Braden Black CEO
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Wednesday, August 25, 2010
States' Financial Woes May Increase Taxes on Business
Even as the country struggles to gain any sort of economic momentum, the lingering unemployment debacle threatens to increase business costs well after we turn the corner in terms of stock prices, consumer spending, and increased construction and manufacturing.
Even if the economy suddenly became robust and all signs pointed to two decades of steady growth, the lingering effects of prolonged and rampant unemployment would continue to churn in a vicious cycle. State unemployment insurance coffers have scraped bottom; most states already have begun borrowing from the federal government to pay the benefits they’re guaranteed to receive. Those loans are interest free for a while. But when the grace period expires – and it almost surely will before states can pay back the money – interest begins to accrue. This creates the fiscal Cerberus states will find themselves unable to slay.
First, they must pay interest. Second, they must pay back the principal, a huge percentage of their operating budget. Third, they must replenish their own unemployment insurance funds depleted by the extended recession. To do that, they’ll have to cut social services and entitlements, such as reducing the size of unemployment checks or making qualification more strict (fat chance). Or, they’ll have to trim their own workforce. This would include policy analysts, middle managers, supervisors and other pencil pushers. Or, they can increase the taxes on company payrolls. In fact, if a state can’t pay back the federal money in a timely fashion, the tax rates on all that state’s businesses would go up to begin repayment.
According to CNN Money, “The median increase will be 27.5 percent. And employers in places such as Hawaii and Florida could see levies skyrocket more than three-fold.”
Higher taxes of any kind mean companies have less money with which to hire new employees. Moreover, higher employment taxes on those very employees would be a deterrent to hiring. States are contemplating raising the amount of each employee’s base pay that is subject to taxation, raising the rate at which that base pay is taxed, or a combination of both methods to increase revenue. This, on top of the other taxes that states have already burdened businesses with, as they try to deal with budget shortfalls in other entitlements.
One consequence of this disincentive to hire could be a growing demand for temporary/contract labor workers. “Temps” always have been seen as a way for employers – especially construction and manufacturing companies – to cope with fluctuating workloads. They bring in more people when they receive a large or unusual order or win several building contracts at the same time, stretching their full-time people too thin. When the project ends, the temporary workers go away, without the need to layoff loyal, longtime employees.
In fact, the temporary employment sector is seen as a leading indicator of where the economy is headed. The use of temporary employees declined sharply in the fourth quarter of 2007 - even in the retail sector at the beginning of the traditionally busy holiday period; it was a harbinger of our current recession.
On the flip side, temporary staff and field worker use sees an uptick as the economy improves. Companies don’t trust their good fortune and don’t want to commit to recruiting, hiring, and training new employees just to have to lay them off if the good times don’t last. This is a very real possibility in the construction industry, which is lagging other sectors as the economy tries to turn the corner.
Even programs designed to alleviate the short-term crunch are destined to create even larger problems in the future. States can receive federal stimulus money for use in paying unemployment benefits, but to get the money, they must liberalize their rules for who is eligible, possibly including part-time workers and workers who quit their jobs to take care of family obligations. Most states made qualification more restrictive in the 1980s in the wake of the last serious recession. So what’s the solution?
Maybe the federal government will extend the grace period so the loans to states won’t begin accruing interest until much later. Maybe Washington could forgive a portion of the principle, but such a provision likely would come with more demands to liberalize state unemployment eligibility and increase benefits, which we don’t need. That, of course, would necessitate another round of business taxes to pay for the influx of people receiving compensation when the next round of unemployment hits. That, in turn, means businesses would be more apprehensive to hire and incur the tax - even in good times, therefore extending the jobless recovery.
Honestly, as a business owner, one of my primary concerns is maintaining or reducing the costs to run my business. I hope the politicians keep that in mind when they “solve” this problem.
Even if the economy suddenly became robust and all signs pointed to two decades of steady growth, the lingering effects of prolonged and rampant unemployment would continue to churn in a vicious cycle. State unemployment insurance coffers have scraped bottom; most states already have begun borrowing from the federal government to pay the benefits they’re guaranteed to receive. Those loans are interest free for a while. But when the grace period expires – and it almost surely will before states can pay back the money – interest begins to accrue. This creates the fiscal Cerberus states will find themselves unable to slay.
First, they must pay interest. Second, they must pay back the principal, a huge percentage of their operating budget. Third, they must replenish their own unemployment insurance funds depleted by the extended recession. To do that, they’ll have to cut social services and entitlements, such as reducing the size of unemployment checks or making qualification more strict (fat chance). Or, they’ll have to trim their own workforce. This would include policy analysts, middle managers, supervisors and other pencil pushers. Or, they can increase the taxes on company payrolls. In fact, if a state can’t pay back the federal money in a timely fashion, the tax rates on all that state’s businesses would go up to begin repayment.
According to CNN Money, “The median increase will be 27.5 percent. And employers in places such as Hawaii and Florida could see levies skyrocket more than three-fold.”
Higher taxes of any kind mean companies have less money with which to hire new employees. Moreover, higher employment taxes on those very employees would be a deterrent to hiring. States are contemplating raising the amount of each employee’s base pay that is subject to taxation, raising the rate at which that base pay is taxed, or a combination of both methods to increase revenue. This, on top of the other taxes that states have already burdened businesses with, as they try to deal with budget shortfalls in other entitlements.
One consequence of this disincentive to hire could be a growing demand for temporary/contract labor workers. “Temps” always have been seen as a way for employers – especially construction and manufacturing companies – to cope with fluctuating workloads. They bring in more people when they receive a large or unusual order or win several building contracts at the same time, stretching their full-time people too thin. When the project ends, the temporary workers go away, without the need to layoff loyal, longtime employees.
In fact, the temporary employment sector is seen as a leading indicator of where the economy is headed. The use of temporary employees declined sharply in the fourth quarter of 2007 - even in the retail sector at the beginning of the traditionally busy holiday period; it was a harbinger of our current recession.
On the flip side, temporary staff and field worker use sees an uptick as the economy improves. Companies don’t trust their good fortune and don’t want to commit to recruiting, hiring, and training new employees just to have to lay them off if the good times don’t last. This is a very real possibility in the construction industry, which is lagging other sectors as the economy tries to turn the corner.
Even programs designed to alleviate the short-term crunch are destined to create even larger problems in the future. States can receive federal stimulus money for use in paying unemployment benefits, but to get the money, they must liberalize their rules for who is eligible, possibly including part-time workers and workers who quit their jobs to take care of family obligations. Most states made qualification more restrictive in the 1980s in the wake of the last serious recession. So what’s the solution?
Maybe the federal government will extend the grace period so the loans to states won’t begin accruing interest until much later. Maybe Washington could forgive a portion of the principle, but such a provision likely would come with more demands to liberalize state unemployment eligibility and increase benefits, which we don’t need. That, of course, would necessitate another round of business taxes to pay for the influx of people receiving compensation when the next round of unemployment hits. That, in turn, means businesses would be more apprehensive to hire and incur the tax - even in good times, therefore extending the jobless recovery.
Honestly, as a business owner, one of my primary concerns is maintaining or reducing the costs to run my business. I hope the politicians keep that in mind when they “solve” this problem.
Labels: Commercial, Construction Industry, Industrial
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