Earlier this month, the state of North Carolina successfully followed through on its plan to pay off Federal Unemployment Account (FUA) debt to the United States government. As recently as January 2013, North Carolina’s FUA debt stood at $2.5 billion dollars.
The early repayment will save North Carolina employers over $700 million dollars in taxes over the next 15 months. (Source: State of North Carolina Press Release.)
North Carolina was first hit with a FUTA tax penalty in 2011 (at the time, 21 states — nearly half the country — faced FUTA tax penalties in the wake of the Great Recession). Since then, North Carolina employers are estimated to have paid nearly $700 million dollars in FUTA penalties alone. Additionally, they have collectively paid an estimated $262 million dollars in interest for the FUA debt. (Source: State of North Carolina Press Release.)
In fall of 2012, we wrote that North Carolina had the third largest outstanding FUA loan balance of any state in the country. At the time, only New York and California’s FUA debts topped North Carolina’s.
North Carolina’s UI Integrity Law Marked a Turning Point
In February 2013, we wrote about North Carolina’s adoption of HB 4, an Unemployment Insurance (UI) Integrity law that aggressively cut unemployment benefits and incorporated features aimed at addressing the poor state of North Carolina’s unemployment system. The passage of this legislation marked a pivotal point for North Carolina’s debt recovery. Called the “Unemployment Insurance Fund Solvency & Program Changes,” it sped up the state’s FUA debt repayment plan to a three year schedule (it had been on track to extend through 2019, which would have cost North Carolina employers $282 million dollars more in interest alone).
With the FUA loan repayment, HB 4 has been declared a success by Republicans in North Carolina (less so by workers advocates, who claim that the favorable tax outcome for businesses has come at workers’ expense). Supporting the GOP perspective, not only is the state out of debt but the unemployment rate has also dropped, which indicates that those who lost extended unemployment benefits were ultimately able to secure employment of some kind. Also, the Governor’s office reports that the “. . . unemployment system is more efficient, more customer friendly and the time needed to settle appeals has been dramatically reduced.”
A Look at North Carolina Employers’ FUTA Cost per Employee:
(based on taxable wage limit of $7,000)
For perspective on how this looks compared to other states, in 2014, FUTA rates were also $126 per employee in California, New York, Ohio, Kentucky and the Virgin Islands. They were higher only in Indiana ($147) and Connecticut ($161). (Source: Tony Fiore of Kegler Brown Hill + Ritter, who is also a consultant for UWC Strategy, Inc., the Washington, D.C.-based association devoted to representing business interests on unemployment insurance and workers compensation public policy issues.)
It’s not surprising that North Carolina FUA debt repayment is celebrated by the state’s politicians (such as North Carolina Secretary of Commerce John E. Skvarla, III) for making North Carolina more attractive to employers who may want to move (or stay) there and support future job creation.
Side Note: Potential Impact of President’s FY 2016 Budget (All States)
Are you in one of those higher FUTA cost states? You may be able to take some comfort in the fact that the latest U.S. Department of Labor report (pdf) on the President’s FY 2016 Budget projects that outstanding FUA loans will mostly be repaid by FY 2018, so the end to skyrocketing FUTA tax rates may be in sight.
Other proposed changes in the FY 2016 President’s Budget include a new net FUTA tax rate starting in 2016 and an increased FUTA taxable wage base starting in 2017. The taxable wage base would jump to $40,000 and then be indexed to annual wage growth. States would be required to have a minimum tax equivalent to 0.175% of the FUTA wage base, effective in 2017. For 2017, with the proposed new taxable wage base, that translates to $70 per employee. At a 66% increase over $42, that may look more attractive to employers in the seven states currently shouldering FUA loans than it will to employers in the 46 other states and territories (like North Carolina) who are finally back down to $42 per employee.
How is your company settling into the stricter standards imposed by UI Integrity legislation? Get our compliance tips here: