As reported by HartfordBusiness.com, the tax hike is due to 5 years of debt that is still being repaid to the federal government for loans taken out to pay unemployment claims.
Connecticut is not alone though. At the height of state unemployment crisis, 37 states had taken $47 billion in federal loans to pay unemployment claims (Title XII loans). Some of them used bonds to pay back the loans, raised taxes on employers, and simply reallocated budgets to pay down their loan balances.
What happens when a state is unable to pay back its federal loan within the first couple years? An increase in the federal unemployment tax rate is imposed. After five years, that penalty is now an additional 0.5 percent increase, which effectively raises the unemployment tax rate on employers across the state. That, coupled with an interest rate increase tacked onto the outstanding balance each year, will cost Connecticut employers an additional $161 per worker.
While some states sought a waiver on this 0.5% federal unemployment tax increase, Connecticut — by taking the hit — will reduce its outstanding balance by about $45 million. Long-term this will actually help reduce costs for employers, because by paying down the loan quicker the state will avoid additional interest costs each year.
These hidden costs that are largely unexpected by employers can add up quickly. Especially in the nonprofit sector where each dollar allocated to overhead must be spent wisely, unemployment costs have to be managed closely.
Fortunately, nonprofits have the unique opportunity to opt-out of the state unemployment tax fund and instead pay only their own unemployment claims, dollar for dollar. The Unemployment Services Trust, which has helped nonprofits exercise this alternative properly since 1983, will provide free evaluations to nonprofits across Connecticut through their partnership with the Connecticut Association of Nonprofits. This will help nonprofits identify whether they should take advantage of their unemployment tax exemption, and give them the resources to do it securely through the UST Program.
To see a state’s outstanding Title XII loan balance, check here.