Unceasing recession spurs more tax talk

By David McGrath Schwartz

Friday, Aug. 14, 2009 | 2 a.m.

Nevada businesses are facing a possible doubling of the unemployment tax they pay the state to keep benefits flowing to laid-off workers.

The tax increase on employers would help Nevada avoid paying a hefty interest rate on a $1 billion loan the state plans to ask from Washington to fund the unemployment benefits pool, which is being drained in the recession because of record unemployment in Nevada.

The alternative: keep the unemployment tax rate low because businesses are struggling in the recession, hope the economy turns around and fewer people look for unemployment benefits, and pay the federal loan back with interest when the state can better afford it.

An outside panel of business, labor and community experts, along with a state administrator, will decide in October how best to pay back the federal government.

“Do we rip the Band-Aid off sooner, and avoid interest payments and (federal government) payments? Or are we willing to pay interest for a while and delay tax increases because businesses are in trouble?” said Cindy Jones, employment security division administrator. “Or is the answer somewhere in between?”

The state’s unemployment insurance trust fund has been a little noted cog in the social safety net for decades in Nevada. The average tax rate on payroll has been relatively stable for the past decade, and the trust fund had $806 million in the bank just last year, according to Jones.

But then the economy tanked, and the unemployment rate jumped from 4.6 percent to its current 12 percent.

“The unemployment rate has defied everyone’s expectations thus far,” Jones said. She said she is confident that the fund would need to borrow money from the federal government in mid-October.

Unemployment systems in Nevada and elsewhere are being tested as never before. (The state taxes the first $26,600 of wages per worker at 1.33 percent on average, collecting $353 per employee per year. The more that a business’s former employees seek unemployment benefits, the higher that business’s tax rate is.)

Senior state officials, speaking on condition of anonymity because no final decision has been made, said the tax rate could as much as double. The Legislature significantly increased the payroll tax on large employers to balance the budget earlier this year. Some legislators warned that an additional increase would come at a bad time for Nevada businesses.

“We should not try to pay it back quickly,” said Assemblyman Joe Hardy, R-Boulder City. “The longer we can stretch the repayment out, the better chance we have to get through this crisis.”

Dan Burns, spokesman for Gov. Jim Gibbons, said, “It isn’t in our control.”

He said the state could try to negotiate repayment with the federal government to avoid raising taxes. “It would be very difficult to double or triple the unemployment tax right now,” Burns said. “It would be counterproductive when we’re trying to create jobs.”

The Employment Security Council, made up of nine members appointed by Gibbons, plans to meet Oct. 6. It will make a recommendation to Jones, who will make the final decision. She said the administrator typically follows the advice of the appointed council.

The money states borrow from the federal government for unemployment trust funds is interest-free for one year. The current interest rate is 4.6 percent, Jones said.

The last time the state had to borrow federal government money for unemployment benefits was in the 1970s, Jones said.

After past recessions, when the unemployment fund was tapped, tax rates were much higher than today’s rate. After the recession in the 1970s, the average rate was 3 percent. After the recession in the 1980s, it was about 2.7 percent. Elliott Parker, a professor of economics at the University of Nevada, Reno, pointed to studies that show unemployment benefits, rather than tax cuts, have a larger effect on the economy, because those laid off typically aren’t saving.

But, he said, “The best thing to do is to borrow in the recession, and pay it back later, when the economy is growing again.”

Jones said Nevada’s trust fund has been run conservatively. Eighteen states are borrowing from the federal government and the number is expected to increase to 28 before the end of the year, Jones said.