For candy makers John and Tempe Brooks, it’s the stealth tax that they fear could eat much of their business.
The husband and wife, who own Adams & Brooks Inc. near downtown Los Angeles, worry a series of hikes that started last month in the unemployment insurance tax could thwart their growth plans.
The little-noticed hikes are designed to reduce the $10 billion annual deficit in California’s unemployment insurance fund.
Tempe Brooks, the company’s secretary and treasurer, said this series of tax hikes by itself is not crippling. But combined with rising costs, especially health insurance, the impact is frightening.
“I feel like I’m being eaten alive in small bites,” Brooks said. “We can absorb one of the tax increases. But it’s all cumulative: Every tax increase comes off our bottom line.”
The tax hikes started with a small federally mandated $21-per-employee increase Jan. 1. They will jump to more than $100 per employee in the next four years, and that’s in addition to the usual annual costs. The money goes directly to the federal government for repayment of loans to the state.
But that’s not all. In his recent budget proposal, Gov. Jerry Brown seeks additional hikes in the unemployment taxes that employers pay, starting next year. If the Legislature approves those taxes, that could add up to an additional $60 per employee annual tab. That money would be used in part to pay down interest that the state has been incurring in its $10 billion annual federal loans to keep the state’s unemployment system solvent.
For a company like Adams & Brooks, which employs about 100 people at the plant just west of downtown that it has occupied for more than 70 years, these tax increases could cost more than $16,000 a year by 2015.
‘Kicking employers’
Companies throughout Los Angeles County and the state are just beginning to grapple with these hikes. Hardest hit are companies in low-margin industries with large numbers of employees, such as garment industry subcontractors. Also, companies that have already laid off workers pay the highest rates; the new tax hikes come on top of that.
“If a company is struggling and has had to do layoffs, the last thing you want to do to that company is to increase its taxes,” said Mark Wilbur, chief executive of the Employers Group, an El Segundo-based human resources consulting firm. “But that’s what’s happening here: kicking employers while they are down. It’s ludicrous. It’s a disconnect in understanding how businesses run.”
So far, employers have been able to manage the tax increase, mainly because it has started small. But as the increases mount each year for at least the next four years, that could change.
At garment manufacturer American Apparel Inc., which employs about 5,000 workers in downtown Los Angeles, the $21-per-employee increase has added more than $100,000 in costs.
“At this point, it’s been a manageable cost for us,” said Glenn Weinman, senior vice president, general counsel and secretary for American Apparel.
But the costs could spiral up to more than $750,000 a year for the company. And Weinman said if that happens the company would be forced to raise prices.
“We would have to make adjustments and that could at some point affect the consumer,” he said.
Meanwhile, at another local garment maker, the concern is more about the indirect cost of the rising tax. STC-QST LLC, which employs about 50 at its plant just southeast of downtown Los Angeles, makes interlining, pockets and other pieces for the apparel industry.
The company relies on several subcontractors. STC-QST executives are concerned that those subcontractors, which have hundreds of employees and operate at low margins, could get hit hard by the increases and hike their prices.
“They will have to pass on 100 percent of this cost increase just to stay in business; that’s how stressed their budgets are,” said Brian Weitman, STC-QST chief executive. “Our challenge is going to be grappling with these cost increases when just about everything else is going up, especially health care.”
Benefit hikes
Many in the business community trace the unemployment insurance fund’s current problems to a decision a decade ago to increase weekly payouts to unemployed workers.
In 2001, when the tech boom was at its height, California’s unemployment insurance fund had racked up a surplus of $6.5 billion. State lawmakers voted to nearly double benefit payments to unemployed workers, to a maximum of $450 per week.
After the dot-com bubble burst, these increased benefit payments remained. As the unemployment fund plunged toward insolvency, rates were hiked on employers. The tax rate is now at the maximum 6.2 percent of the wage base, which is defined as the first $7,000 of each employee’s wages. However, each employer’s final bill goes up or down, depending on its history of laid-off workers filing claims.
But the rate hikes of the last decade were not enough. Even during the boom years of 2006 and 2007, the fund was accumulating deficits because of the high payouts. So when the 2008 recession hit, the annual deficit widened to more than $10 billion and the state was forced to seek yearly federal loans.
Twenty-six other states also needed federal loans to keep their unemployment insurance funds afloat. But while some other states took steps to reduce benefit payouts, attempts to do this in California have fallen flat in the Legislature.
Beginning last month, the federal government started increasing the required employer contribution by about 0.3 percent more than what was paid last year. That amounts to about $21 for each employee for this year; next year, an additional $23 per employee will be added and the following year an additional $25 or $26 per employee and so forth. Within four years, the total increase will be more than $100 above the per-employee charge employers paid last year.
But these hikes will only bring in $300 million more a year, barely making a dent in the $10 billion annual structural deficit. Meanwhile, the state is required to make interest payments of at least $300 million a year on the federal loans. That money cannot come out of the unemployment insurance fund but must come from another state funding source. Last year, the state raided the disability insurance program to make the interest payment and intends to do the same this year.
On top of the federal surcharge, Brown’s proposed surcharge would be $39 per employee starting next year and increase to $61 per employee in 2014 and then gradually go back down to about $40 per employee by 2017.
Business groups want to see payouts rolled back.
“New taxes on employers will only further diminish our ability to rebound economically,” said John Kabateck, executive director of the California chapter of the National Federation of Independent Business, which represents small and midsize businesses. “Instead, California should focus on reducing benefits and the length of eligibility” for unemployment benefit payouts.
Candy manufacturer Tempe Brooks said the tax hikes will crimp plans to give workers annual raises.
“It’s hard to explain to our workers why we can’t give them a raise, that the money instead will be going to pay off this unemployment tax, ”she said.
Brooks said the rising taxes also could threaten the ability of the company to expand production at a facility it recently bought in the city of San Bernardino.
“We were looking forward to adding jobs. But every dollar we have to spend on government regulations, permits, fees and taxes takes away from our ability to invest in this new plant and new jobs,” she said.
