Mass. projects business tax hikes

Unemployment fund will require increases as jobless rate climbs

Massachusetts is projected to suffer a long period of high unemployment that will require businesses here to pay about $270 million more in unemployment insurance taxes over the next two years to cover the cost of benefits, according to state labor officials.

The unemployment rate, which hit 5.3 percent in September, is forecast to rise above 6 percent next year and stay there through 2010, officials said. Businesses on average will see unemployment taxes rise about 8 percent, or $51 per employee, to $621 next year, and possibly another 10 percent, or $60 per employee, to $681 in 2010, under these projections.

These increases, however, pale in comparison to those in 2004, when taxes jumped an average of more than 60 percent, or about $250 per employee, to replenish the trust fund that pays unemployment benefits. The fund became nearly insolvent after the deep recession that began in 2001, and the state had to borrow a total of about $600 million from the federal government in 2004 and 2005 to finance unemployment benefits.

The no-interest loans were quickly repaid.

The Legislature changed the system in 2003 to establish triggers that automatically increase taxes according to a rate schedule when rising joblessness begins to drain the fund.

The combined increase projected for the next two years is less than half the dollar increase in 2004, illustrating differences between the 2001 recession and the current downturn. The 2001 recession hit Massachusetts hard because it was led by a crash in technology and business spending, which drive the state's economy.

The state lost about 6 percent of its jobs, about triple the rate nationwide. The unemployment rate rose 3.2 percentage points to 5.9 percent from its low of 2.7 percent. Nationally, unemployment rose 2.5 points during that period to 6.3 percent.

A bust in housing and consumer spending are leading the current downturn. While these areas are important to Massachusetts, the state does not have a high concentration of businesses exposed to these sectors. Construction represents a relatively small component of Massachusetts employment, and much of the state's manufacturing is geared toward business equipment.

Economists forecast national unemployment will rise to about 8 percent, up 3.6 points from its low of 4.4 percent in March 2007. Moody's Economy.com projects Massachusetts unemployment will peak at about 6.5 percent, 2.4 points from its low of 4.1 percent April.

Next year's unemployment tax increase will be the first for businesses since 2004. This year, before the economic situation appeared so dire, the Legislature froze rates for 2008 to avoid a $150 million increase in unemployment insurance taxes.

In 2009, businesses will pay an additional $111 million, and another $160 million on top of that in 2010, under current projections.

Leading business groups such as Associated Industries of Massachusetts and the Greater Boston Chamber of Commerce aren't fighting the increases. But over the longer term, business officials said, the state has to do more to lower the costs of unemployment insurance. Only New Jersey employers make higher average payments, according to the US Labor Department.

Massachusetts is the only state that allows unemployed workers to collect benefits for up to 30 weeks. Other states cap benefits at 26 weeks. (During periods of high unemployment, the federal government provides additional funding that allows all states to offer up to 39 weeks of benefits.)

John Regan, executive vice president of government affairs at AIM, conceded that a recession may not be the time to talk about trimming unemployment benefits. But high costs hurt the state's ability to attract employers and the power of existing companies to compete, grow, and create jobs.

"Policy makers ought to be broadly concerned about the entire economic climate in Massachusetts," he said. "The cost of unemployment insurance is a factor in which we stand out in a negative way."

In a recent interview, Suzanne Bump, state secretary of Labor and Workforce Development, said the state has taken steps to cut costs by making the system more efficient through such methods as electronic filing and payments. Criticisms that Massachusetts benefits are too generous are overstated, she said.

The main driver of costs is the state's higher wages, on which unemployment benefits are based, she said. In addition, very few workers collect 30 weeks of benefits. The average is about 17 weeks. "It isn't really a factor in the cost of the system," she said.

Robert Gavin can be reached at rgavin@globe.com.