‘Think outside the box’ to fix Hawaii’s unemployment tax

from Grassroot Institute of Hawaii, June 23, 2023

Hawaii’s state Legislature avoided any major tax increases during its 2023 session, but it failed to address a “silent” increase in the state unemployment insurance tax, the brunt of which many businesses felt earlier this year. 

In a conversation that aired Sunday, Grassroot Institute researcher Jonathan Helton told H. Hawaii Media radio host Johnny Miro that many Hawaii businesses are reeling from inflation and a labor shortage, and having to pay more in taxes isn’t exactly helping them.

He noted that higher unemployment taxes after economic downturns have been shown to slow economic recovery. 

Helton suggested the Legislature think outside the box and look for ways to change the unemployment insurance program in the future years. Austria and Chile could serve as models for a system of individual unemployment accounts, he said. 

TRANSCRIPT

6-18-23 Jonathan Helton with host Johnny Miro on H. Hawaii Media radio network

Johnny Miro: Good Sunday morning to you. I’m Johnny Miro. Once again, it’s time for H. Hawaii Media public access programming on our five Oahu radio stations: 101.1, 101.5, 97.1, 107.5, and 96.7. 

Another important topic to be discussed, and hopefully, it’s not too deep for you, but it’s very important for businesses. Local businesses are going to be potentially severely impacted by this. 

And once again, joining me for discussion would be the policy researcher Jonathan Helton from the Grassroot Institute of Hawaii. And the businesses were hit this year with a pretty big unemployment insurance tax hike. That’s what the discussion is about this morning. Now, the tax hike was silent and automatic and the Legislature didn’t have to pass a bill to make it happen.

Now, unfortunately, the Legislature also didn’t pass a bill to make it not happen. So we’re going to ask: Why did the tax go up and what should or can elected officials do about it? 

So, Jonathan Helton, once again, policy researcher at the Grassroot Institute, good Sunday morning to you.

Jonathan Helton: Good morning to you, Johnny.

Miro: All right, Jonathan. First question: Hawaii businesses are facing a pretty big tax increase this year. How much more are they looking to pay?

Helton: Well, overall, businesses in Hawaii are going to be paying $130 million more this year in unemployment taxes than they did last year. That’s a 46% increase. 

And so — now that’s not every business, right? Not every business is going to pay 46% more. We’ve spoken to some businesses. They’re going to pay even more than that, so on average, the tax is going to go up a lot.

Miro: Can you explain a little bit about the unemployment insurance and how that tax works?

Helton: Yes. And I’ll try not to get too much into the weeds here because I know this could be very complicated. But in general, there’s two things you need to know about the unemployment tax. 

The first thing is something they call an “experience rating,” which is basically just a fancy term for how often a business lays off its employees. So businesses that lay off their employees more often, they have an experience rating that ends up giving them a higher tax rate. That’s the first thing. 

The second thing is the tax schedule. The tax schedule is basically just the rates that all different types of businesses face. 

So when you put those two things together, basically, what you get is you have a list of tax rates, and if a business doesn’t have very high unemployment, they will have a lower tax rate, and a business that has higher unemployment, they will face a higher tax rate. 

And so all of these businesses, they pay the unemployment tax into the unemployment fund, and if someone has to be unemployed, they can draw from that fund.

But what happens is, and what’s happening now, is when the fund runs out or runs low on money, all businesses pay a higher rate. That’s that 46% increase we’re talking about this year.

Miro: So it sounds like they’re basing it on how often your employees are laid off or they quit, or whatever the case — not the actual size of the business? Am I missing something?

Helton: No, that’s pretty correct. If you’re a startup, they do have a special rate for startup businesses, but for most of the time, what determines your tax rate is whether or not you’ve had to lay off your employee.

Miro: OK. All right. We’re speaking with policy researcher Jonathan Helton from the Grassroot Institute. Always love to get the information from these knowledgeable folks. 

So, why did taxes go up this year, Jonathan?

Helton: So this year, they went up to replenish the unemployment fund. And this is what happened, again, that goes back to the rate schedule. The rate schedule automatically increases tax rates on businesses when there’s not a lot of money in the unemployment fund. 

So, for a little bit of context, last November, the unemployment fund had about half as much money as it should have. It should have about $530 million in it. Right now, it’s about 70% full. That’s partially because they increased the unemployment tax to refill the fund. So that’s why taxes are going up, is because the fund wasn’t full.

Miro: All right. Obviously, the last couple of years were not normal in the sense of business or just life in general. So, how did the COVID-19 crisis affect the unemployment fund, Jonathan?

Helton: And that’s exactly why we have this massive tax hike, is when you go back to early 2020, you know, April 2022, more than 20% of Hawaii’s workforce is unemployed. And so that very high level of unemployment persisted a lot in 2020, and that’s exactly why the fund ran low, is because so many people were drawing on unemployment that the unemployment fund pretty much ran out of money.

Hawaii had to borrow $700 million from the federal government for the unemployment fund so they could pay out benefits. 

So that’s kind of why we’re in this situation. You ran out of money during the pandemic, and now, businesses are having to pay higher taxes to replenish the fund. So if you’re a business, in a lot of ways, it’s a lose-lose situation because during the pandemic, a lot of businesses were closed. They had to put people on unemployment because they simply couldn’t be open because of the lockdown. And now that we’re out of the pandemic, you know, businesses are facing inflation and labor shortages, and now they get hit with a tax hike. So a lot of businesses are not having a good time.

Miro: I can imagine. And obviously, to me, they probably knew this was coming, but what are business owners saying about this tax hike? I mean, how’s it going to affect their operations?

Helton: Yes. We saw this report from the [Honolulu] Star-Advertiser over the weekend. You know, there was a business owner talking about how they were already dealing with labor shortages with inflation, higher materials prices. So, you know, an extra tax on that, you know, that’s not really going to help them. 

And there is research out there that’s been done that says when you have higher unemployment taxes after a recession, that actually makes unemployment worse. That slows down some of the new hiring and the new economic growth, which, you know, that’s not a surprising conclusion, and that’s been studied, and they found that. 

Actually, I will say one thing, we’ve talked to several businesses about this. One of the businesses that we talked to actually discovered that there was some sort of accounting paperwork error, so that might have been made by the state in computing their unemployment taxes.

So, you know, they’re trying to figure out what’s their actual unemployment tax’s supposed to be. And I don’t know if they’ve gotten that particular situation figured out, but, you know, for all the business owners out there, if your unemployment tax went up like dramatically, you might consider looking into, you know, contacting the state, just making sure to double check that you’re paying the right amount of money on this tax. And you certainly don’t want to be paying more than you have to if someone made an error.

Miro: The unemployment fund, it’s not where it needs to be. Well, the discussion is the unemployment tax and the effect it has. It will hurt potential and local businesses. Now, the Legislature didn’t pass any legislation this year about the unemployment tax, but did they take, you know, I remember they took action a couple of years ago. Isn’t that correct?

Helton: Yes, they did. And, you know, that was certainly appreciated two years ago. So it would’ve been back in 2021. The Legislature passed a law that basically what they did is they set the rate schedule at a lower level than it would’ve otherwise been, right? Because in 2020 you had all the unemployment, so the unemployment taxes were set to automatically increase drastically in 2021.

What the Legislature did, they passed a law that increased the taxes, but the increase is much lower than otherwise. So that was good. That lower level of tax was in place in 2021 and in 2022, but they didn’t pass anything this session. So that’s why you see the higher tax compared to last year.

Miro: All right. Jonathan, what would you suggest over there, you and folks at Grassroot Institute, all suggest to help lower the burden of this tax hike? Any suggestions?

Helton: You know, we’ve suggested that Gov. [Josh] Green could look at calling a special session. I know that he suggested that because he didn’t get some of the bills that he wanted to get passed. So if a special session is called, we would like to see some legislation that might lower the unemployment tax this year. But really, you know, we need to be looking long-term. Next year, what can the Legislature do? 

We’re trying to do some research into that. Can they reduce the rate schedule next year? Should they reform the unemployment system so that it, you know, maybe it doesn’t have this kind of problem again next time we have a recession? 

You know, I think there’s a lot of questions that need to be asked, as we, you know, approach 2024.

Miro: Jonathan, did the Legislature do anything this year to give businesses a break?

Helton: I am very thankful to say that they did. So they did pass the bill known as Senate Bill 1437. This bill’s a little bit confusing. I think it makes more sense to lawyers and accountants than anyone else. 

But the best way I can explain it is, if you own an S corporation or if you’re a member of a partnership, this bill could allow you to deduct your state income tax from your federal income tax. So basically, what this would do is it would lower the federal income taxes for some businesses in Hawaii. 

There were a lot of businesses behind this. I’m happy that the Legislature passed this. And a big thank you to Gov. Green for signing this bill. So they did do that, which was good.

Miro: Are there any other reforms that you would recommend — the people at the Grassroot Institute — are there any other reforms that you would recommend?

Helton: Yes. You know, looking forward again to 2024, there’s a couple of things the Legislature might want to look at doing. 

Some researchers have suggested allowing individuals who are receiving unemployment to take a part-time job and then have some of their unemployment reduced. So they would still be getting some benefit, but they would be getting less benefit if they were able to take a part-time job.

And a reform like that might help get more people into the workforce. We’re still looking at research on that to see what other states have seen by implementing this policy. 

And then, you know, think outside the box. There’s some other countries — Chile and Austria, for example. They have individual unemployment accounts. So instead of all of the businesses paying into one central fund, in those countries what happens is the business and the employee pay into a fund that really the employee has a lot of control over.

So if the employee is laid off, they can draw from that individual fund. And, you know, maybe when they retire, they can get the money out of that individual fund. 

But, you know, just thinking outside of the box like that, there’s a lot of different things that could probably be done to make the unemployment system work better, both for businesses and for employees.

Miro: If the governor doesn’t get a special session — just to wrap it up here — when would businesses potentially feel the full impact of something coming down at an unemployment insurance tax increase? When do you think that would happen, the full impact to that?

Helton: I believe they’ve already felt this back in March. Back in March, I think, was when they were sent out the notice of what their tax bills were going to look like. So a lot of businesses are already paying that higher tax bill, unfortunately.

Miro: OK. Jonathan, thanks for spending some time with us on this Sunday morning. Appreciate it. Where can folks reach you and take a look at all your great work?

Helton: Yes, absolutely. Always happy to be here. You can check out this work. We’ve got all sorts of other works on tax, housing, healthcare policy at grassrootinstitute.org. That’s grassroot, no “s,” institute.org.

Miro: Thanks for chiming in this morning and have yourself a fantastic rest of your Sunday, Jonathan.

Helton: Thank you. I appreciate it.