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UIA Compensation Fund drops below $2.5B; businesses to pay higher taxes in 2021

Problem Solvers
Posted at 7:28 PM, Jul 01, 2020
and last updated 2020-07-02 17:16:16-04

GRAND RAPIDS, Mich. — Michigan’s Unemployment Trust Fund is quickly losing money.

The employer-funded account pays out state benefits when people are laid off and file for unemployment.

Because the fund dropped below a certain threshold, taxes are about to go up for all employers across the state.

That increase will no doubt affect everyone from companies to their customers.

“So, I do have a high turnover rate it’s the nature of our particular business,” said Brian Kloet who owns seven Great Clips locations in Michigan.

When Governor Whitmer issued the stay-at-home order in March, all of his locations closed.

“We were shut down we had no choice, and now we had to lay our employees off."

He will also have no choice when it comes to helping replenish the state’s unemployment trust fund. Employers are taxed based on how much they use the system.

“Just think of it as their layoff experience rating,” said MSU Economics Professor Stephen Woodbury. “If you get in a bunch of car accidents your car insurance gets jacked up. If you’re an employer and lay off a lot of workers, they raise your tax rate.”

Woodbury is also a senior economist for the Upjohn Institute in Kalamazoo.

He says those taxes then go into the trust fund to pay out benefits. Which means Brian and every other employer in the state will pay more starting in January.

“In December they’ll re-issue that particular document and give us a new tax rate,” said Kloet.

According to the Michigan Employment Security Act, if the state's compensation fund dropped below $2.5 billion by June 30th, taxable wages would increase from the first $9,000 to the first $9,500 that each employee earns.

It did drop so taxes will go up.

Companies now have to decide how this could affect profits.

“So that means we have to lower wages, raise prices, we have to negotiate with our suppliers for or a lower wage, a lower cost of items coming in,” said Kloet. “The margin still needs to be there or the business ceases to exist.”

In April, the director of Michigan’s Department of Labor and Economic Opportunity addressed the fund and its future. (Trust Fund question starts at 13:47)

“And through the end of July on a conservative estimate we, of course the trust fund would last, if you kind of have a middle-ground estimate we would probably expend around half of the trust fund through that period of time,” said LEO Director Jeff Donofrio.

And it’s getting close if it’s not there already.

According to testimony from UIA director Steve Gray, the trust fund had $4.6 billion at the end of 2019. That was the third highest reserve in the country.

In mid-May it fell to $3.9 billion and just a month later dropped to $2.5 billion.

If it drops to zero, the state will have to borrow money either from the federal government or privately through bonds like it’s done in the past.

That too will increase taxes and it’s all because of COVID.

“If a vaccine appeared tomorrow, we’d be all set I think,” said Woodbury. “The recession would go away and we’d be back in pretty good shape within a few months. Markets are very resilient.”

So the big question I had, since the state shut businesses down causing the layoffs, can the governor waive this law and tax increase.

Her spokeswoman said she got my question and was looking into it, but I have not heard back.