Bill Would Help States Fight Unemployment Tax Fraud
By Colin Quinn, Special to Stateline
States may soon have a new tool to keep businesses from dodging unemployment taxes, a practice that is estimated to collectively cost states many millions of dollars a year.
The tool is a bill (HR 3463) that passed Congress last month and is now awaiting President George W. Bush's signature. Sponsored by Republican U.S. Rep. Wally Herger, it closes a loophole that allows companies to avoid paying high unemployment taxes, a practice known as SUTA dumping.
SUTA is an acronym for State Unemployment Tax Acts. The Congressional Budget Office estimates the SUTA Dumping Prevention Act could save state unemployment funds and small businesses $498 million over five years.
"I'm very excited," Herger told Stateline.org. "This is a win-win situation for everyone."
Herger's home state of California had identified 29 companies with payrolls between $10 million and $1.6 billion who practiced SUTA dumping, costing the state's unemployment fund nearly $100 million annually.
The practice works like this: when an employee is laid off, he or she can go to the state to receive unemployment benefits, which are paid for from a fund partially financed by employers. The more claims a company has historically, the higher its tax rate. To skirt the tax, companies under present law can do one of two things: form a new corporation and use the fledgling company's lower rate or buy a different firm and use the purchased businesses' rate. In both cases, companies can save a huge chunk of money.
"We basically had some unscrupulous business entities that were taking advantage of the system," Herger said. "[They were] changing the name of the company and getting out of paying normal rates they should have been paying. Other companies were paying the tab for them."
Nearly 30 state unemployment insurance administrators said their laws were inadequate to stop SUTA dumping, Robert J. Cramer, managing director of the The Government Accountability Office's, formerly known as the General Accounting Office, special investigations group, told a congressional hearing in 2003.
Arkansas, Maine North Carolina and Washington passed legislation in 2003 to impose fines on businesses that manipulated their unemployment tax rates, but they were the exception rather than the rule.
Herger, who chairs the U.S. House Ways and Means Subcommittee on Human Resources, decided to act. He held hearings and listened to testimony from CEOs before writing legislation. Herger said the bill received wide bipartisan support.
The bill does not dictate to states how to enforce the law or provide specific penalties for companies found guilty of SUTA dumping. That decision will be left to the states to decide.
"It's telling states they need to change their individual state laws," Herger said. "The message is that companies know they can no longer get away with this."
The bill also goes after people who fraudulently claim unemployment benefits. Savings will be routed back to state unemployment benefit accounts.
Milan P. Yager, executive vice-president of the National Association of Professional Employer Organizations, said it was critical to working people that the federal and state governments work to protect the integrity of the tax rating system.
"The small businesses are out there trying to sell hammers and dresses," Yager said. "They don't know why their rates are going up... the job of protecting the system is for state legislators."