The state of Michigan still stands apart from the rest despite losing it’s crown as the state with the highest unemployment rate to Nevada. This is because they have been borrowing from the Feds since September of 2006 to cover their trust fund imbalance. Currently, the balance exceeds $3.8 billion. Only California has a larger balance. States are mandated by law to continue to pay unemployment insurance benefits even if the state fund is exhausted. So they must borrow from the Federal Government. The following figures are for Michigan specifically. Some states will differ.
Michigan just completed the first year of a credit reduction, the only state to do so. This means that normally employers are required to pay 6.2% of the first $7,000 of each employees salary to the state unemployment insurance fund. They have been receiving a credit in the amount of 5.4% toward that amount, leaving only .8% actually paid in. The legislation imposes a credit reduction .3% for each year if a state goes two years without repaying it’s Federal loan balance in full. So Michigan employers only saw a credit of 5.1% this past year while every other state got the full 5.4%. For 2011, Michigan will be joined by two other states in having this credit reduction imposed. Indiana and South Carolina now will see only a 5.1% credit reduction rate imposed for 2011. However, since Michigan is carrying a balance for another consecutive year, they will be assessed a .6% reduction for 2011 meaning the credit is reduced to 4.8%. That’s an additional $42 per employee. Basically, each year the credit reduction is reduced results in a $21 increase per employee.
Normally, an employer pays $434 each year per employee in unemployment insurance to their state. The full 5.4% credit lowered that burden to only $56. Michigan employers just paid $131 per employer last year and will pay $154 in 2011. That’s nearly a $100 per employee penalty compared to another state that doesn’t have a credit reduction. Generally, the U.S. Small Business Administration considers under 500 employees to be a small business. With 500 employees, a $100 difference means $50,000 per year. That’s the penalty an employer of this size must pay annually to conduct business in Michigan compared to another state such as neighboring Ohio.
That’s not all either. After the third year of being delinquent on repaying the Federal loans, a formula kicks in that can result in even higher penalties. That fate surely awaits Michigan next year. And there’s even more bad news. The Federal Government has been extending these trust fund loans interest free under the Obama stimulus program. That ends on Dec. 31st. Not only can Michigan not repay the $3.8 billion principal, interest will start accruing. For 2011, Michigan is expected to be assessed $150 million in interest.
On January 1st, 2011 Michigan employers with a negative reserve balance will also be imposed a .75% solvency tax on each employee’s first $9,000 of income. That’s another $67.50 per employee on top of the standard SUTA withholding tax. This is to offset the interest payments the state will need to start paying the Federal government for its $3.8 billion dollar loan balance.
Needless to say, the situation is very bleak in Michigan and is looking to get much worse in 2011. Michigan employers are at a disadvantage when competing with other states due to the reduced tax credit. A solvency tax will begin in January making it worse. If the Bush tax cuts are allowed to expire, the resulting tax increase across the board will be another dagger the state can’t absorb. 2011 is shaping up to be a very bad year.