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Feds lower unemployment tax increase for NC employers

North Carolina employers bracing for another increase in their federal unemployment taxes won’t be paying as steep an increase as expected.

Gov. Pat McCrory announced Wednesday that the U.S. Department of Labor has granted the state a waiver that reduces the tax increase for employers.

The waiver reduces the employers’ tax increase for the 2014 tax year from $77 per employee to $21 per employee. Collectively, that will save employers about $180 million, according to the state.

The waiver sought by the state was granted because “the U.S. Department of Labor has recognized the progress we have made in paying down this debt, which is almost $2 billion in the last 20 months,” said Dale Folwell, who heads the state Division of Employment Security that administers unemployment benefits.

The state’s debt, which peaked at $2.8 billion, stood at $465 million as of Nov. 7, according to Department of Labor data.

Under federal law, beginning in 2011 the debt triggered an annual increase in the federal unemployment taxes – commonly known as FUTA for Federal Unemployment Tax Act – paid by employers. Only employers – not employees – pay federal and state unemployment taxes.

Because of the debt, FUTA taxes for the state’s employers have been rising $21 per employee per year.

In addition to that annual $21-per-employee increase, the state’s employers were facing an additional $56-per-employee penalty based on the number of years the state has owed the federal government, said Lockhart Taylor, an Employment Security official. But the waiver eliminates that penalty.

McCrory, in a prepared statement, credited the overhaul of the state’s unemployment benefits that he signed into law last year for driving the debt reduction.

“Restructuring North Carolina’s unemployment insurance system and aligning it with those of our neighboring states has set our unemployment program on a path to sustainability,” he said.

The overhaul reduced the maximum amount of unemployment benefit checks by roughly one-third, to $350, and significantly cut the maximum weeks of benefits. It was opposed by Democrats and advocates for the poor, who complained it demonstrated a callous disregard for the needs of jobless workers.

The cumulative impact of the annual $21-per-employee increases in employers’ FUTA taxes won’t be eliminated until the state completely pays off its debt to the federal government.

Folwell said that he anticipates the debt will be repaid in full in May. That would reduce FUTA taxes for employers by $84 per employee going forward, according to Employment Security.

The resulting improved tax climate for employers, said Folwell, should be an inducement for companies thinking of moving to the state or expanding existing North Carolina operations, “which will result in more people being employed.”

“We have seen a drastic reduction in debt, and we have seen positive reforms to the system, which is really a huge success nationwide,” said Jake Cashion, director of governmental affairs for the N.C. Chamber. “We’re really insuring that the business community is not faced with continued tax increases.” The Chamber lobbied hard for the overhaul of the state’s unemployment system.

Bill Rowe, director of advocacy for the N.C. Justice Center, said that repaying the debt in full will present an opportune time to revisit the state’s unemployment benefits.

The state’s employers will lose their extra unemployment tax burden when the debt is eliminated, but “these very severe cuts to benefits are permanent and do not go away,” he said.

Roughly two-thirds of the debt is being repaid by the reduction in unemployment benefits, with the increase in federal unemployment taxes accounting for the rest, Rowe said.

With the weeks of benefits tied to the unemployment rate under the new system implemented last year, workers who lose their jobs today are eligible for up to 14 weeks of benefits.

“That’s the lowest in the country,” Rowe said. The state’s weekly benefit checks also have fallen from the middle of the pack to among the lowest, he added.

Even with its reduced debt, North Carolina ranks fifth-highest among the nine states that still owe the federal government money for unemployment benefits.

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