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Home / Washington Business - July/August 2006 / UI bad news tempered by potential advantages |
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UI bad news tempered by potential advantages |
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Written On: July/August 2006 |
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Written By: by Mellani McAleenan - AWB Governmental Affairs Director |
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Unemployment insurance has been a contentious topic for years—not just between business and labor, but within the business community as well. However, with Washington’s benefits taxes among of the highest in the nation, years of bickering gave way to massive reforms in 2003, reducing benefits and beginning the trend toward lower taxes that were fairly apportioned between employers. Even so, taxes paid on family-wage jobs remained 300 percent above the national average.
Even though benefits remained high in comparison with other states, unions and many Democratic legislators believed the reforms cut too deep. Thus, in 2005, the state returned to two-quarter averaging. The worker’s highest two quarters of wages are averaged and the lowest two omitted to determine the amount of benefits. That meant a year-round worker (a nurse) who earned $30,000 per year received less benefits than a seasonal worker (construction) who earned that amount in two quarters and without working the rest of the year. The 2003 reforms created a four-quarter averaging system so that both $30,000 per year employees were eligible for the same benefit. The 2005 law had a two-year sunset provision and created a task force to review the issue. The task force did not come to a resolution on how to balance high benefits with overall business competitiveness, but the 2006 Legislature permanently re-enacted two-quarter averaging in SB 6885.
AWB strongly opposed the bill as originally passed by the Senate. It attempted to offset the resulting increased taxes with targeted tax reductions, but the reductions were aimed at the wrong targets. Members of the business community who were unaffected by two-quarter averaging would have seen tax reductions, while others would see extreme tax increases. The bill passed the Senate with a one-vote margin. Interestingly, only one Republican senator, Pam Roach, voted for the bill.
It would have been easy for the House to take that legislation and pass it. Thankfully, Speaker Frank Chopp declined the opportunity and negotiations began in earnest in the House. The resulting legislation is both good and bad. The question remains: Will it work?
The business community lost two major components of the 2003 reforms: four-quarter averaging and "liberal construction," which requires the law to be construed in favor of the employee. We lost four-quarter averaging in the best way possible because the bill uses two-quarter averaging to determine benefits and four-quarter averaging to determine taxes. Employers will not see a tax increase due to the increased benefits because the difference is paid for by an unanticipated increase in trust fund dollars. However, the bill also caps taxes for certain seasonal industries at a lower rate than the rest of the business community. The difference will be socialized into the rest of the employers’ taxes.
Tax reductions are created to offset those increased costs. Socialized taxes are lowered from 0.6 percent to 0.5 percent depending on the level of the trust fund (13 months of benefits), and then to 0.45 percent for Rate Class 1 at 14 months. The solvency surcharge now kicks in at seven months instead of six, meaning that a tax increase could happen sooner than it would have in the past. The tax breaks rest solely on the accuracy of the Employment Security Department’s accounting.
Whether this bill is good or bad will be determined over time as we watch the trust fund balance. If ESD is wrong, the business community will face massive tax increases in order to pay for increased benefits. If they are right, the business community will see extended tax breaks that are better than those in the 2003 reforms.
Another key victory is that the legislation re-enacts provisions of the 2003 reforms outlining eligibility for persons who voluntarily left employment that were being challenged in a court case. One change was made such that relocation for a spouse’s mandatory military transfer is considered good cause, regardless of whether the new state has reciprocity with Washington.
Finally, a number of important issues were left unresolved and subject to further study. Issues of repeated episodes of unemployment, Rate Class 40 employers, employer turnover, and fraud prevention methods were all left to be dealt with in the future. ESD will report its findings in December, creating the possibility for additional changes in the 2007 legislative session.
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