Business owners could face large unemployment tax increases

Just after they made it through a shutdown, Washington business owners could see another challenge on the horizon — skyrocketing unemployment tax rates.

With unemployment levels not seen since the Great Depression, the state’s unemployment fund is quickly being spent.

“Since the beginning of March, the balance in that trust fund has dropped by about 50% — nearly $2.5 billion has flowed out of the fund to pay benefits,” said Bruce Beckett, government consultant to the Washington Retail Association. “And if that trajectory continues, clearly by the end of the year, beginning of next year, the fund will be depleted.”

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The unemployment fund is entirely funded by Washington businesses, he explained. That’s why an increase in the unemployment insurance taxes paid by businesses are the likely candidate to refill the pot of money. According to the Employment Security Department’s forecast, these unemployment tax hikes could be steep for many Washington business owners.

“Where the vast majority of Washington’s employers sit in this array, it could be between a 400% and 600% increase next year,” Beckett said.

He noted that, normally, unemployment tax rates are based on how often an employer has had to lay employees off, and therefore has caused people to use the unemployment system.

“Employers pay into it based on their experience, so it makes a lot of sense that if you’re an employer that has a lot of layoff experience, you pay more into the system than someone who is a very stable employee and has very little experience with their employees needing benefits,” he explained.

Right now, however, the state does not want to punish business owners for having to lay off employees due to the lockdown.

“The unemployment that has happened in the last few months, or the vast majority of it, is because of a mandate to curtail business activity to protect against the spread of COVID-19, so it’s not because of the employer’s decision … it’s completely outside the control of the employer, and they shouldn’t be penalized for that,” Beckett said.

Rose Gundersen, vice president of operations and retail services for the Washington Retail Association, said most of the tax increases will be in the form of a socialized tax, meaning they will be spread out among everyone. The tier of business owners who don’t tend to lay off employees very often will see the highest hikes.

“It’s spread across, regardless of individual employers’ experience … it’s a reversal,” she said. “For those who have had really no experience [in laying people off], they are going to incur the biggest increase in unemployment tax rates, and vice versa.”

She pointed out that many small businesses have used PPP loans to keep employees on this far — but may need to lay employees off when that money runs out.

There are other potential ways to mitigate the drying-up of the unemployment fund without relying on businesses, Beckett said. One way would be to seek a federal loan — though he noted that this would be somewhat of a Band-Aid on a gaping wound. A federal loan would have to be paid back within two years, which would just postpone the issue.

Another way would be for the state to replenish the unemployment fund.

“Inject some of the federal CARES Act money into the system to ensure that unemployed workers continue to get their benefits — and to maybe avert the tax increase on employers at the very time that everyone’s hoping we can get people back to work,” Beckett said.

This could require action by the Legislature, which is why the Washington Retail Association is asking for a special session to be convened this fall.

“It’s very imperative that the special session convenes before the end of the year, because ESD has no choice but to increase the rate the way they see data is showing, and they send out the rate increase at the end of the year,” Gundersen said.

Beckett said the best solution would be for people to get their jobs back. But at a time when the coronavirus pandemic rides a narrow line and could get better or worse at any moment, he doesn’t see this as likely.

“If the employment situation were to turn around rapidly, then maybe this gets into balance and none of these draconian measures are necessary,” he said. “But that’s not the trend line at the moment.”

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