for at least a tripling of their unemployment taxes, which without legislative intervention they say would disrupt any statewide economic recovery.
The state Department of Labor and Industrial Relations is supposed to notify employers of the state unemployment tax rate they will pay this year no later than March 15, with the applicable rate taking effect this month and the payments due by the end of April.
State unemployment tax rates for employers are determined by a schedule, which is currently at “C” and because of fund depletion could move to the highest level of “H.”
Each employer’s individual tax contribution also is calculated according to its unemployment insurance fund utilization, which means businesses that made cuts to their workforce or reduced employee hours would face higher unemployment taxes.
Chamber of Commerce of Hawaii President and CEO Sherry Menor- McNamara said the chamber is working with state Rep. Sylvia Luke, who chairs the House Finance Committee, to fast-track legislation to mitigate the mandated rise. The chamber’s position, joined by other organizations and businesses that are advocating for relief, is that an increase would impede Hawaii’s economic recovery by slowing rehiring, leading to additional layoffs and causing companies to rethink raises, cost-of-living increases and other benefits.
Lynette Eastman, general manager of the Surfjack Hotel &Swim Club in Waikiki, said she’s still working with ProService Hawaii, the state’s largest payroll and human resource services provider, to determine her boutique hotel’s unemployment tax increase, which might be as high as 10%.
Eastman said the coming tax increase on top of continuing COVID-19 pandemic- related struggles, makes it feel like “we are two months away from Armageddon.”
“I had 60 workers and was finally able to bring 45 of them back. This additional expense looming over us could prevent us from bringing the other 15 back as quickly as we’d like,” Eastman said. “It also could impact raises, cost of living and other benefits for our most important resource — our people.”
Joe Kent, executive vice president of the Grassroot Institute of Hawaii, said Schedule H sets the tax rate between 2.2% and 6.6%, depending on how much each employer contributed to the fund in previous years and other factors. While there are still too many variables to determine the full impact of the coming tax hike on employers, Kent said it’s “going to be worse than we can even calculate.”
DLIR spokesman Bill Kunstman said “it’s unlikely that the average employer’s unemployment tax rate would go to the max, as the average employer has sufficient reserves to prevent that trigger.”
Still, the Grassroot Institute of Hawaii anticipates that Hawaii’s yearly unemployment tax on businesses is set to automatically triple in 2021 to an average of 3.65% or $1,757 per employee, up from 1.11% or $534 per employee.
Menor-McNamara estimates that on average, her members might have to pay almost $2,000 more for each employee in 2021. Each case is different, but Menor-McNamara said she’s heard of one midsize business that is facing a nearly $1 million increase in unemployment taxes.
Without prompt intervention, she expects businesses across the state might begin additional layoffs as early as this month. Menor-McNamara said a small business with 10 employees would need to lay of a half position just to keep pace with last year’s expenses. A 20-employee company would need to lay off one worker and a 100-employee company would need to lay off five, she said.
Jason Higa, CEO of FCH Enterprises Inc., better known as Zippy’s, said the local restaurant chain is facing an 18-fold increase in unemployment taxes because the company, which normally has a low turnover rate and low fund use, had to cut 25% of its workforce, which dropped from 2,000 workers to about 1,500.
“For many businesses, small businesses especially, the increase comes down to survival,” Higa said. “Hopefully people understand that restaurants are all in a cash bleed. We aren’t making any profit and so what’s happening is our cash reserves since March have been depleted. Those that have closed have literally run out of cash.
“Today those that (are open) still have a cash reserve. But how long can you survive before the vaccine can become available? The (state unemployment tax rate) increase just accelerates the remaining days that you are trying to survive,” he said. “The consequences are people are not going to hire. Worst-case scenario we’ll see more closures of businesses and more people that are unemployed and tapping into the unemployment insurance fund.”
Nelson Befitel, chief counsel for ProService, said even more worrisome is that the state unemployment rate schedule hike is occurring when Hawaii’s employers are still grappling with the negative impacts of the coronavirus pandemic and most are only glimpsing economic recovery.
The timing, which comes as COVID-19 infections are surging in Hawaii and across the globe and additional lockdowns are expected, couldn’t be worse for most Hawaii businesses.
On top of that, Befitel said, Hawaii employers are facing higher federal unemployment taxes because it’s unlikely the state government will pay back the money it borrowed from the federal government to cover unemployment by the deadline.
“If the money is not paid back, the (federal unemployment tax) credit that employers receive will be reduced, increasing costs for Hawaii employers again,” Befitel said.
Normally, he said, the federal unemployment tax rate is 6%. However, each state that implements a conforming unemployment insurance program may receive a credit against the full federal rate that converts the federal rate to 0.06%.
Each year that the state’s federal loan is not repaid, Befitel said, employers get less of a federal unemployment rate waiver, which means the net federal tax goes up to .9% in year two, 1.2% or more in year three, 1.5% or more in year four, 1.8% or more in year five and so on.
Luke said she’s working with Rep. Richard Onishi, chairman of the House Tourism and Labor Committee, on a bill that would keep the state’s 2021 unemployment tax schedule at level “C” and exclude 2020 layoffs, furloughs and cuts from counting against an employer’s history.
“This is not a situation because of the employer’s history. This is basically the state shut down the economy and forced businesses to close their doors for health and safety reasons,” Luke said.
She said Gov. David Ige’s administration also is working on a bill to bring relief for businesses but said it won’t be enough if it moves the unemployment tax schedule higher than “C” or if it assesses employers based on pandemic-related labor cuts, much of which was beyond their control.
Kunstman said DLIR has a proposal in the governor’s package to mitigate the increase but is still deliberating its recommendations.
There is precedent for mitigation, albeit not as dramatic as Luke is seeking. Kunstman said employers faced a rise to Schedule H in 2010 and 2012, but the Legislature ameliorated it to “D” in 201o and “F” in 2011 and 2012. Kunstman said the rate rose to “G” in 2013.
Statutory unemployment tax schedule increases are supposed to help rebuild the state’s unemployment trust fund, which is far from solvent.
Kunstman said the state unemployment trust fund ended 2019 with a $600.5 million balance. He said the state is still calculating the fund’s 2020 shortfall, however, nearly $1.4 billion in benefits were paid between January and October 2020.
During that same 10-month period, only $171.8 million in income and interest was added to the fund.
Kunstman said the federal government advanced $734 million to Hawaii to pay benefits after the fund was exhausted. The state ended up borrowing $691.5 million after it applied employer contributions of $3.8 million and CARES Act funding of $39 million.
“Currently, the mechanism for paying (the fund) back is employer contributions,” Kunstman said.
Menor-McNamara said the state is essentially asking employers to be held responsible to repay loans they didn’t initiate for the state unemployment fund.
“The schedule change is nothing more than increasing the repayment terms because the ‘bank’ is out of money,” she said.
Luke said she agrees that employers shouldn’t be held fully accountable for the pandemic, especially since their contributions, even at “H,” wouldn’t make the fund whole.
“We have to work really hard to rebuild our economy, and this type of destruction will prolong the economic recovery and will be even more damaging for the state’s future,” she said. “Right now, the UI trust fund doesn’t have money so we have to borrow anyway — that’s just the realities of it. And even if we assess employers at the highest level, we just don’t have enough money to pay for all the UI claims that we need to pay.”
Kent said the Grassroot Institute supports the state reducing the current unemployment tax burden even if it extends the bill into the future but cautions against failing to plan for the future costs of that decision.
“We need to get our economy back and businesses are going to be really hurt by the taxes,” Kent said. “Still, this is a brand-new unfunded liability that the state has, and it’s growing. The state needs to get its finances in order and address the issue by reducing spending and putting some money toward the fund.”