‘Brewing storm’ likely to cost firms

Business Courier of Cincinnati - September 5, 2008

Waning jobless fund could raise business taxes

Business Courier of Cincinnati

Ohio’s dwindling unemployment benefits fund took another turn for the worse this month when a state consultant increased his deficit estimates. The latest numbers, based on unemployment data released in mid-August, show the fund shrinking to $20 million by year’s end – down from $2.3 billion eight years ago. Consultant Wayne Vroman of the Urban Institute in Washington, D.C., now projects a $591 million deficit by the end of 2009.

That’s more than double his estimate from two months ago, making it more likely Ohio businesses will face more than $240 million in new unemployment taxes next year.

“Some increase is inevitable,” predicted Ohio Chamber of Commerce President Andrew Doehrel. “The hole’s too deep.”

He co-chairs the Unemployment Compensation Advisory Council, a panel of business, labor and legislative leaders, which is debating potential funding fixes. Already, they have agreed on the need for a temporary freeze in benefits and at least an $83 million tax increase that would cost Ohio companies an average of $22 per employee.

But Vroman has urged the panel to consider an increase three times that size and to index increases to rising wages.

Lawmakers decide

State lawmakers will have the final say; they ignored the panel’s last package of reform measures, recommended in 2006. This time, the advice will be harder to ignore.

“It’s going to to take some tough decisions,” said State Sen. Eric Kearney. “I’m not in favor of an increase in business taxes, but you can’t have a system that’s underfunded. I mean, it’s a safety net for folks. You’ve got to have it.”

The expected increase in unemployment taxes is part of a “brewing storm” in Ohio that includes group-rating discount changes for workers’ compensation insurance and a potential expansion in the use of prevailing wage rules, said Doug Moormann, vice president of economic development for the Cincinnati USA Regional Chamber of Commerce. “We’re seeing a lot of things that could increase the cost of doing business in Ohio,” Moormann said.

Local employers don’t like it but said unemployment taxes are a relatively small burden. “We could deal with it, but it would be unfortunate if we had to,” said Sara Jones, business manager for HGC Construction Co. in Walnut Hills.

“We just try to be resourceful enough to grow with or without the changes,” said Pat O’Callaghan, CEO of Queensgate Foodservice, a 100-employee firm that distributes food items to restaurants.

“I’m disappointed that our government didn’t deal with it sooner,” said Bob Coughlin, founder of payroll processing firm Paycor Inc., with 325 local employees.

Ohio’s unemployment insurance pool has been draining for years, thanks to a prolonged period of rising unemployment and relatively low tax rates. Recent mass-scale layoffs drove Ohio’s unemployment rate to a 15-year high of 7.2 percent in July, with more than 11,000 jobs lost during the month. Another 10,000 jobs could be lost in the months ahead as DHLpulls its air cargo operation out of Wilmington and General Motors closes its Moraine assembly plant.

“We’re going to have to pay the piper,” said Zach Schiller, research director for Policy Matters Ohio, a nonpartisan research group. “It was clear some time ago that we were going to be broke.”

Good times should support bad

“The whole thing is supposed to be counter-cyclical. In the good times, we’re supposed to be investing more” to cover expenses in a declining economy, said Maryellen O’Shaughnessy, special assistant for policy and legislation for the AFL-CIO.

But Ohio firms have enjoyed relatively low unemployment taxes in the last decade.

Unemployment tax rates vary by industry and experience – how frequently employees use unemployment benefits – but Ohio companies pay an average of 2.2 percent on the first $9,000 in employee wages. That taxable wage rate base hasn’t changed since 1995 and is below the national average of $11,500.

As state benefit reserves drained, a series of automatic tax increases kicked in. But those haven’t stopped the bleeding. And if the fund continues to empty, unemployment claims would be paid by borrowing from the federal government for the first time since the 1980s. If those loans aren’t paid in two years, Ohio firms could lose a discount they enjoy on federal unemployment taxes.

“At some point, the system has to generate more revenue,” Vroman said.

In July, the consultant for the Ohio Depart ment of Job and Family Services urged a three-year freeze on benefits, an increase in the taxable wage rate base of up to $3,000 and the indexing of base rates to ensure revenue growth. Labor groups are pushing for a long-term fix that would make increases automatic by tying the taxable wage rate base to an index of average wages in the state.

In late August, the Ohio Chamber proposed a three-year freeze in benefits and an increase of the base by $1,000. It also proposed a state bond issue of up to $300 million. State attorneys are reviewing that option.

“There have been legal opinions that say bonds can’t be issued for these purposes,” said O’Shaughnessy. “Also … why should the taxpayer be borrowing to cover the responsibility of the employer?”

The panel meets Sept. 17, and battle lines are drawn. Doehrel said Ohio will lose jobs to neighbors if it increases its taxable wage base above $10,000. Indiana, Kentucky and Pennsylvania have lower taxable bases. But O’Shaughnessy said they face the same pressures as Ohio and could raise their base.

And the chamber is fighting Vroman’s long-term recommendation for automatic increases to the taxable wage rate base. “It leads to a system where costs are allowed to rise unchecked,” he said.

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