For the past few years, North Carolina has owed the federal government more than $2 billion to cover a debt it incurred by borrowing money to pay unemployment insurance (UI) benefits. On November 10, 2012 North Carolina missed another deadline to repay the federal loan in order to avoid additional tax penalties. As was the case in 2011, employers now face an additional Federal Unemployment Tax Act (FUTA) tax of .3 percent. This translates into a tax increase on every job from $63 to $84 per employee, and will continue to rise annually by approximately $21 per employee until the debt is paid.
North Carolina’s unemployment insurance system is funded solely by employers through state and federal unemployment payments. Therefore, North Carolina employers were scheduled to repay approximately $2.5 billion in principal and more than $500 million in interest from 2011 to 2019 to extinguish the state’s loan. Taking no action would have resulted in a series of increases in the rates to be paid by employers under the FUTA. This plan of action was a significant deterrent to job creation. Employers were essentially penalized as they hired additional employees by being forced to pay a “per employee cost” to help retire the debt.
The North Carolina Chamber Foundation commissioned a study to find best practices and realistic opportunities to reform our state’s broke and broken UI system. Using the results of that study, the North Carolina Chamber developed a number of recommendations to bring solvency, integrity and affordability back to the UI system. The proposed solutions addressed both unemployment insurance taxes as well as benefits.
These realistic and well-researched suggestions were presented to members of the General Assembly and considered in the crafting of House Bill 4 which was signed into law on February 19, 2013. House Bill 4 gives employers greater certainty by creating a three-year debt repayment plan and mitigates federal employer tax increases as much as possible. This will ultimately save all North Carolina employers an average of $714 per employee over the next seven years!
For example, a company with 300 employees would be subjected to approximately $308,700 in FUTA/UI taxes alone, under the seven-year “do-nothing” government approach. However, under House Bill 4 this same employer will only pay $94,500 in FUTA taxes over the next three years – ultimately saving $214,200 in FUTA taxes over the next seven years.
Read an executive summary of the North Carolina UI Solvency Study Observations and Recommendations.