Rising unemployment pushes up Va. business tax

Rising unemployment in Virginia is draining the state fund used to pay unemployment benefits, meaning businesses will have to pay even higher taxes to cover jobless workers.

The tax increase is triggered by a state law that requires an increase in the state unemployment taxes that businesses pay when the balance in Virginia's benefits trust fund falls below 50 percent of a required solvency level, currently $1.176 billion.

In addition, state officials anticipate that the trust fund will be so low by January 2010 that the state will be forced to borrow hundreds of millions from the federal government to pay unemployment claims.

Last year, 347,570 initial claims for unemployment were filed. In 2009, state officials estimate they'll receive close to 580,000 initial claims.

Based on current unemployment projections, the 50 percent threshold for the fund is expected to be breached by June, meaning a tax increase would take effect in January 2010.

One result is a near doubling of the average per-employee state unemployment tax paid by business owners. In 2008 the average tax cost was $88 annually; by 2010 that number is projected to jump to $155.

It's likely that many businesses will have to pay a higher tax rate for the next four years, state officials said.

The tax increase "accentuates the (economic) problems" facing Virginia, said the chairman of the state Unemployment Compensation Commission, state Sen. John Watkins.

"It makes it more expensive to continue to operate a business," said Watkins, R-Powhatan County. "Businesses have to get the money from somewhere. They either pay higher taxes or employ less people."

Carla Mackie knows those kinds of worries.

"Any change like this really affects us," said Mackie, operations manager at The Full Cup, a lingerie boutique in Virginia Beach. "Every dollar hurts small businesses."

A higher state unemployment tax rate could have far-reaching implications of businesses.

Firms with fewer than 50 employees represent nearly 95 percent of all companies in Virginia, and the 1.4 million people they employ are about 39 percent of the state's workers, according to the state Department of Business Assistance,

In the current economic climate, unemployment taxes for many Virginia companies will increase even if their staffing levels remain constant.

"They have to because we're paying out so many benefits," said Virginia Employment Commission spokeswoman Joyce Fogg.

Virginia's unemployment rate, which is currently 4.6 percent, is expected to exceed 6 percent next year, according to the employment commission.

In North Carolina, where unemployment is 8.7 percent - a 25-year high - a state official said Wednesday there are no plans at this point to raise the unemployment tax rate.

The state's unemployment fund is "extremely low," said Larry Parker, spokesman for the North Carolina Employment Security Commission.

Even with the higher taxes on businesses, Virginia officials predict the state trust fund will be drained by January 2010, and Virginia would have to borrow money from the federal government.

Employment Commission officials estimate the state would need a loan of nearly $578 million and spend another $6 million in interest.

"We don't need the money now, but it's looking like a year from now we're going to hit bottom," said employment commission senior economist James Wilson.

Only one other time in state history - in 1983, at the end of a recession - has Virginia had to borrow from the federal government to pay unemployment claims, Wilson said. The state borrowed $45.6 million but avoided interest payments by paying off the loan the same year.

Five states - Indiana, Michigan, New York, Ohio and South Carolina - are presently borrowing money from the federal government to shore up their ailing unemployment trust funds, according to the U.S. Department of Labor.

North Carolina officials said they aren't sure whether they will need to borrow money from the federal government.

"We're hoping we don't have to," Parker said.

Del. Lionell Spruill, D-Chesapeake, hopes higher taxes and borrowing can be avoided if Virginia receives money in the proposed federal stimulus package that can be directed to the unemployment trust fund.

"There's no guarantee on that, either, but we're hoping," Spruill, who also serves on the state Unemployment Compensation Commission, said of the package that Congress is considering.

Julian Walker, (804) 697-1564, julian.walker@pilotonline.com