State lawmakers want to avert an unemployment insurance tax increase on businesses by March, but there is growing recognition that previous tax breaks were likely mistakes that helped drain a reserve meant to cover surges in unemployment.
The House Labor and Public Employment Committee is expected to advance a bill on Tuesday that would delay a scheduled unemployment tax increase that could cost businesses $300 more on average per employee. Revised estimates show that businesses now pay $720 on average per employee. The one-year delay would save businesses an estimated $107 million.
The state Senate and Gov. Neil Abercrombie have agreed with the House to try to take some action by March, before businesses have to pay the higher rate, but the state’s labor director warned lawmakers Friday that such tax breaks are shortsighted and expose businesses to even larger tax increases in the future.
"Essentially, what the bill does is it allows us to kick the can down the road," Dwight Takamine, director of the state Department of Labor and Industrial Relations, told the House Labor Committee.
The state’s unemployment insurance system is designed to sustain itself through automatic rate increases on businesses when a reserve falls below an adequate level. The reserve is expected to grow when the economy is healthy and unemployment is low, creating a safety net for when the economy declines and unemployment rises.
But lawmakers granted businesses a significant tax break in 2007 — when the reserve was more than $550 million — and then softened a staggering automatic rate increase in 2010 — when the reserve tumbled toward the red — interruptions that helped empty the reserve and forced the state to borrow from the federal government to pay unemployment claims.
Revised estimates by labor analysts show that the state would have a $192 million reserve at the end of the year if the new rate increase takes effect as scheduled, but $77 million if lawmakers approve the delay.
Several lawmakers acknowledge that previous unemployment tax breaks were likely mistakes — and that a delay this year could lead to larger tax increases in the future — but worry that a tax increase now would hurt businesses and undermine economic recovery.
State Rep. George Fontaine (R, Makena-Kihei) described a tax hike this year as a "hand grenade" tossed into the business community.
The Chamber of Commerce of Hawaii, the Hawaii Automobile Dealers Association, the Hawaii Restaurant Association and other leading business interests have asked lawmakers for a two-year delay to give businesses more certainty about their unemployment tax liability.
Jim Tollefson, the chamber’s president, disagreed that the previous tax breaks were mistakes, contending that they kept money in the economy and likely prevented cutbacks and layoffs that could have increased unemployment. "I think it was the right thing to do at the time, and I believe that this is the right thing to do now," he told the committee.
Hawaii’s unemployment rate was 6.6 percent in December, the highest in 16 months.
Takamine — who as a House member warned about the consequences of the previous tax breaks — said the reserve would have withstood the recession without the need for significant tax increases had lawmakers not made the changes in 2007 and 2010.
State Rep. Karl Rhoads (D, Chinatown-Downtown), chairman of the House Labor Committee, said lawmakers are committed to helping businesses. But he also said he should have heeded Takamine’s earlier warnings.
"It’s the one vote that I really regret," he said after the hearing.
State Sen. Clayton Hee (D, Kahuku-Kaneohe), chairman of the Senate Judiciary and Labor Committee, said senators are also committed. He said senators would take Takamine’s concerns into consideration, however, since the labor director is representing the interests of the unemployed.
"It’s pretty clear that the Legislature may have overreached," he said of the tax breaks when the unemployment reserve was flush. "I’m not sure it was a mistake, but it clearly was done without the anticipation of the economy going to hell as quickly as it did."
