INDIANAPOLIS – The Indiana Senate on Tuesday approved a plan to increase taxes on businesses and cut payments to out-of-work Hoosiers in an effort to repair the state’s deficit-ridden unemployment insurance system.

Senate approval leaves just weeks to find a compromise on an emotional issue fraught with philosophic and partisan divides.

“We are asking everybody to participate in fixing this system – everybody – especially those who use the system the most,” said Sen. Brandt Hershman, R-Wheatfield. “If we hit employers too hard in this proposal, we run the risk of putting more Hoosiers out of work.”

Indiana’s unemployment trust fund has had a structural imbalance since 2001 and ran out of money last year.

Several legislative leaders have said fixing the bankrupt system could push lawmakers into a special session.

The issue is complicated by several factors, including the sheer size of the problem. The state could owe the federal government $1.2 billion by the end of the year, and the monthly deficit continues to grow as more Hoosiers lose their jobs.

The timing also couldn’t be worse as legislators try to overhaul the system during the middle of a painful recession.

“We know that this is a serious issue. We also know it’s a sensitive issue. In this economy, in this recession, it’s incredibly difficult to find the solution, and so many people are depending on us to get it right,” said Senate Minority Leader Vi Simpson, D-Bloomington. “There has to be a delicate balance – gain and pain – and it’s our job to find that balance.”

House leaders plan to dissent on the changes, which would send the bill to a conference committee to iron out differences. That committee could be named this week and begin meeting soon.

“We don’t think you should cut benefits to people who are devastated by losing their jobs because of this economy,” Democratic House Speaker Pat Bauer said. “We’ll work to get something done, but certainly we don’t want to punish people.”

The 30-20 vote on House Bill 1379 was largely along party lines with all but three Republican senators in support and all Democrats against. Senate President David Long, R-Fort Wayne, said it’s time for legislators to work together to find a solution.

“We now face five weeks of tough negotiations. That is where the give and take of ideas and potential solutions between all four caucuses will take place. That is where we will all have to work together to get a bill passed,” he said in a written statement. “So it’s time to put aside the rhetoric and the finger-pointing and get to work.”

In its current form, the legislation would make the fund solvent by 2011 and allow the state to begin paying back the federal government in 2012.

Overall, it would raise more than $800 million in annual revenue for the fund through tax increases as well as benefit and eligibility changes.

It would permanently increase business taxes $328 million annually starting in 2010.

A major component in the hike is an increase in the taxable wage base. Currently, an employer pays only on the first $7,000 of an employee’s salary, but this plan would increase that to $10,000, still below the national average but more in line with other Midwestern states.

The plan also would adjust the rate structure for businesses. Currently, a business pays a tax rate ranging between 1.1 percent and 5.6 percent on the first $7,000, depending on its use of the system. That means a minimum annual contribution for each employee is $77 and the maximum is $392.

Under the bill, the tax rate would range from 0.75 percent to 8.2 percent. Along with the new $10,000 wage base, the minimum annual contribution for each employee is $75 and the maximum is $820.

Also, the bill would implement a sliding-scale benefits system that slowly decreases benefits over time as an impetus for unemployed Hoosiers to find work more quickly. The change would save the trust fund $125 million annually, which Democrats said would mean less money flowing to local communities.

The average unemployment benefit in Indiana is $298 and the maximum is $390.

Senate Democrats said this change cuts benefits between 15 percent and 28 percent during the initial 26-week period depending on whether a person is receiving the minimum, average or maximum amount.

Hoosiers could waive the sliding scale if they are enrolled in certified training programs.

The plan also would save the state hundreds of millions of dollars in changes to the system in an effort to weed out waste and abuse.

One example would be the reclassification of some jobs as seasonal, meaning workers would not be eligible for unemployment benefits unless their employers pay a high-usage surcharge. The clearest example of this is the construction industry, which sees a high percentage of workers claim unemployment every year during the winter.

nkelly@jg.net