Mo. to lose unemployment tax credits

Wednesday, October 26, 2011

Beginning next month, the federal government will take away tax credits from Missouri employers and use the taxes collected to pay back about $725 million the state borrowed to pay unemployment benefits.

For the past two years, Missouri was able to borrow the money to shore up its unemployment trust fund interest free, but now the state must pony up and pay it back.

Unemployment benefits are financed through state and federal assessments on businesses. When state funds run out, they can borrow from the federal government to pay unemployment benefits. The federal government then can recoup the loans by increasing taxes that businesses pay.

The IRS allows businesses to take a tax credit for the state unemployment taxes they pay to the Missouri's department of revenue, but starting Nov. 10 all Missouri employers will see a 0.3 percent reduction in their Federal Unemployment Tax Act credits for each year the state's loans remain outstanding.

That will amount to about $21 per employee the first year. It will double to $42 the second year, $63 the third year and $126 the fourth year, said Tracy King, vice president of governmental affairs with the Missouri Chamber.

"The federal government has a repayment mechanism if the balance has been outstanding for two years and that is the loss of the FUTA tax credit, which means the federal tax rate will go up through the collection of state taxes," King said.

The increased unemployment tax rate will apply to all employers regardless of size. Only the employer pays FUTA tax and it is not deducted from employee wages.

The tax increase comes at an already difficult time for Missouri businesses, she said.

"Right now we have a lot of businesses that every dollar counts and they're struggling to keep the doors open. When you're hit with $21 per employee, which may not seem like a lot to some businesses, to others it's a matter of keeping the doors open or the doors closed."

It's a revolving problem because if a business closes, that puts more people on the unemployment rolls, King said.

Missouri's unemployment rate has been dropping in recent months, at 8.7 percent in September, down from a high of 10.2 percent in January.

September unemployment rates aren't available for individual counties yet, however, in August area unemployment rates were as follows:

* Cape Girardeau County: 7.4 percent

* Bollinger County: 8.9 percent

* Perry County: 6.2 percent

* Scott County: 9.2 percent

* Stoddard County: 8.8 percent

"Most states are in this situation we're in," King said. "We're not the worst by any means, but it is a huge problem for our employers because there is no option. We have to pay it back."

The state has options on how to pay its unemployment loans back, including issuing bonds, something the Missouri Chamber and other business groups support. Missouri's Board of Unemployment Financing has the statutory ability to issue bonds for up to 10 years to repay federal loans. House Bill 163, which failed to gain any traction in the most recent legislative session would remove the 10-year bonding limit and allow the state to continue receiving federal unemployment benefit funds through 2013.

"There's not an easy answer," said John Mehner, president and CEO of the Cape Girardeau Area Chamber of Commerce. "Organizations including the Missouri Chamber and Associated Industries of Missouri have been diligently working on it and trying to come up with solutions and it's just not easy."

King said the Chamber hasn't given up on bonding as a solution to repay the loans and keep employers' FUTA credits intact.

But for now, the federal government will recoup the loans by increasing taxes on employers.

"It's going to come off the bottom line. It's going to be an expense you're going to incur that you hadn't budgeted or planned for. Most businesses probably aren't aware, but it's coming."


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