INDIANAPOLIS – Businesses around the state have been paying hundreds of millions in additional taxes every year because of an unemployment tax penalty since 2011.
The money has been slowly reducing the $2.2 billion debt owed to the federal government from when the state ran out of cash to pay unemployment benefits during the recession.
But there is a possible end in sight.
Lawmakers included language in the new state budget giving flexibility to the State Budget Committee to pay off the loan early.
But there’s a big if.
State tax collections likely would have to come in strong and unemployment benefits would have to remain stable.
"That is a huge additional tax businesses are paying," said Indiana Chamber of Commerce President Kevin Brinegar. "They could hire more staff, invest in equipment, expand, give raises, improve training, provide benefits.
"And the money stays here, multiplying in the state’s economy instead of going to the morass of the federal government."
The federal unemployment tax penalty costs every business in the state $105 per employee this year. It will rise to $126 per employee next year if not every dollar is paid back by Nov. 9.
Rep. Dan Leonard, R-Huntington – the House expert on Indiana’s unemployment trust fund – said if the State Budget Committee finds the money to pay off the loan this year it saves employers $327 million next year.
In addition, employers could stop paying a surcharge to the state that covers the interest on the federal loan.
"I think the economic stimulus would be dramatic throughout the state," he said. "You have no ideas the headaches I have had with this. We started with $2.2 billion and hoped to pay it off in late 2018 or 2019. We’re in a much better position now."
But it’s unclear exactly what the magic number will be later this year. As of last week, the state owed $547 million.
Projections by the Indiana Department of Workforce Development showed the loan would be paid off next spring. But that would still leave businesses paying the penalty in 2016.
The question is how much would state budget officials need to find to pay off the loan this year.
Leonard said estimates showed the loan would be at about $369 million by the end of the year.
But during the first quarter benefits were below projections. This is because of fewer Hoosiers signing up for unemployment and people spending less time on unemployment.
Leonard said extrapolating those savings to the rest of the year, the loan amount could drop to just $200 million.
DWD Spokesman Joseph Frank wouldn’t speculate, saying new projections should be available in a few weeks.
"The vast majority of revenue comes in first and second quarter," he said. "By the time the second quarter ends, we know pretty well how the rest of the year is going."
Brinegar and Leonard think the amount of $200 million would be feasible to discuss paying off.
"I would like to think the odds are very good," Brinegar said. "It will depend on where things stand in October. I would hope the State Budget Committee would consider ($200 million) to be a manageable amount."
Originally, legislators were eyeing a tax amnesty program for the funding. It would have been a one-time influx of cash to pay a one-time debt. But that money is being now used for a regional cities initiative sought by Pence.
"I wasn’t exactly thrilled," Leonard said.
So that leaves the general fund, where most of the Indiana’s revenue from sales, income, business and other taxes is deposited.
State Budget Director Brian Bailey said the initial plan was to pay off the loan in 2016 and save businesses money in 2017. But the projections have improved enough to at least make it a conversation now.
"It has to be fiscally responsible," he said, noting the level of surplus is important to keep Indiana’s AAA credit rating.
He also said Pence didn’t favor regional cities over unemployment.
"We wanted to do both," Bailey said. "We just have the timing differently."
Leonard said there are other, more complicated, options than just hoping for unexpected revenue.
The state could borrow from a dedicated state fund and then businesses could pay that state loan back in the next year or two, but without high federal interest.
Some examples would be the Public Deposit Insurance Fund, the Pension Stabilization Fund or the Major Moves Fund. But it doesn’t appear the language in the budget goes that far.
"If the number is small enough, it makes sense to pay it off," Brinegar said.