Impact of UI Trust Fund on Small Businesses in 2022
Minnesota businesses, despite surviving closures and continued uncertainty, are now facing a new crisis that must be addressed - either in a Special Session before we reconvene or as soon as the Legislature goes back on January 31, 2022.
The Unemployment Insurance (UI) Trust Fund, or UITF, currently owes nearly $1.1 billion in debt to the federal government. Minnesota, like many states, began borrowing from the federal government in the summer of 2020 to pay a surge in unemployment claims caused by the Governor’s shut-down of businesses in response to Covid. The UITF needs to restore a balance of approximately $1.6 billion to meet federal solvency requirements. Approximately $2.6 billion in total is needed for full solvency.
In addition to the current $1 billion in debt to the federal government, we are racking up significant interest payments every month. Current interest accrued for the fiscal year is already about $4.2 billion, but thus far, we have only paid $35,000 in interest payments.
Until the UI debt is repaid and the UITF reserve is restored, Minnesota businesses, through no fault of their own, will face large Unemployment Insurance tax increases from both the state and federal governments.
We expect an increase in the federal UI payroll tax base and a 4% interest surcharge while the UITF balance remains negative.
There will also be an increase in state unemployment tax, based on a formula in current statute that could increase both the base rate and impose an additional assessment that can range from 5% to 14%, depending on the balance in the trust fund on March 31, 2021. Based on that, we can expect the additional assessment for 2022 to be at 14% rate. MN DEED will be sending letters to employers confirming the tax increase the week of December 8 – 15th.
Conservatively, it looks like most businesses are facing a combined federal/state UI tax increase of 15-20% for 2022. If we don’t pay off the debt in 2022, UI taxes will continue to rise in subsequent years, based on the amount of debt and the formula.
Unlike FICA taxes, UI payroll taxes are the entire responsibility of the employer, not employee, so the burden of repaying the UITF falls solely on business owners.
Thirty-one other states paid back their UITF debts by using funds from the CARES Act or American Rescue Plan. Despite a surplus and over $1 billion of federal pandemic relief funds, Minnesota has put $0 towards paying down our UTIF debt.
Taking Action:
I began sounding the alarm on this pending tax increase more than a year ago and introduced a bill in the 2021 session to address it. My bill, HF 2455, would have required the state to use the first $2 billion of the federal American Rescue Plan (ARP) funds to replenish the UITF “before any additional assessment, special assessment, or other state unemployment tax rate increase is calculated or imposed on taxpaying employers.”
Now time is running out. Last week, my Republican colleagues on the Workforce Development Committee sent a letter to Gov. Walz urging him to address this impending crisis by:
- Prioritizing eliminating the UITF debt and restoring the required reserves in any special session between now and the beginning of the 2022 session;
- Working with Minnesota's federal delegation to reinstate the interest waiver on UI loans and seek UI debt forgiveness;
- Enhancing UI fraud prevention measures within the Department of Employment Economic Development; and
- Examining existing state and federal UI laws for authority to suspend tax increases until the debt is eliminated and reserve rebuilt with surplus funds.
Personally, I do not support seeking federal forgiveness of the UITF debt. The federal government has sent billions of our tax dollars to Minnesota to be used for Covid-related expenses and we should be using our CARES and ARP dollars to get it done.
If the debt is “forgiven” by the federal government, it will create a “moral hazard” in the future which signals that states who don’t manage finances well will be bailed out. In addition, a bail-out would add to our national debt. Despite what many seem to think, “there is no such thing as free lunch.”
2022 Session: At the end of the last Special Session in June, the Legislature set aside $1.1 billion in federal ARP funds to address future Covid-related expenses. I am working with my colleagues and a group of business leaders to develop a proposal to use that $1.1 billion, as well as some of the expected state budget surplus, to repay our UITF debt and replenish the reserve so employers won’t be on the hook for these large tax increases.
Surprisingly, Democrat members of the Senate announced yesterday that they oppose using the federal ARP money to repay the UITF debt, arguing that employers should “pay their fair share” and pay the UI tax increase to repay the debt.
It is unconscionable that government would force businesses to close and then require them to pick up the tab for debt incurred to provide unemployment benefits. Businesses didn’t want to shut down – they were required to. If they are forced to pay a double-digit tax increase, many will not be able to make it. More businesses will close, more employees will lose their jobs, and our debt for unemployment benefits will continue to increase.
Small businesses are still trying to recover from their losses during the closures and are continuing to struggle with labor shortages and supply chain problems. Prior to the pandemic, Minnesota businesses were already taxed to maintain a nearly $1.5 billion trust fund surplus. The current deficit is pandemic-induced and using the federal funds to pay off the UITF debt will simply return us to our pre-pandemic state. Businesses will continue being taxed to provide unemployment benefits, but at the pre-pandemic levels.
The last thing businesses need is a substantial UI tax increase. We must work quickly to solve this crisis and help Minnesota’s job creators.
|
