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Small-Biz Killers: Who Pays for Jobless Benefits?

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By Michelle Malkin  •  December 8, 2010 08:44 AM


Grim reaper photoshop credit: Manly Rash

As I promised you on Tuesday, today’s column takes a closer look at how small businesses are getting whacked by skyrocketing unemployment insurance tax hikes across the country. Friends of mine here in Colorado Springs first alerted me to their massive bills, which have arrived over the past two weeks. Business owners from several other states have written me with similar horror stories — and I’ve included some of their experiences below. It’s yet another example of how the hidden Obama jobs death toll is wreaking havoc on America’s wealth producers.

One important point of clarification: The extra 13 months will not be tacked on to the existing 99 weeks’ package. Rather, the current proposal would extend eligibility for this basket of benefits until the end of 2011. (See Gabriel Malor at Ace of Spades for an explanation.) For the business owners footing the bill, the distinction makes little difference. Politicians pontificate. Employers pay. And you can bet come December 2011, they will extend this bottomless government “compassion” at others’ expense all over again.

For an excellent overview and analysis of the UI program’s flaws, fiscal problems, and needed changes, see the April 2010 testimony of UI expert Douglas Holmes here (PDF). He concludes: “The status of the slowly recovering economy dictates that, although the state and federal trust funds are insolvent, we must first do no harm to discourage job creation and economic recovery.” If only “Do No Harm” were a Washington mandate.

(See also this useful UI state tracker.)

Meanwhile in the Beltway, opposition to the tax deal is building. Staunch conservatives Sen. Jim DeMint and Rep. Michele Bachmann have announced their opposition (DeMint opposes the bill; Bachmann is objecting to the added spending). As I’ve urged before, Republicans need to tell the stories of those who are harmed by interminable wealth redistribution programs. They need a voice.

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Small-Biz Killers: Who Pays for Jobless Benefits?
by Michelle Malkin
Creators Syndicate
Copyright 2010

There is no such thing as a “free” government benefit. Ask small-business owners who are footing skyrocketing bills for bottomless jobless benefits. While politicians in Washington negotiate a deal to provide welcome temporary payroll, income and estate tax relief to America’s workers, struggling employers wonder how long they’ll have to pay for the compassion of others — and whether they can survive.

The Beltway deal hinges on extending federal unemployment insurance for another 13 months. This would mark the sixth time that the deadline has been extended since June 2008.

State unemployment benefits last up to 26 weeks. Bipartisan-supported Washington mandates have raised that to 99 weeks. The current proposal would extend eligibility for this basket of benefits until the end of 2011. The cost of the joint federal-state program is borne by employers who pay state and federal taxes on a portion of wages paid to each employee in a calendar year. (At the federal level, employers must pay 6.2 percent of the first $7,000 of income to keep the system afloat.)

The combined burden of these hidden state and federal payroll taxes has exploded during the recession as President Obama’s economic recovery interventions backfire and the jobless rate remains stuck near double-digits. State unemployment insurance funds have gone broke in nearly half the states. As of April 2010, unemployment tax analyst Douglas Holmes testified before the Senate, 35 states and jurisdictions had unemployment fund-related debts worth $39.5 billion. Anti-fraud efforts to prevent scams and overpayments are woefully underfunded.

In an interminable money shuffle, these bankrupt state unemployment insurance funds are now borrowing money from the feds, whose own regular unemployment benefits account and extended benefits account are both in the red. Washington is relying on transfers from the federal general revenue fund to cover loan obligations related to all these hemorrhaging accounts.

Who pays? Dentists, tavern owners, maid services, mom-and-pop shops — small businesses that are the backbone of the American economy. In my home state of Colorado, small and mid-size firms have been saddled with eye-popping unemployment insurance bills that have doubled, tripled and more in the past year. The businesses that have the lowest claims histories are getting punished the most to make up the jobless benefits fund deficit.

Greg Howard, owner of McCabe’s Tavern in Colorado Springs, told the Colorado Springs Gazette his bill spiked a whopping 600 percent. “It’s enough to T you off a little bit,” Howard told the newspaper. “The dollar amount isn’t tremendous, but it’s going up six times.”

A small commercial painting contractor told me this week that her nine-person company’s 1st quarter UI bill has gone from $1,000 to more than $6,500 over the past three years. “It’s killing us!” she told me. “How can we hire additional employees? This is a big increase in addition to the health insurance annual increases, etc. We had to reduce our employees’ wages by 10 percent this year, and who knows when we will be able to bump them back up?”

Lon Gibson, owner of Legalpool, Inc., told me how perverse unemployment insurance incentives led him to shut down his business in Philadelphia:

“We placed legal staff, especially temporary secretaries and paralegals. Part of our business was to place a secretary at a law firm for a short period of time. … Invariably, however, the temp would apply for unemployment benefits after the assignment. The agency would make a profit of $6 to $10 an hour from the assignment. Later, the bill would come in from unemployment for the temp and thus eliminate the profit we made from the temp! Ultimately, unless the temp didn’t file, the money we made on the temp was completely subtracted by required unemployment payments. It was exactly like, to use a football analogy, making a 10-yard gain and consistently having it eliminated by a holding penalty. … I can only imagine what other agencies are going through now with this administration.”

John S., president of Vinyl Headlights Inc., shared his plight:

“We are a variety rock band that travels up and down the East Coast. Yes, everyone thinks we’re lefty rockers, but that could not be further from the truth. We’re all businessmen, and we provide a service. Since Obama’s term, I have been watching our cost of business going up (UI, fuel, licenses, etc.), and we’ve had to modify our rates lower to keep us profitable. … We have let an employee go to further reduce costs. The last resort is to dissolve the company and send every man for himself. More than likely, all employees would take unemployment. If the government just got out of the way, I could employ people and provide the government revenue, but I am better off employing no one to keep from paying UI and the taxes. If a musician can get it, why can’t (Obama)? Oh, wait: He’s never had to make a payroll, and private enterprise is the enemy.”

These unsung Obama jobs death toll stories are amassing across the nation. Alas, the victims of government wealth redistribution never earn as much of Washington’s attention as the beneficiaries.

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Reader and small business owner Bill in Shelton, WA e-mails a great point: “Never discussed is the fact that the unemployment rate (9.8% today) does not include unemployed or underemployed small business owners. Your article today quoted many small business owners and the amounts they were paying for UI, but no one talks about the fact that these small business owners are not eligible for unemployment benefits so when the contraction of the economy or the burdens of taxation drive them out of business, there is no benefits to tide them over.”

Two more important points of clarification from reader Mike Switzer, former Director of the Florida Division of Unemployment Compensation:

1. The current “net” federal unemployment tax (FUTA) rate is .8% after applying a standard credit against the nominal 6.2% rate paid only rarely in states that have failed to repay federal loans timely.

2. Normally employers do pay 100% of all UC benefits through 2 payroll taxes: the state (SUTA) tax that covers regular benefits up to 26 weeks, and a separately collected federal tax (FUTA) that covers half of 13 weeks of basic extended benefits. However, Congress has authorized seveal additional extensions including some of the ARRA [stimuluus] grants, and they do not come out of dedicated UC trust funds at state or local levels. These additonal weeks up to 99 are simply based on expanding the federal debt that will need to be repaid by all taxpayers….and thereby socializing the UC system even further, despite the original design in 1933 to pay for benefits only out of payroll taxes, a mechanism that has been viable for over 70 years and many recessions….yet another radical/root Obama change.

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Categories: Automakers, Barack Obama, Feature Story, Obama Jobs Death Toll