I have had many calls regarding the increase of State Unemployment Tax Authority (SUTA) rates.
In the way of background, we should remember that as of February 1, 2011, South Carolina has borrowed $923 million from the federal government to meet federal requirements to pay benefits. This debt accrued over a period of two years as a result of the most severe recession in many decades and mismanagement by the prior department.
If our state does not increase the rates that companies pay into the state unemployment insurance fund it will be forced to borrow additional money from the federal government – all of which must be repaid with interest. As a result of our existing $923 million debt, federal law mandates an automatic increase in the federal unemployment taxes for all South Carolina employers in 2010.
According to the Department of the Workforce, companies classified as “Class 20” in the new insurance pool paid $200 million into the unemployment system over the last seven years. They filed claims against the system totaling more than $700 million. Companies classified as “Class 1” in the new insurance pool paid $115 million in unemployment insurance benefits over the past 7 years, yet have not taken a dime out of the system. This includes thousands of self-employed individuals who are not able to claim unemployment should their entrepreneurial ventures fail. More than half of all South Carolina businesses – primarily small businesses that drive our economy and create the bulk of the new jobs that will lead our economy into the future – will see an insurance rate decrease.
By creating this classification system, employers with the fewest layoffs will see the smallest increases in cost – or decreases – while those employers with the most layoffs will see the largest increases in costs.
The General Assembly arrived at this solution by adopting the recommendations of experts following more than 16 months of study. We hired a national expert to help craft a plan and received input from many experts and business community leaders (including the S.C. Chamber of Commerce, the National Federation of Independent Business, the Small Business Chamber of Commerce, the S.C. Manufacturers Alliance, and others). South Carolina’s model is being considered in many other states this year.
If the current system was not implemented, every business in our state faces the potential of a massive federal unemployment tax increase that would rise annually until the state repays all outstanding loans. These increases would impact all employers regardless of their layoff history. The other option would be to pay the debt out of the state’s stressed General Fund, which would result in further cuts to education, law enforcement, and health care.
The unemployment insurance system is not optional, in that if South Carolina were to cut it back severely or disband it at the state level, the federal government would impose a replacement, which would probably be even more of a burden on businesses of all sizes.
However, it is clear that the massive increase for some companies will have a devastating effect on cash flow just as they are pulling out of the recession. Currently, a Senate panel is reviewing possible changes to the payment schedule for businesses to minimize the effect of these rate changes.