Can CT prevent a federal unemployment tax hike in January? Businesses are pushing for it.

Avoiding the tax increase will depend on whether the state’s unemployment trust can stay fiscally afloat until mid-November

State labor officials are trying to keep Connecticut’s cash-starved unemployment fund afloat through early November, while avoiding borrowing to replenish it before then.

If they can do so, they could stave off a potential increase in federal unemployment taxes costing Connecticut employers roughly $30 million next year.

But businesses, which pay taxes annually to support both the Connecticut and federal unemployment trusts, are asking the General Assembly and Gov. Ned Lamont to tap the state’s robust coffers and bolster Connecticut’s jobless fund now — to eliminate any chance of a federal tax hike.

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“It really is going right down to the wire,” Daryle Dudzinski, the Department of Labor’s deputy commissioner, told the CT Mirror this week, adding that state officials “would absolutely want employers to not have to pay additional monies. … We want our employers to do well.”

Most states borrowed from Washington to keep weekly jobless benefits flowing following the arrival of the coronavirus. Connecticut secured $1.2 billion between 2020 and earlier this year.

The feds test debt levels annually in early November and businesses in states with outstanding debt get hit the following January with higher federal unemployment taxes.

Connecticut has repaid its $1.2 billion, but only had $52 million in its state unemployment trust as of Monday. That’s enough, Dudzinski said, to pay benefits for another four to five weeks.

There also will be more state unemployment tax receipts coming in between now and Nov. 9, when the federal government will look at debt levels.

Connecticut may well have to borrow again in the coming months to cover unemployment benefits — expected to cost about $13 million per week — especially if the national economy slips into recession, as some economists fear, Dudzinski said.

The question is, will the existing $52 million and any incoming state tax receipts be enough to keep the fund afloat until after Nov. 9?

“It is definitely too soon to call,” Dudzinski said. “We monitor this every week — sometimes daily.”

Lamont’s budget spokesman, Chris Collibee, added, “Although it’s still too early to predict where the fund will be in November, the administration is cognizant of the key November 9th date and is carefully monitoring the UI [unemployment insurance] loan balance. As we get closer, we will look at whether to cover any loan balance out of the money reserved for interest payments and will consult with the legislature as necessary.”

But the state’s chief business lobby said this week there’s no reason to play things down to the wire. Connecticut has the resources to easily lift its unemployment trust out of the fiscal danger zone, said Eric Gjede, vice president of public policy for the Connecticut Business and Industry Association.

“Businesses have been struggling in this state, no question about it,” he said.

The federal unemployment tax rate on Connecticut businesses currently stands at 0.9% on the first $7,000 of payroll, a maximum of $63 for each employee. The potential increase this January would add 0.3 percentage points up to 1.2%, or no more than $84 per worker. The projected impact on all employers combined would be $28 million to $30 million.

State officials already have taken some steps to bolster the unemployment trust — including effectively negating a previous federal rate hike — and the CBIA is grateful for that, Gjede said.

In 2022, it was clear Connecticut still would owe money to the federal unemployment trust by mid-November — and businesses would see 0.3 percentage points added on to their federal tax rate in January 2023.

So Lamont and legislators dedicated $40 million in state resources last year to finance a one-time drop in the state unemployment tax in the coming year. That not only offset the entire federal January 2023 hike, but helped businesses save another $9 per employee.

And in 2021, Connecticut officials used state funds two other ways to help businesses with the unemployment trust dilemma.

They deposited $120 million into the state trust so the entire burden of repaying pandemic borrowing wouldn’t fall on Connecticut businesses.

State officials also set aside another $30 million to spare businesses from a special, temporary federal tax. Washington orders a special assessment each September on businesses in debtor states to cover the interest on that debt. That $30 million reserve has shielded businesses from more than $9 million in special assessments since 2021.

The business community as a whole also is expected to benefit next year from a huge package of reforms to the state’s unemployment system — changes endorsed by state leaders from both parties, as well as by the CBIA and labor groups.

These reforms, enacted in 2021, actually would reduce state unemployment taxes starting in 2024 on about three-quarters of all businesses. Those that lay off high numbers of workers, though, would pay more.

But even with all the state has done, the pandemic also had many effects on the economy that continued beyond 2020, and businesses have to learn to adjust, said Patrick Flaherty, director of research for the state labor department.

For example, the coronavirus at first weakened demand for services as people quarantined, so consumers spent more on goods. “Now consumer spending is moving back towards services so retail employers are starting to see that in their bottom line,” he said. “The pandemic changed spending habits temporarily and some businesses are just now starting to feel the impact.

“The labor market got even more competitive and some businesses took on too much debt,” Flaherty added.

But Republican legislators and other business advocates said Connecticut could have done far more in terms of tapping its coffers to help businesses support the unemployment trust.

The state closed the 2021-22 fiscal year with a record-setting $4.3 billion surplus equal to about one-fifth of the entire General Fund. It finished last fiscal year on June 30 with a $1.9 billion cushion — the second-largest in state history.

But nearly all of those funds have been used to whittle down the state’s massive pension debt.

Still, Connecticut also has a projected surplus for the next fiscal year that approaches $1.1 billion, and its rainy day fund is at its legal maximum, holding $3.3 billion — equal to 15% of the General Fund.

“We’re very disappointed that more relief was not provided very early in the process,” Gjede said.

Republican leaders in the state House and Senate also said Lamont and his fellow Democrats in the legislature’s majority ignored GOP calls for dedicating more state funds for the unemployment trust.

“I think Connecticut has missed an opportunity,” said House Minority Leader Vincent J. Candelora of North Branford. “The financial status quo for businesses is just not good enough.”

Senate Republican leader Kevin Kelly, of Stratford, said the fastest way to help businesses grow jobs coming out of an economic downturn — such as that caused by the pandemic in 2020 — is to mitigate tax burdens. Both Kelly and Candelora said they were open to channeling more funds into the trust this fall.

“If we stave off the tax, it’s good for the families in Connecticut,” Kelly said.

The co-chairwoman of the legislature’s Appropriations Committee, Sen. Cathy Osten, D-Sprague, and Rep. Toni E. Walker, D-New Haven, said they would meet with Department of Labor officials to learn more, but were skeptical legislators would meet in special session this fall to address the unemployment trust.

Keith M. Phaneuf is a reporter for The Connecticut Mirror (https://ctmirror.org/ ). Copyright 2023 © The Connecticut Mirror.