Senate advances bill to hike tax on employers

ST. THOMAS - The Senate Housing and Labor Committee passed a bill Friday to increase the tax on employers to help the government pay off the interest owed to the federal government on the millions borrowed to pay unemployment benefits in the territory.

The bill, sponsored by Sen. Carlton Dowe, would implement an annual tax on employers of $25 per employee. The proceeds would pay off the interest owed to the federal government.

The measure also would raise the new employer's contribution to the V.I. Unemployment Insurance Trust Fund from 1 percent to 2 percent of wages paid during the calendar year.

Under the V.I. Code, the employer contribution to the Unemployment Trust Fund is determined by a formula that takes into account a number of factors.

The existing law states that no employer's tax rate will be less than zero or more than 6 percent. Dowe's bill changes the minimum to 1½ percent.

V.I. Labor Commissioner Albert Bryan Jr. said the territory's Unemployment Trust Fund once was the most solvent fund in the nation. In 2001, it had more than $54 million, he said.

Money from the fund can be used only to pay unemployment benefits. The V.I. Labor Department is simply the custodian of the fund, which technically belongs to the territory's employers, Bryan said.

In 2001, the V.I. Legislature voted to reduce the minimum tax rate to zero and the new employer rate to 1½ percent. The same measure eliminated the delinquency rate and a separate surcharge used for training at the Labor Department, Bryan said.

"So, in effect, experienced employers have paid no or minimal unemployment insurance taxes to the local fund for the last 10 years," Bryan said.

In addition, local employers remained eligible for the federal tax rebate - a $378 credit per employee.

Bryan said that despite the changes, the fund remained solvent until the recession hit in 2008 and unemployment claims rose by 75 percent.

"We went from a situation where we disbursed about $6-$8 million a year to $14 million a year," he said.

While the recession strained the system, benefits were able to be paid out of the fund until August 2009, at which point the federal government offered interest-free loans to states and territories to pay unemployment claims.

However, the interest-free loans only lasted for two years, Bryan said.

The federal government has continued to lend the territory money to pay unemployment, but it has since begun to accrue interest. Bryan said the current balance on the loan is $39 million. The interest owed on the amount totals about $966,000 and is due in September.

Two weeks ago, the Senate authorized borrowing $1 million to cover the interest payment. That legislation is pending approval by Gov. John deJongh Jr.

The proposed $25 per employee tax will offset the interest payment anticipated for the coming year, which will be due September 2013.

"We should all understand that the $25 per employee will not be enough to cover the entire interest payment, but we have set the rate with the impact on our businesses in mind," Bryan said.

Charles Engeman testified on behalf of the St. Thomas-St. John Chamber of Commerce on Friday. He said the Chamber is "firmly opposed" to the bill.

"The bill would result in an additional barrier to opening a business in the territory," he said.

Not only would it double a new employer's unemployment tax rate, it will penalize existing employers who have few, if any, unemployment claims.

For an example, Engeman said an employer with 10 employees who currently pays a 1 percent contribution pays $150 per employee, or $1,508 a year for all 10 employees. By raising the tax to 2 percent, the employer would have to pay $3,016 a year plus $250 for the new $25 per employee tax.

He said the bill actually penalizes employers who have fewer employee turnovers or who have fewer unemployment claims filed by employees. Engeman said the V.I. Code already allows the tax rate to be adjusted for over- or underfunding of the fund.

"Before implementing such drastic legislation that could further cripple the struggling business community, the issue should be fully examined, and all affected parties should have the opportunity to provide input on possible solutions to any real issues that may exist," Engeman said.

Specifically, in the past the Labor commissioner has convened an advisory council to work on possible changes to the code regarding unemployment insurance.

Bryan said the matter is urgent. He reminded senators that the debt is not a debt of the V.I. government, but rather a debt of the territory's employers.

"If we do not make this payment, we put our unemployment insurance program as well as our training funds in jeopardy," he said.

The bill was passed unanimously on to the Rules and Judiciary Committee for further consideration. Committee members Neville James, Terrence Nelson, Usie Richards and Celestino White Sr. attended Friday's hearing. Senators Alicia Hansen, Louis Hill and Alvin Williams Jr. were absent.

- Contact reporter Aldeth Lewin at 714-9111 or email alewin@dailynews.vi.

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