Many Rhode Island employers could see a reduction in the amount of unemployment insurance tax they pay, while employees are on the hook for a slight increase in temporary disability tax, thanks to state tax law changes that went into effect at the beginning of the year.
That’s because the strengthened economy is putting less of a strain on the state’s unemployment insurance trust fund, while there is a growing use of temporary disability insurance and temporary caregiver insurance, state officials say.
“Employers are using the unemployment system less, which has allowed us to build up the trust fund balance; therefore, they’re going to pay less this year,” said Donna Murray, assistant director in charge of labor market information for the R.I. Department of Labor and Training. “The workers are using the temporary disability insurance program more, therefore that resulted in a slight increase in the tax that they will be paying this year.”
Last year, 36,107 temporary disability insurance claims were approved, compared with 34,563 in 2018, according to DLT. That’s a 4.5% increase. Payments totaled $193.2 million in 2019, a nearly 4% increase of 2018’s payments of $186 million.
State statute now levies the TDI tax on the first $72,300 of an employee’s salary, an increase from $71,000 in 2019. The tax rate also has increased to 1.3%, up from 1.1% last year. The new formula means the maximum tax for a typical worker will now hit $939, compared with the previous high of $781.
While employees will pay more in temporary disability insurance tax, employers may not see the same effect with reconfigured unemployment insurance taxes.
‘Employers are using the unemployment system less.’
DONNA MURRAY, R.I. Department of Labor and Training assistant director of labor market information
Changes to the way the tax is assessed are expected to save Rhode Island employers a total of $20 million. The changes are meant to shift more of the burden on businesses, many of them seasonal, that tend to generate the most unemployment claims.
“Overall, that’s how it’s meant to be, so employers that do not use the system much, and have more money in there than they take out, are going to pay a much lower percentage,” Murray said.
According to the most current figures for 2019, employers paid about $172.9 million in unemployment insurance tax, while unemployment benefits totaled about $112.7 million, DLT reports. In 2018, unemployment insurance tax generated $213 million, while $144.6 million was paid out in benefits.
This year, the amount of employees’ salaries that most employers will be taxed on – known as the taxable wage base – has been boosted to $24,000, an increase of $400 over 2019. At the same time, the unemployment tax rate has been reduced. It was 1.1% to 9.7% last year, and now stands at 0.9% to 9.4%.
Despite an increase in the taxable wage base, employers may end up paying less because of the lower rates, Murray said.
But not all companies will see significant savings. Those that repeatedly leave a trail of unemployment claims will be taxed on $25,500 of their employees’ salaries, up from $25,100 in 2019. Those businesses will likely be taxed at the highest rate of 9.4%.
“If somebody has a business that has higher layoffs in seasonal times, they will be paying more,” said Christopher Carlozzi, the Rhode Island state director of the National Federation of Independent Business. “The way it’s looking for 2020, there is a reduction in the [rate], but because the wage base is increasing also, the employer may see some savings.”
The changes aren’t likely to make much difference in total layoffs, said Joe Viele, executive director of the Southern Rhode Island Chamber of Commerce, which covers much of Washington County and its coastal areas.
They may, though, help allay concerns in the business community that there would be harsher action taken by the state to penalize companies that continually lay off employees, he said.
“If they’re looking to penalize employers that are seasonal and have a chronic layoff issue, that’s not the way to solve it,” Viele said. “Let’s say it’s a restaurant on the beach or a landscaper who typically lays off their employees in the winter; there’s no penalty for that employer here. I’m not looking for a penalty to the employer, but I thought that’s what was coming.”
Overall, Viele said, the change may even be beneficial.
“I don’t think it’s going to have any effect on whether a business decides to lay off or not,” he said. “If [the tax changes are] going in this direction, it’s probably positive for businesses.”
Carlozzi said additional changes to unemployment insurance tax would likely be well received by the small-business community, which he added regards the tax as “particularly onerous.”
Citing a Tax Foundation report that ranked Rhode Island around No. 30 in the nation for the tax, Carlozzi said, “It’s certainly somewhere the legislature could work in the future to improve tax rates for small businesses.”
Elizabeth Graham is a PBN staff writer. Contact her at Graham@PBN.com.