NCPA - National Center for Policy Analysis

States Raise Payroll Taxes to Repay Loans

November 24, 2010

State governments are borrowing heavily from the federal government to keep paying unemployment insurance benefits and, even with the weak job market, most states are raising payroll taxes to pay off the loans, says the Wall Street Journal.

  • Thirty-one states have borrowed nearly $41 billion from the federal government.
  • California alone has borrowed nearly $8.8 billion as of mid-November, according to the Labor Department.

As states try to replenish the funds and begin to repay the loans, employers are facing increases in state and federal payroll taxes, a potential barrier to new hiring.

  • A National Employment Law Project analysis found 41 states increased unemployment insurance payroll taxes this year by an average of nearly 33.9 percent.
  • The largest was a 168.5 percent boost from 2009 in Hawaii.

Payroll taxes levied by states fund unemployment benefits for up to 26 weeks -- longer in some states.  The federal government requires states to pay benefits even if their unemployment funds run out of cash, says the Journal.

In certain circumstances, Washington will increase its tax on companies in states that aren't repaying loans from Washington.

  • Employers in as many as 26 states will face tax increases of between $21 and $84 per employee per year if their state governments don't repay Washington by November 2011.
  • Employers in Michigan are already paying the added fee.

Source: Sara Murray, "States Raise Payroll Taxes to Repay Loans," Wall Street Journal, November 20, 2010.

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