Tomorrow when the unemployment cliff arrives in North Carolina, all unemployed workers will be impacted. If not by the immediate and abrupt loss of federal benefits than by the reduction to benefits, changes to the eligibility criteria, and changes to the suitable work requirement. And the economy will be affected too.
Amidst all these changes, a full assessment of how employers will fare is also warranted. While it is certainly true that employers will be asked to contribute more through a federal requirement that increases their contributions by $21 per employee each year that their state’s debt goes unpaid, a fuller picture is needed to understand how HB4 affects employers in the short- and long-term.
First, in the immediate-term, employers will contribute an estimated $558 million dollars, due to federal requirements, towards the repayment of the unemployment insurance debt. This represents 21.8 percent of the overall contributions. To put that in context, the share paid by workers via reduction in benefits will be more than three times greater. Moreover, it is important to note that the debt while held by the state is something solely payable by employers (the state cannot use General Fund appropriations to pay the debt off). It was also driven primarily by tax cuts for employers in good times.
The financing changes include elimination of a zero tax rate, a slight increase to the maximum rate and a change in the formula that calculates how much an employer will owe. It was this change in formula that as originally proposed would have actually reduced taxes on 43 percent of taxable wages in the state. Under the final formula, state taxes will go up slightly–though not for everyone. And, again, the change isn’t nearly as significant when compared to the benefit cuts. State taxes for employers make up 0.7 percent of the debt repayment under HB4 or $24 million. And because the benefit levels and eligibility are cut so dramatically and permanently, employer’s contributions will be held low when the debt is repaid and the federal tax goes away.
The result is employers will be contributing a mere $91 per employee in 2021, a third of what they would have contributed in state unemployment insurance taxes under current law. Such an average contribution level would put North Carolina at the bottom among states in terms of employer support for unemployment insurance.
Proponents argue that lower unemployment insurance taxes are important to supporting job creation and improving competitiveness. But businesses hire employees when they need new workers to meet rising demand for their products or services. A business that sees no need to hire new workers will not do so because of an unemployment insurance tax cut.
Of course, businesses need to have enough after-tax revenue to hire, even when they see rising demand. But shifting the level of unemployment insurance taxes will have too small of an impact on business costs to change the calculus for most businesses. All state and local taxes, including unemployment insurance taxes, paid by businesses represent just 1.8 percent of business costs. Unemployment insurance taxes represent 0.1% of total business costs. And in looking at states that have low-unemployment insurance taxes, there is no relationship with improved employment conditions.
While it may be easy to summarize by saying that businesses will be the overwhelming beneficiaries of these changes, that would be shortsighted. In reality, businesses are likely to suffer down the road too as the unemployment insurance is no longer functioning to stabilize the economy. With these changes workers will certainly bear the brunt of the impact but the ability of businesses to weather severe downturns will be compromised as well.