LIHU‘E — Helping Hawai‘i citizens who cannot find work could end up hurting those who currently have jobs and add to the rolls of the unemployed. Businesses will soon have to compensate for what could be a large hike in
LIHU‘E — Helping Hawai‘i citizens who cannot find work could end up hurting those who currently have jobs and add to the rolls of the unemployed.
Businesses will soon have to compensate for what could be a large hike in unemployment insurance taxes in coming years. Officials predict local enterprises will end up paying nearly $1,000 more annually, on average, per employee, which could lead to further layoffs and reduced hours for individuals currently in the labor force, representatives the state Department of Labor and Industrial Resources said in a Wednesday morning Webinar.
“I’m terrified of it,” said Michael McGinnis, owner of Divine Planet and Aloha From Hanalei, regarding the potential increase.
With about 10 employees, the difference in yearly expenses could be “substantial,” he said.
The significant increase in taxes is necessary to replenish a dwindling state trust fund used to provide benefits for the unemployed. DLIR officials say that because the balance has dropped some $241 million since December 2008, efforts to offset the reduction are inevitable.
An average of $17 million was paid out in benefits each month in 2008, while some $31 million is being spent each month in 2009, according to the DLIR.
It is anticipated that the fund will run out by the end of next year, as it already has in many other states, said Kaua‘i Chamber of Commerce President Randall Francisco.
In 2008, before the economy took a dramatic turn, the unemployment fund was abundant and business taxes were reduced. Now that the fund’s pool is being drained, business have to shell out that extra money at a time when they need it most, Francisco said.
The taxable wage base — the maximum amount of salary or wages per employee that are subject to unemployment tax — was reduced from $35,300 in 2007 to $13,000 in 2008 due to special legislation, according to DLIR documents.
That reduced wage base, combined with a low average tax rate of 0.7 percent, among the lowest since 1970, yielded just $90 in taxes, on average, per employee in both 2008 and 2009, DLIR statistics show.
The state projects that the tax wage base will jump back to $38,800 with a 2.75 percent average rate, yielding $1,070, on average, per employee in 2010. Those numbers are projected to rise again in 2011 to a TWB of $39,100, an average rate of 3.9 percent, and per-employee taxes of $1,520.
The average tax rate had hovered between 1 and 2 percent for more than a decade, while the average tax per employee peaked at $560 in 1995 and $510 in 2003, never dropping below $280 until the special legislation.
DLIR says projected unemployment levels will push the fund balance into the negative in December 2010, and taxes for 2010 and 2011 will automatically increase under Hawai‘i Revised Statutes Section 383, resulting in a positive balance two quarters later.
However, with “businesses in distress” already “cutting back on their expenses,” the additional costs could necessitate cutting hours and staff reductions, Francisco said.
“Many small business are hanging on by their fingertips,” said Kaua‘i Small Business Development Center Director John Latkiewicz in an e-mail. “For those businesses, a tax increase is someone jumping up and down on their fingers.”
To go from paying approximately $100 per employee each year to $1,000 is a jump that could either make or break many businesses on island, said Office of Economic Development Director George Costa.
“It’s unfortunate,” he said, adding that there is really no way around it.
The unemployment insurance tax will go up, “that’s a given,” DLIR officials said. However, they are currently working on reducing and managing the amount as much as possible so the increase might be more “reasonable” for businesses in a down economy.
The 50th state is “in between a rock and a hard place,” Latkiewicz said.
“Tax revenues need to be increased or services decreased,” he said. “Neither is desirable.”
By August 2009, the number of claimants exhausting their 26 weeks of unemployment benefits reached nearly 2,500 in the state. Approximately 2,500 more claimants exhausted their additional 33 weeks of federal Emergency Unemployment Compensation in August, according to the DLIR.
“There are certainly a significant number of people who have either used up benefits or are about to do so,” said Kaua‘i WorkWise Branch Manager Bill Grier.
While the job market has gotten “a little bit better,” things have remained “relatively unchanged,” he said.
“It could be argued that we all, including small businesses need to share the burdens created by the economic downturn,” Latkiewicz said. “Almost everyone is taking a hit in the current downturn.”
For more information, visit hawaii.gov/labor.
