RIPEC: State unemployment trust may run out by Sept., resulting in raised business taxes

PROVIDENCE – Rhode Island’s unemployment insurance trust fund is on track to run out by September, and the result may be higher taxes for employers down the road, the Rhode Island Public Expenditure Council said in a report released on Thursday.

In January, the state fund was at its highest level ever. Even adjusted for inflation, however, RIPEC noted that despite this, the U.S. Department of Labor considered the state’s level of unemployment insurance trust solvency to be below recommended levels to sustain a recession.

With the astronomical impact of COVID-19 on unemployment figures, the trust is quickly headed towards insolvency.

The fund totaled $537.9 million at the start of 2020 and had been depleted to $395.6 million by May 18. The balance was projected to decline to $203 million before July by the R.I. Department of Labor and Training.

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RIPEC’s analysis assumed that Rhode Island’s unemployment rate will remain around 15.9% for the remainder of 2020, using projections from IHS Markit that were presented at the state’s  May 2020 Revenue Estimating Conference.

The analysis said that if the fund becomes insolvent, the state will need to get an advance from the federal government to make its payments. This will require UI taxes paid by employers to eventually increase to pay back the loan. The increase was predicted to continue through 2021 or beyond. 

The report cited increases following the 2008 financial crisis as precedent, noting that the average UI taxes paid by Rhode Island employers incrementally increased from $503 per employee per year to $818 per employee over a few years, before coming back down to a levels such as $592 in the second quarter of 2019. 

The report projected that for a job with a median annual salary of $49,847, the employee withholding tax impact will increase by $150 from 2020 to 2021 to $798. For a higher-wage job with a median annual salary of $76,086, withholding impact year over year would be $217 per employee to a total of $1,157 annually. In lower-wage jobs, the increase was projected to be $93 year over year, to $496.

RIPEC noted that while employers will not be specifically impacted for having workers participating in the UI benefits program due to COVID-19, employers will still be impacted generally, adding that the trust fund is not expected to be replenished for years.

The report recommends that the state look into using part of its $1.25 billion allocation from the federal government to bolster the funds to mitigate financial impacts to businesses in the state, which it said, “already face relatively high taxes compared to other states.” Such usage has already been authorized by the U.S. Treasury.

“Rhode Island is on track to borrow from the federal government to keep its unemployment insurance trust fund solvent for the second time in 11 years,” said RIPEC President and CEO Michael DiBiase. “This level of frequency should be of concern to policymakers and taxpayers, as should the fact that the Temporary Disability Insurance withholding rate is likely going to experience its second year-over-year increase.” 

The report also suggested that the state refrain from increasing UI benefit levels, which were last changed in 2011 to more closely match neighboring states.

RIPEC also noted that Rhode Island is one of five states with a public disability program and is the only state that requires participation of employers without an option to purchase private plans in lieu of participating. The report called on lawmakers to consider reforming the Temporary Disability Insurance and Temporary Caregivers Insurance system to enable employers to opt into private or self-insurance plans, as well to seek opportunities for efficiencies, citing the program’s “relatively high cost.”

Chris Bergenheim is PBN’s web editor. You may reach him at Bergenheim@PBN.com.