Published February 11, 2010 in the Times Argus
State Sen. Vincent Illuzzi
Worker tax could close shortfall
MONTPELIER – More than 300,000 wage-earning Vermonters could be asked to help bail out the state's unemployment trust fund.
A proposal under consideration in the Senate would raise up to $22 million annually by assessing a new tax on the vast majority of working residents. The new revenue, Senate lawmakers say, could allow the state to rescue the bankrupt fund without cutting the benefits of out-of-work Vermonters. The additional money, according to Sen. Vince Illuzzi, would also tamp down the tax increases on businesses that will be needed to return the fund to solvency.
"It's not unprecedented," said Illuzzi, the Republican chairman of the Senate Committee on Economic Development. "Other states have done this. And we see it as a way to distribute the burden."
Commissioner of Labor Patricia Moulton Powden said Wednesday the Douglas Administration opposes the broad-based tax hike. Working Vermonters, she said, can ill-afford the new burden during difficult economic times.
The Senate proposal would add a one-tenth-of-1-percent or two-tenths-of-1-percent surcharge on weekly paychecks for about 330,000 wage earners. For an employee making $40,000 annually, the new tax would amount to $40 or $80, depending on which rate the Senate chooses.
"While we respect that we have a crisis with regard to the unemployment trust fund, we think there are ways to solve this problem without instituting a new tax," Moulton Powden said. "The proposals we have laid out have mapped out ways to accomplish our goals of getting the trust fund back on stable footing without having to tax workers."
The administration's latest proposal looks to raise money through a combination of higher taxes on employers and reduced benefits for the 20,000 out-of-work Vermonters now receiving unemployment benefits.
Cutting the maximum weekly unemployment benefit from $425 to $400 and instituting a one-week waiting period for new unemployment recipients would help reduce trust fund expenditures by about $90 million through the next four years, according to an administration plan unveiled last October. On the employer side, the Douglas administration has suggested a stepped increase in the taxable wage base that would see unemployment taxes nearly double over the next four calendar years, bringing a total of $84 million into the depleted fund.
"We continue to argue that we need to look at a balance of increases in taxes on the employer side and adjustments and cuts on the benefits side," Moulton Powden said.
Last month, the unemployment trust fund hit a zero balance, forcing the state to get a credit line of $58 million from the federal government to pay the $4 million it sends out weekly in unemployment benefits. Barring any changes, according to Moulton Powden, the state is on course to borrow more than $250 million by 2013.
Interest on the loan will come from the state's general fund, already hit hard by dropping revenue. But interest isn't the only problem, Moulton Powden said. The longer Vermont borrows, the more pronounced the impact will be on employers, who will see federal unemployment tax rates go up by 0.3 percent annually starting in 2012.
That penalty will begin to accelerate, Moulton Powden said, if Vermont continues to borrow past 2015. The administration plan, she said, returns Vermont's fund to the black by 2015. The Douglas proposal would result in a more than $200 million surplus by 2018 – still is not enough to protect the state against the kind of severe recession that saw Vermont's unemployment rate jump almost four points in eight months.
Illuzzi said his plan restores the fund in the same time period. Better, he said, it does so without hitting out-of-work Vermonters already struggling to make ends meet at current benefit levels. And it slows the curve, he said, on the administration's proposed tax increases for employers, many of whom say they will be unable to absorb the new burdens without resorting to layoffs.
"It's a trade-off," Illuzzi said. "Do you put some businesses under? Or do you ask a much larger number of people to put a much smaller amount in?"
In the Douglas plan, the increase in the taxable wage base would rise by $2,000 over the next four years, to a final total of $18,000 (they currently pay unemployment taxes on the first $10,000 their workers earn). Illuzzi said the broader-based tax approach would allow lawmakers to restore the fund with a taxable-wage-base increase of as little as $1,000 per year.
Leadership in the Democratically controlled Legislature has indicated that it is unlikely to support any decrease in maximum benefits.
The unemployment issue has been characterized by leaders in both parties as one of the most severe fiscal issue facing the state. Last year, Vermont paid out nearly $300 million in unemployment benefits. It took in about $54 million in employer contributions.
Betsy Bishop, executive director of the Vermont Chamber of Commerce, said her organization would not dismiss the proposed new tax out of hand. However she said it shouldn't be the first place legislators look for new revenue. Cutting benefits, by whatever method, she said, is a necessary component of any long-term unemployment solution.
"To me there are two sides of the equation – revenue coming in and benefits going out," Bishop said.
Adjusting only one variable in that equation, Bishop said, won't adequately balance the fund.
"No matter how much revenue you bring in, if you don't adjust benefits going out you still have a structural problem," she said.
Illuzzi said he hopes to have a bill ready for a committee vote before the end of the week.