It has been a quarter century since the state's businesses last got hit with a major tax increase to cover unemployment checks to laid-off workers. Since then, that tax rate has fallen, and today more than 25,000 businesses in the state pay nothing into the unemployment insurance fund.
As a result, the state's $2.7 billion IOU to the feds - borrowed since the recession to cover the insurance shortfall - is among the highest such deficits in the country.
With North Carolina's first debt payment coming due later this year, the low tax rate enjoyed by businesses is almost certain to end. Leading the call for a tax restructuring and a likely tax increase are Republicans in the state legislature. They fear that allowing the debt to balloon will saddle all businesses with automatic increases in federal payroll taxes.
"We're in a hell of a hole," said state Sen. Bob Rucho, a Republican from Mecklenburg County. "We need this problem solved, and solved as soon as possible, because we're bleeding to death."
Rucho was one of the sponsors of a bill that calls for an overhaul of the state's unemployment insurance fund. The bill passed the General Assembly last week and makes the N.C. Department of Commerce responsible for hiring an independent consultant to come up with options to fix the state's broken unemployment insurance system.
The consulting organization under consideration, Boston-based Lucas Group, worked closely with South Carolina officials last year to tackle a similar insolvency problem, Rucho said. The Lucas Group recommended toughening misconduct laws and increasing enforcement against fraudulent claims by residents who are not eligible for unemployment benefits.
It also recommended a tax increase on businesses.
South Carolina last year raised the maximum tax rate for unemployment insurance from 5.4 percent to 11.3 percent. As a result, the state expects to take in $680 million this year in unemployment insurance taxes, up from $290 million last year.
Businesses in South Carolina received their newly calculated tax bills in late January. After a storm of protest, that state's lawmakers are now working to scale back the law and blunt its impact.
"All these businesses are trying to say: 'How am I going to recover from this?' " said John Byrnes, president of the S.C. Association of Personnel and Staffing. "I've heard of some businesses whose taxes went up 600 percent."
Still, officials in North Carolina say a tax increase is all but inevitable, given the size of the state's debt.
"Unless Congress forgives that debt, I suspect tax increases are on the table," said Bruce Clarke, CEO of Capital Associated Industries, a nonprofit human resources association in Raleigh. Clarke's company advises more than 1,000 businesses, and he writes a business column for The News & Observer's Work&Money section.
Underpaying in N.C.
Insolvent funds for unemployment insurance are a national problem, with 33 states and territories indebted to the federal government to the tune of nearly $46 billion. Only five states owe more than North Carolina. California tops the list at $10.4 billion.
Any solution to curing a deficit that huge will be controversial, said Eric Hobbs, president and owner of Technology Associates, a nine-employee business in Cary that provides computer support for small businesses.
"We're talking about pulling a significant chunk of productivity from the economy to make up for the past two years," Hobbs said. "It will be $2.7 billion that will not be used to hire new people. Simple."
In North Carolina, the General Assembly cut the unemployment insurance tax rate a number of times in the mid-1990s, going so far as to exempt companies without a history of laying off workers. Today about 12 percent of all N.C. employers don't pay into the insurance fund.
North Carolina's businesses that did pay the unemployment insurance tax last year paid $281 per employee, far below the national average of $360 per worker, according to data compiled by the U.S. Department of Labor.
Choice of consultant
The N.C. Chamber, the state's business lobby, backs hiring an independent consultant to review options, said John McAlister, the group's vice president for governmental affairs. McAlister said the chamber won't debate the pros and cons of tax increases until the consultant comes up with specific proposals for discussion.
Under the law passed by the General Assembly on March 16, the Department of Commerce can select a contractor without issuing a bid on the project or considering other candidates. An agency spokesman said it's too early to discuss details about selecting a consultant.
The N.C. Employment Security Commission, the agency that administers unemployment checks, referred all questions to the commerce department.
But a former ESC chairman, Harry Payne, sent a letter last week to all state legislators to warn them against making rash decisions. Payne chaired the ESC for seven years until January 2009. Before that, he was the state's labor commissioner for a decade.
"They were sold on this as a crisis," said Payne, who now works as senior counsel for policy and law at a nonprofit advocacy group, the N.C. Justice Center. "There's just no hurry. Why they're hurrying it now just escapes me."
Payne, a Democrat, told the legislators that the Lucas Group appears qualified for the assignment but said lawmakers should consider other contractors.
Payne wrote to the legislators: "Why the rush to tax now? Let business get stronger."
The state could still get a reprieve on its debt. The Obama administration has proposed a two-year moratorium on interest payments, while a proposal in the U.S. Senate would forgive portions of the debt owed by states.
Rucho said such proposals are not a substitute for a solution.
"Their whole solution to the problem is counting on Washington to forgive the debt," he said. "What kind of planning is that?"
In testimony this month before the N.C. Senate Finance Committee, the ESC said the state's options include doing nothing and counting on the feds to forgive the debt, raising taxes or eliminating exemptions, or borrowing money through a bond issue.
The General Assembly could make the fund solvent by changing the law to increase collections by $700 million a year, the ESC said. That option would nearly double the total tax intake; last year the state took in $824.5 million.
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