Minnesota businesses are paying more in federal taxes because the state of Minnesota hasn’t paid back loans it got from the federal government.
Because Minnesota has borrowed money for more than two years to keep the state’s unemployment trust fund solvent, the federal government is reducing the tax credit it gives Minnesota businesses on their Federal Unemployment Tax (FUTA). The loss of that credit costs businesses about $21 a year for each employee it is paying more than $7,000.
Minnesota, like many other states, is borrowing money from the federal government to pay for unemployment claims because more money is being spent on unemployment benefits than is being collected from employers and workers. Minnesota is among 17 states that hasn’t paid off its debt in two years and employers now must pay extra.
A tax analyst for the State of Minnesota, Tom Romans, says Minnesota is in this position not only because of the great recession that started in 2008, but also because companies that have large numbers of seasonal layoffs such as construction and mineral extraction companies are not assessed a higher unemployment tax rate. Romans says that over the past decade Minnesota has moved towards a system where employers that have more unemployment claims pay a higher rate for unemployment insurance. But the inequality still exists because the state caps the percentage an employer can be charged for insurance at 9 percent.
Romans says since the penalty hits all businesses, those businesses that have very few layoffs are essentially subsidizing those that layoff most of their workforces annually, such as the road construction industry.
If Minnesota had raised the cap on the unemployment tax so it only needed to borrow money for one year, the federal government would have allowed the loan to be essentially interest free, Romans explained. But when the loan goes as long as it has (more than two years in Minnesota’s case), the federal government starts reducing the tax credit it gives the employers in the state, meaning they have to pay more per employee.
Romans says Minnesota is in the “middle to high end” of states when it comes to maintaining a large enough trust fund to pay unemployment benefits. Romans says one reason Minnesota has not maintained a larger trust fund is opposition from lawmakers who fear unemployment benefits might be increased or extended if there is money in the trust fund to pay for it.
Projections show that Minnesota’s unemployment trust fund will be out of debt by July of this year, says Romans. But it may temporarily dip into debt again this fall. All of that is of course dependent upon the economy. But if the forecast holds true, soon Minnesota employers will no longer be paying extra for unemployment insurance.
Disclosure: The writer of this story, Michael McIntee, is an owner of a small Minnesota business and paid an extra $7 for his company’s 4th quarter FUTA due to Minnesota’s loss of the tax credit.