INDIANAPOLIS – Indiana businesses could get a one-year reprieve from unemployment insurance tax increases under a proposal offered by Senate Republicans and supported by Gov. Mitch Daniels on Tuesday.

The legislature in April passed a bipartisan bill overhauling the state’s bankrupt system. But the tax increases weren’t set to take effect until January.

Now, Senate President Pro Tem David Long, R-Fort Wayne, wants to delay the tax increase for one year. He said the reason is that the economy hasn’t rebounded at the level legislators had anticipated.

"This will give us time to catch our breath," he said, noting that the federal government could decide to bail states out.

Although the state fund is insolvent, the federal government has lent the state $1.3 billion so it can continue paying unemployment claims. That figure is expected to reach $1.7 billion by the end of the year.

The increases, along with some changes within the system, were meant to slowly bring the fund back to solvency. It had been running a structural deficit – paying more out in benefits than it was taking in from businesses – since 2002.

"Given that the national economy is not yet recovering, and that no other state in the nation acted on their own (unemployment insurance) shortfalls, I would sign a measure to postpone for now the higher premiums now scheduled," Daniels said in a statement.

He signed the bill into law even though he called it "imperfect."

Businesses could save about $260 million in additional unemployment taxes in 2010 if the delay is approved.

"The top priority of our state should be saving existing Hoosier jobs during this severe economic downturn," said Patrick Kiely, president of the Indiana Manufacturers Association.

"There was a concern from the outset what impact this would have on existing employment and future economic growth."

Kiely’s association and other business groups contended many Hoosiers would be laid off for employers to pay the new taxes.

Marc Lotter, spokesman for the Indiana Department of Workforce Development, said even with the state tax increases, the state would have built up a $2.7 billion debt to the federal government by the end of 2010.

With a delay, that would rise to $2.96 billion.

Regardless of what happens to the state tax increases, Lotter said Hoosier businesses are set to see a rise in their federal unemployment tax in 2011 because the state owes so much money.

That increase would be $21 per employee per year.

Long and others said they are hopeful the federal government will forgive the loans entirely – right now they are just interest-free – and reverse the federal tax increase.

Rep. David Niezgodski, D-South Bend, the point person on the issue for the House Democratic caucus during the legislative session, said he is open to the idea as long as Hoosiers still receive the benefits they deserve.

House Republican Leader Brian Bosma of Indianapolis said not a single member of his caucus voted for the legislation, and he is glad those involved in the process have re-examined the tax increases.

"It was one of the largest business tax increases in my recollection," he said. "At this particular time in the economy, it’s devastating."

nkelly@jg.net