New York's business lobby is making a fuss about an unemployment tax surcharge recently billed to employers in the state, but the lobbyists have only themselves to blame.
What groups like the National Federation of Independent Business don't want to acknowledge is that the surcharge — an extra $12.75 per employee to cover interest on loans from the federal government — is a direct consequence of their own decades-long anti-tax strategy, which bankrupted New York's rainy day fund and left the state woefully unprepared for recession.
New York had no choice but to borrow as growing numbers of New Yorkers got laid off and filed for unemployment. Inevitably, the bill is coming due for those short-sighted tax breaks.
In the long run, this anti-tax zeal hurts the small employers that the federation claims to represent. Big corporations, which account for the majority of layoffs and pay the highest wages, benefit most from the state's relatively low unemployment taxes. Now that the fund is bled dry, small employers are left holding the bag.
New York unemployment taxes reached a historic low over the 10 years leading up to the recession. Between 1999 and 2008, employers enjoyed the lowest average tax rate in the program's 75-year history. It's also when the state's unemployment trust fund fell into the red for a record four straight years. Those who blame today's trust fund woes on the "breadth and scope" of the recent downturn ignore the reality that these historically low tax rates put New York on the brink of borrowing even before the recession began.
Compared to neighboring states and the nation at large, New York's unemployment insurance taxes are unusually low. Last year, the average effective tax rate in the five bordering states was 68 percent higher than New York's, while the national average rate was over 33 percent greater. The main reason for New York's revenue shortfall is that the amount of wages subject to taxation — capped at $8,500 since 2000 — is among the lowest in the nation. In comparison, New York's neighbors apply unemployment taxes to the first $15,900 of wages on average.
That's why New York had to borrow from the federal government when the Great Recession hit. And as a result, for the second straight year, New York employers will pay higher federal unemployment taxes in 2012 (in addition to the surcharge) to pay back the state's $2.8 billion loan from the U.S. Treasury. Unlike state unemployment taxes that apply higher rates to employers with more layoffs, the interest charge and federal tax increase will hit all employers—even those that have never had a single layoff.
Unfortunately, the state Legislature is unwilling to restore New York's rainy day fund to sensible levels. Legislation introduced in 2010 would have put the state's trust fund in the black by 2015 by gradually increasing the amount of taxable wages. The legislation, however, was stalled when anti-tax ideology trumped the responsible course of action.
Rather than pretend that today's untimely unemployment insurance costs are the fault of unemployed workers, the federal government, or unfortunate circumstances, the federation should come clean with its membership. Rising unemployment insurance costs are the direct consequence of its long-term strategy to under-fund the state's rainy day reserves. Protecting employers from unforeseen cost increases during future downturns will require business groups and state lawmakers to confront an uncomfortable but undeniable reality: it's time to fix New York's outmoded unemployment insurance tax.
Mike Evangelist is a policy analyst with the National Employment Law Project.