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New tax on workers part of proposed unemployment fund fix

MONTPELIER – A state Senate committee has approved legislation that would see hundreds of thousands of Vermont workers pay an additional $100 million in new payroll taxes over the next four years.

The employee tax – already dubbed the "working families tax" by one Democratic gubernatorial candidate opposed to the idea – is the most controversial measure in a bill aimed at replenishing the state's bankrupt unemployment trust fund.

But the 0.2 percent surcharge on paychecks – $80 a year for someone making $40,000 – is just one of a slew of new financial burdens that would hit employers, workers and unemployment beneficiaries.

"It's a tough bill," said Sen. Vince Illuzzi, chairman of the Senate Committee on Economic Development, which approved the legislation in a 3-2 vote late Friday. "I wish I wasn't in the position to be on record to launch it and begin the contentious debate that will follow."

A 60 percent increase in the portion of each worker's wages on which employers are taxed would see Vermont businesses pay an additional $200 million into the unemployment fund over the next four years. And benefit reductions – achieved primarily by instituting a one-week waiting period for new claimants and changing the formula used to calculate benefits – would amount to more than $100 million over the same period.

The bill is far from a done deal. The 3-2 committee vote – the panel's first split decision on a "major" bill, Illuzzi said, since 2005 – reflects deep divisions in the Legislature over how to solve a crisis that could see the unemployment fund run nearly $300 million into the red by 2014.

Rising unemployment rates in Vermont rapidly drained the fund, which saw a $300 million balance in 2001 evaporate during the recession. Earlier this month, the fund hit a zero balance, forcing the state to get a credit line of $58 million from the federal government to pay the more than $4 million it sends out weekly in unemployment benefits.

Barring any changes, says Commissioner of Labor Patricia Moulton Powden, Vermont is on course to borrow $284 million from the feds by 2013.

Vermont incurs a number of financial penalties by borrowing. Interest on the loans – $5.8 million in fiscal year 2011 alone – will have to come from the General Fund, which is already struggling to meet the demands of critical programs and services. And the federal government imposes new tax penalties on employers in states with negative-balance funds – penalties that could run in excess of $24 million annually by 2013.

The specter of interest payments and higher federal taxes, Illuzzi and Moulton Powden say, means Vermont must act quickly to restore the fund to solvency. The Senate plan gets the trust fund back in the black by 2014 – an even more aggressive schedule than under the Douglas administration plan, which achieves solvency by 2015.

But the more quickly Vermont restores the fund, the more financial pain for businesses, employees and beneficiaries.

Sen. Doug Racine, a Chittenden County Democrat and gubernatorial candidate who sits on the economic development committee, said the employee tax provision compelled his vote against the bill Friday.

"I believe it's a rather huge additional tax burden on working Vermonters that just can't afford this right now," Racine said.

The Douglas administration also opposes the paycheck surcharge.

"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 last week.

While the tax proposal has drawn opposition from officials on opposite ends of the political spectrum, the real contention will lie in how to make up the $23 million in new revenue the tax would generate annually.

Racine and other Democrats say the onus is on the business community, which they say would shoulder a disproportionately small burden under the legislation passed Friday. Democrats by and large attribute the unemployment fund problem to chronic underpayment by employers, who have seen tax rates go unchanged over the last quarter century.

Between 1983 and 2009, the taxable wage base remained static at $8,000 (legislators approved an increase to $10,000 last year). In 1983, that figure represented 50 percent of the average wage. Last year, it was 22 percent.

Christopher Curtis, a lawyer with Vermont Legal Aid, which represents unemployment beneficiaries, said underpayments by employers got Vermont into this mess. The state needs higher contributions from them now, he says, to get it out.

"Taking money out of the pockets of workers, especially those who have been recently laid off, or working families, is not the way to get us out of this recession," Curtis said. "We believe the issue is more properly addressed through employer contributions and federal borrowing until the economy turns around."

The bill would calculate benefit rates based on the last four quarters of work, rather than the two-quarter threshold used in current law. The change, drafters say, is intended to decrease benefit levels for seasonal workers who know ahead of time that they won't be working for long periods of time. The provision would save the state nearly $10 million annually. But Curtis says that measure, combined with the one-week waiting period, unfairly targets out-of-work residents struggling to meet their most basic needs.

Administration officials and the business lobby see things far differently. Under the Senate plan, they say, businesses already would see per-employee unemployment obligations rise from $256 in 2009 to $680 in 2014. In lieu of the so-called worker tax, Moulton Powden says, Vermont should cut maximum weekly benefits to $400, from the current $425.

"We believe there's room for additional savings on the beneficiary side," she said Friday.

Illuzzi said it's worth noting that the employee tax – which would affect about 330,000 wage earners – expires once the unemployment trust fund is back on stable footing. And solving the problem quickly, he said, minimizes the ripple effect in the Vermont economy.

The proposal, should it make it through the Senate, is said to face considerable opposition in the House. Speaker Shap Smith said Friday that leadership there has yet to reach consensus on the employee tax concept.

"It's not dead on arrival," he said.

U.S. Rep. Peter Welch has proposed pending legislation that would forgive interest payments on federal unemployment loans. And some observers believe the widespread nature of the problem – 40 states are likely to see their unemployment funds run into the red in coming months and years – could compel the federal government to waive tax penalties and other financial impositions associated with borrowing. Those changes, Curtis says, would make longer-term borrowing more fiscally palatable than the aggressive measures in the Senate bill.

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