Rising unemployment taxes may hinder hiring

WASHINGTON -- As if small businesses needed another reason not to hire, consider their latest financial burden: The cost of rising unemployment itself.

Employers already are squeezed by tight credit, rising health care costs, wary consumers and a higher minimum wage. Now, the surging jobless rate is imposing another cost. It's forcing higher state taxes on companies to pay for unemployment insurance claims.

Some employers say the extra costs make them less likely to hire. That could be a worrisome sign for the economic recovery, because small businesses create about 60 percent of new jobs. Other employers say they'll cut or freeze pay.

Behind the trend are widespread layoffs. The number of people claiming jobless aid has tripled since the recession began. The demand has drained the funds that many states use to pay jobless claims. Nearly half the states are borrowing from the federal government.

Now the bills are coming due. States reset their unemployment insurance taxes at the end of each year, and 33 states will raise them next year, according to the National Association of State Workforce Agencies. The states' tax revenue in the last fiscal year fell $42 billion short of what's needed for unemployment aid.

Most of the tax increases are being triggered by laws requiring higher taxes to make up for a decline in state funds to pay for benefits. In some cases, cuts in jobless aid are required, too.

Federal law requires states to build up unemployment insurance trust funds in good times so they can pay benefits during downturns. But the severity of this recession has bankrupted many states' trust funds and forced them to borrow from the federal government. States eventually must pay back the loans. Otherwise, the federal government can raise taxes on their businesses.

The tax increases will have "a small, negative effect on hiring" because they will raise employers' costs, said Wayne Vroman, an economist at the liberal Urban Institute.

Contributing to the problem is that many states cut their unemployment taxes earlier this decade when the economy was healthier. That left them unprepared for the waves of layoffs that began last fall. Some experts say business groups pushed for the cuts and set the stage for tax increases.

States have been swamped by a jump in recipients, from 2.8 million in May 2008 to nearly 9 million now.

The federal government is paying for about 4 million of those beneficiaries. These people exhausted the 26 weeks states typically provide and are receiving extended federal benefits. The unemployed can get up to 73 weeks of extra aid, for a total of 99 weeks, the longest extension on record.

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AP Writers Deanna Martin in Indianapolis, Bill Kazcor in Tallahassee, Mark Niesse in Honolulu, Melinda Deslatte in Baton Rouge, Jim Davenport in Columbia contributed to this report.