As the recession deepens, Hawaii is paying out unemployment benefits faster than planned but will still have enough money to cover jobless claims through the end of 2009.
But at the rate the money is being paid out, employers may have to give up the break they’ve been getting on the payroll tax since last year.
The state expects it will use up half of the money in the unemployment insurance fund this year, paying out $234 million from the $454 million balance at the start of the year.
That will leave $220 million at the end of the year, assuming an unemployment rate of 5.5 percent.
If the fund dips to that level, it will trigger a hike in payroll taxes for Hawaii employers who have been benefitting from the tax break that was intended to run through 2010. The break has enabled companies to pay less into the unemployment insurance fund, saving some large employers as much as $100,000 a year.
“The hope is that we don’t get to that $220 million point because then we would have to do a raise in taxes to protect the solvency of the fund,” said Ryan Markham, spokesman for the state Department of Labor and Industrial Relations. “Hopefully at the end of 2009 the local economy is in better shape.”
While the balance wouldn’t leave the state in a pinch going into 2010, the reserve will be at its lowest since 1998.
Hawaii is one of only a few states with a comfortable balance in its unemployment insurance fund. The souring economy has triggered layoffs across the nation and the U.S. unemployment rate rose to 7.2 percent in December, the highest level in 15 years.
Approximately 20 states are on course to run out of unemployment insurance money within the year, some within the next few months.
Hawaii’s unemployment benefits are among the highest in the nation at a maximum $545 a week, up $22 from last year.
By contrast, Florida’s maximum is $275 a week, an amount that hasn’t changed in 10 years.
Hawaii legislators say they are keeping an eye on the unemployment fund, but are unlikely to introduce any measures to rescind the payroll tax break. Opponents of the tax break, passed in 2007, had warned of just the kind of economic downturn that the state is seeing now and that cutting the payroll tax would endanger the solvency of the fund if unemployment soared.
But the payroll tax break has provided businesses with a small cushion in a year when many industries are struggling. The net savings to business is estimated at $151 million over the three years.
“There is some concern in the business community because if the tax goes up, it affects businesses’ bottom line,” said Rep. Karl Rhoads, who chairs the House labor and public employment committee.
“On the flip side, unemployment compensation is an unemployed person’s life line, it allows them to keep paying their mortgage and buying food,” said Rhoads, D-Iwilei-Kakaako. “So we don’t want the fund to go broke, but at the same time we don’t want to overact and collect too much from employers.”
In 2008, $184 million in benefits were paid out from the fund, with the state’s unemployment rate at 3.9 percent and weekly jobless claims averaging 11,400.
At the 5.5 percent projected unemployment rate for this year, approximately 4,000 more people would be tapping into the fund each week.
The payroll tax cut was proposed at a time when Hawaii unemployment was close to 2 percent and the unemployment fund swelled close to $600 million. Hawaii employers, paying the highest payroll taxes in the nation, complained that it didn’t make sense to keep throwing money into the fund with unemployment so low.
Legislators agreed in 2007 to lower the taxable wage base for unemployment insurance payments from $35,300 to $13,000 for 2008 through 2010.
The tax break saw 44 percent less paid into the fund in 2008, an amount expected to drop another 25 percent this year.
State law requires a $256.8 million reserve for the fund. That amount is figured using a formula that considers the highest amount of unemployment benefit payouts in a year within the past decade.
So, if the amount in the fund follows the present projection and drops to $220 million, it will be well below the reserve and will require the payroll tax to return to its previous level in 2010, cutting the tax break a year early.
“Even if the unemployment tax relief law is terminated, the positive aspect is that Hawaii businesses, primarily small businesses, were able to benefit by saving tens of millions of dollars during that period,” said Jim Tollefson, president and CEO of the Chamber of Commerce of Hawaii, which took the lead in pushing the tax-relief bill.
“The dilemma is that we don’t want to increase the cost of doing business during these challenging economic times,” Tollefson said. “So we’re concerned about eliminating the relief for businesses. But we also need to look ahead to the future and be prepared for the increase in unemployment that’s likely ahead.”
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