State unemployment tax rate could rise to pay loans

CARSON CITY -- If you have a business, you probably spend a lot of time thinking about how to make it through the year.

The worst recession since the Great Depression has taken a huge toll on Nevada, with bankruptcies, home foreclosures and business closures at record levels.

Well, wait until next year.

It is expected to get worse.

You could be hit with a triple or higher increase in unemployment taxes to start paying off an anticipated $1 billion in loans the state Employment Security Division probably will borrow from the U.S. Department of Labor by the end of 2010.

Employers, not employees, pay this tax to cover the cost of unemployment benefits for their laid-off workers. The tax is paid on the first $27,000 of each worker's wages. Rates paid by individual companies vary, from 0.25 percent to 5.4 percent, depending on their frequency of laying off workers.

Mae Worthey, the division's spokeswoman, said Monday that the state already has borrowed $433 million from the federal government and anticipates it will borrow $14 million more a week for the remainder of the year.

That would increase the debt to the $800 million to $1 billion range by the end of the year.

The state is borrowing the money so that it can continue to pay the required maximum 26 weeks of state unemployment benefits to qualifying unemployed workers. The average check is about $300 a week. Nevada leads the nation with a 14 percent unemployment rate; more than 189,000 residents are out of work.

The state unemployment tax rate last was raised to cover a federal loan 35 years ago, according to David Schmidt, an economist with the Department of Employment, Training and Rehabilitation.

But the amount needed back then is a pittance compared to today, he said, although he couldn't recall exactly what it was.

"Even if the tax rate were tripled, we still would be sinking more into debt," Schmidt said. "To cover a loan would mean it would have to be increased even more. We really don't have a comparable historical precedent."

Schmidt said the state trust fund to cover unemployment benefits topped $800 million in 2007 but went into the red last year because of rising unemployment.

In 2009, the state paid out $1.08 billion in unemployment benefits and received about $250 million in unemployment taxes.

Ray Bacon, executive director of the Nevada Manufacturers Association, anticipates unemployment taxes will be increased by enough in 2011 to end the need for additional federal borrowing. Bacon is one of a handful of business representatives who regularly attends state meetings on unemployment taxes.

But he anticipates the recession in Nevada will last four or five years longer. Until it ends, he doubts the state will be able to draw down the $1 billion loan.

"I am very concerned. Some employers will see a 10-times increase in the rates they pay," Bacon said, because they've laid off so many employees. "Business is going to take a whopping increase in taxes because of the unemployment trust fund. Unfortunately, there is no good answer."

At the same time, he predicted some state legislators will look to increase business taxes to cover a state budget shortfall that some estimate will be greater than $3 billion in 2011.

Businesses simply cannot afford to be hit with multiple tax increases, Bacon said.

Interest will be charged by the U.S. Department of Labor on the loan starting in September 2011, unless Congress decides to waive the interest. States have not been charged interest to this point.

On Friday the current Nevada debt was estimated at $300 million, but Worthey received more accurate figures Monday.

Worthey also said Monday that the number of Nevadans who will exhaust all benefits now is estimated to be growing at 6,000 a week, with about 22,000 expected by the Fourth of July weekend.

The U.S. Senate on Thursday rejected a plan that would have continued to pay federal unemployment funds to laid-off workers for as long as 73 weeks past the 26 weeks provided by the state.

Cindy Jones, the Employment Security Department administrator, decided in December to keep the state unemployment tax rate at 1.33 percent in 2010. She noted at the time that the office's philosophy is not to raise the tax during a recession because such a move would burden already struggling businesses. Increasing the tax during economic boom periods is preferred, she has said.

She could not be reached for comment Monday.

Jones will set the 2011 tax rate in December of this year. She generally follows the recommendations of the Employment Security Council, a group of business and union representatives who meet in October.

At the time Jones made the decision, her analysts said even if the rate had been increased to a 4.33 percent average, the state still would pay out more in benefits than it receives in taxes because of Nevada's record high unemployment, which then was 13 percent.

Nevada isn't alone in its borrowing. According to the U.S. Department of Labor website, 31 states had borrowed a combined $38.4 billion from the federal government as of Thursday. California has borrowed $7.2 billion, Michigan, $3.8 billion, and New York and Pennsylvania, both $3 billion.

Contact Capital Bureau Chief Ed Vogel at evogel@ or 775-687-3901.