Employers in Washington could see sharp increases in unemployment taxes starting next year as the state confronts the unexpected costs of hundreds of thousands of layoffs during the pandemic.
By 2022, taxes that employers pay to cover state jobless benefits could rise to an average of $936 per worker. That’s almost three times the expected 2020 figure of $317, according to preliminary figures released Thursday by the state Employment Security Department (ESD).
And those are average increases: Employers who had more layoffs could see higher per-employee taxes.
The tax hikes are needed to replenish the state unemployment trust fund, which has fallen from $4.7 billion to $2.8 billion since March 1 after paying out benefits to so many laid-off workers. A new state forecast shows the fund will likely be insolvent by early 2021 , which will require the state to borrow federal funds to cover any shortfall.
The forecast for tax increases comes amid mixed news about the economy.
On Thursday, the state reported 31,911 new, or “initial,” claims for unemployment insurance for the week ending June 27. That’s up 7.8% from the prior week, and reflects continued job losses in the hotel, restaurant and retail sectors, among others, ESD data shows. But it’s down substantially from the wave of layoffs in March, April, and May. Nationally, initial claims fell 3.7%, to 1.4 million, the U.S. Labor Department reported.
On Monday, ESD first acknowledged that the trust fund faced possible insolvency, but agency officials didn’t release any specific projections for tax increases. Thursday’s forecast suggests the state will need several years of substantial tax hikes to return the trust fund to its pre-COVID levels.
ESD’s data shows the average tax per worker peaking at $936 in 2022 before falling modestly to $896 in 2023, $829 in 2024, and $691 in 2025.
Nick Demerice, ESD spokesman, cautioned that Thursday’s forecast is preliminary. The actual tax increases will depend in part on future economic conditions: A faster than expected recovery could mean workers come back to to work sooner and withdraw less from the trust fund.
Likewise, changes in government policy, such as new federal grants for depleted state trust funds, could reduce the amount Washington needs to generate in new taxes.
“There’s a number of different factors and variables that could change dramatically, which would change this [forecast] modeling,” Demerice said, adding that the state expects to have a clearer picture when it begins applying for federal loans in August or September.
Unemployment taxes have two components. There is an individualized “experience-based” tax, which is based on the average annual benefits paid to a specific employer’s workers over the preceding four years. Typically, the more layoffs a company has, the greater its experience tax rate. Employers also pay a “social cost” tax, which covers costs that aren’t attributable to a single employer.
The combined tax rate, which is levied on a portion of a company’s payroll, varies considerably: In 2020, total rates ranged from 0.10% to 5.7%, but were expected to average 0.91%. Prior to the pandemic, ESD expected the average to remain around 1% through 2025. The new forecast shows the average rate peaking at 2.74% in 2022 before gradually falling.
The new projections will be unwelcome news for employers already struggling with dramatic declines in revenue during the pandemic.
“It’s huge,” said Elizabeth Reed, co-owner of Interface Technologies Northwest, a Lynnwood-based installer of commercial telecommunications systems, when told of the increases. “I understand we have to pay for what just happened, but you’re hitting employers for something that they had no control over.”
Reed’s company has avoided layoffs during the outbreak, thanks to a federal pandemic loan. But she says the prospect of higher unemployment taxes in the future will make her and other employers reluctant to hire new workers out of fear of higher tax penalties if they have to be laid off.
“None of us can know what’s going to happen with COVID,” Reed said. “So you’re not going to hire anybody back if you don’t have to.”