Unemployment Insurance Tax Increases Looming, As Are Challenges in Addressing Them

Not surprisingly, the health of the Unemployment Trust Fund and the taxes on employers required to maintain it are shaping up to be significant issues for Vermont employers going into 2021.  Unfortunately, the end of the recent legislative session shows that dealing with these issues will be challenging.  AIV will be leading efforts to address these challenges and underlying problems with the UI system, and we encourage you to contact us at info@aivt.org if you are interested in more information, updates going forward, and opportunities to engage on these issues.

Background

UI taxes in Vermont are driven by the health of the Trust Fund.  Put simply, when Fund balances are relatively low taxes increase, and when they are relatively high taxes decrease.  Employers fall into one of 21 tax brackets on a tax schedule based on their history of lay-offs and resulting experience rating.  In turn, there are five different schedules of these brackets, with rates in Schedule V being higher in each bracket than rates in Schedule I.  These schedules can change every year based on whether the Fund needs more or less revenue to maintain a healthy balance to cover benefits and have a reserve for a potential recession.

Owing to a number of factors, including the significant increases in the taxable wage base to help restore the Trust Fund after the last recession and the fact that it has been a number of years since that last recession, balances in the Trust Fund were much higher than necessary going into 2020 – exceeding $500 million.  In response, we are currently in Tax Schedule I, and as part of a corrective measure included in the 2010 reforms to restore the Fund, the taxable wage base is due to drop from $16,100 this year to $14,100 in January.

Although the excessive balances in the Fund turned out to be fortuitous in helping to absorb the impacts from the economic shut down this year, those impacts have been so large that the automatic self-correcting response in employer taxes is due to be much more dramatic than might be expected in the normal growth and recession cycle the system is designed for.  Given current trends, it is expected that on July 1, 2021, employer tax rates will jump from the current Schedule I all the way up to Schedule V.  This will more than triple the UI tax burden on employers with the lowest (best) experience ratings, and increase taxes on those with the highest by more than 60%.

Possible Fixes and Challenges

To help avoid such a sudden and significant tax impact, the House Commerce Committee, with the support of the Department of Labor, AIV, and other stakeholders, attempted to pass legislation at the end of the recent legislative session to soften the blow on employers.  The provisions, included in the House version of S.353, would have first kept the taxable wage base at $16,100 in January, but would then also have held the increase in the tax schedules to Schedule III rather than Schedule V in July.  These changes combined would have deferred approximately $24 million in increased UI taxes next year.  It would only have been a deferral, however, because employers are still ultimately responsible for restoring the health of the Fund eventually.

However, the leadership of the Senate Economic Development Committee opposed providing relief to employers unless UI benefits were also increased.  Although couched in an argument about fairness and balance in providing relief, this argument is fundamentally flawed.  UI benefits have not been reduced during the COVID crisis, and remain among the most generous in the country.  Moreover, eligibility criteria have been expanded and the federal government has subsidized significant increases in benefits already.  Finally, not only would the proposed relief for employers be temporary, increasing benefits will actually increase the amount of taxes employers will have to pay in the long run.

In part because this legislative disagreement arose in the closing days of the session, no provisions addressing UI taxes were ultimately enacted.  In order for any changes to be adopted in time to address the increase in tax schedules next July, legislation will now have to be passed in the first couple of months of the new year.  It is likely that there will again be an attempt to tie tax deferrals to benefit increases, threatening not only the recovery of employers but also the affordability and integrity of the UI system.

AIV has long worked to address the affordability and protect the integrity of the UI system, and played a leading roll in the difficult reform efforts to restore the system after the last recession.

We will be providing more information and will continue to lead on this effort over the coming weeks and months and into the next legislative session.  We strongly encourage employers to contact us about this issue at info@aivt.org so that we can keep you up to date and work with you if you are interested in helping engage legislators on this matter.