Tax surcharge eyed to boost jobless fund

More than 130,000 Maryland employers could be hit with a tax surcharge of at least 1 percent in January to bolster the underfunded program that hands out jobless benefits, state officials warned yesterday.

Companies would shell out about $90 extra for each employee, generating roughly $176 million next year. But the state legislature could forestall the increase in January if it chooses.


The last time the surcharge went into effect was in 1992, in response to a recession, and the additional tax lasted through 1996.

Some businesses may be caught by surprise by its return.


"I'm not sure employers are really aware of what's coming," said Tom Saquella, president of the Maryland Retailers Association.

Concern about the future of the unemployment compensation funding program has prompted creation of a state task force with a mandate to suggest reforms to the General Assembly by Dec. 1.

The task force had its first meeting yesterday and was briefed on the problems.

Maryland's unemployment rate was 4.6 percent in June, up from 4.3 percent the previous month, adding thousands to the number receiving unemployment benefits. But the program is also losing money from "leakage" - taxes aren't generating enough to cover costs.

The task force, which met in Annapolis, was handed copies of a newly issued report from the Maryland Budget & Tax Policy Institute that says the program is backward - taxing employers more in bad times and less in boom times.

"A tax increase immediately after a recession is not a good idea," said Patrick Lester, senior policy analyst for the institute and the report's author. "The long-term solution is fixing the underlying system so we raise enough revenue during good periods so we don't get stuck in this same situation again."

Employers are now taxed on the first $8,500 in wages paid to each employee, at rates ranging from 0.3 percent to 7.5 percent - that is, $25 to $637 per person. A company's rate depends on the portion of its work force it laid off in the previous three years.

A surcharge is added automatically if the reserve in the unemployment insurance trust fund is deemed too low, based on a formula tied to taxable wages.


To meet the legally required reserve requirement, the fund would need a balance of $832 million by Sept. 30. But the fund is already far short of that amount, and the Maryland Office of Unemployment Insurance expects the balance to drop to $650 million by the end of next month.

State law would require a 1 percent to 1.1 percent surcharge starting in January to begin replenishing the reserve fund, said Thomas Wendel, executive director of the unemployment office.

The Maryland Budget & Tax Policy Institute, whose report was financed by the Open Society Institute-Baltimore and the Rockefeller Foundation, recommended raising the basic tax rate, the taxable wage or both in good times to build up larger surpluses and avoid the surcharge in recessions.

Lester believes the state could safely hold off on a surcharge and ride out the shaky economy.

Saquella, the retailers association president, is also a task force member and believes structural changes ought to be discussed. But he noted that businesses have generally accepted the bad-times surtax in the past.

"The way the system works, it's pay me now or pay me later," he said.


On the other hand, he said, employers would be very unhappy if the state tried to make up for the fund "leakage" by handing them the unemployment bill for workers who voluntarily quit, an issue up for debate.

When people leave one job for another and are laid off from their new position several months later, the new employer is charged for its share of the 26-week unemployment benefits, and the state covers the rest. There's been talk of having the original employer pay instead of the state, but that would be a very unpopular move, Saquella said.

He's concerned about increasing costs on top of the surtax, which in itself would leave employers paying anywhere from 15 percent to four times more to the unemployment insurance fund.

Meanwhile, the Maryland Budget & Tax Policy Institute suggested in a January report that the state ought to pay more in unemployment benefits and to more people - part-time workers aren't eligible now, for instance.