WASHINGTON – Virtually every private employer in the U.S. will get a tax cut on Friday.
It won't affect workers' paychecks. But the expiration of a 35-year-old "temporary" unemployment tax — about $14 a year per worker — will mean real money for some big companies at a time when President Barack Obama is pushing Congress to raise taxes on businesses by closing some loopholes.
Amid a fierce debate over whether higher taxes should be part of a deal to reduce annual deficits — in exchange for letting the government go further into debt — , the small cut in federal unemployment taxes has received little attention on Capitol Hill. Most employers probably don't even know they are getting it, especially those who are being hit with bigger increases in state jobless taxes.
But business groups say every little bit helps, whether you're a small employer struggling to make a payroll or a huge company like Wal-Mart, with more than 1.4 million U.S. workers. That's nearly $20 million a year in savings for Wal-Mart.
Some worry that reducing federal unemployment taxes while the jobless rate hovers above 9 percent will add to the system's financial problems. But the tax cut will save businesses nationwide more than $14 billion over the next decade, according to congressional estimates.
"The death of any tax on jobs, no matter how big or small, is a historic moment and one to be celebrated," said Rep. Dave Camp, R-Mich., chairman of the tax-writing House Ways and Means Committee. "The fact that it has taken 35 years for this 'temporary' tax to expire clearly illustrates the dangers of higher taxes — once in place, they are unlikely to ever go away."
The expiring levy was a 0.2 percent surtax on the first $7,000 of a worker's wages. Getting rid of it effectively lowers the federal unemployment tax from 0.8 percent to 0.6 percent for most employers. That's a decrease from $56 a worker to $42 a worker each year. The tax is paid by nearly all private employers, who also must pay state unemployment taxes.
The surtax was first imposed in 1976 to help pay for federal unemployment benefits distributed in the 1970s. The tax was supposed to be temporary, but like a lot of short-term measures in Washington, it endured and was extended at least eight times, under both Republican and Democratic presidents.
President George W. Bush proposed extending it in his 2009 budget, and Obama proposed making it permanent in the 2012 budget he released in February. Both presidents said the additional tax was necessary to help sustain federal unemployment trust funds. But Obama's proposal has been largely ignored by Congress.
"Payroll taxes are always a big problem for small businesses because they are not based on the profitability of the business, like most taxes are," said Bill Rys, tax counsel for the National Federation of Independent Business. "Especially right now, when we have small businesses still really struggling to work their way out of this recession, every little bit has an impact on their bottom line."
The federal unemployment trust funds were drained by the recession in 2008, and federal jobless benefits are currently paid from general fund revenues, adding to the budget deficit.
George Wentworth, senior staff attorney at the National Employment Law Project, said letting the tax expire now is going to make it harder to replenish federal unemployment trust funds.
"For 35 years, that additional 0.2 percent has been critical to stabilizing the system, and certainly there's probably never been a time when the system had a greater need for that," Wentworth said.
The tax cut comes as Obama and GOP leaders are trying to negotiate a deficit reduction package. As part of the package, Obama wants about $400 billion in tax increases paired with more than $1 trillion in spending cuts. Republicans are balking at the tax increases.
At the same time, Obama wants to extend a temporary Social Security payroll tax cut that Congress passed for 2011. The Social Security tax cut, totaling $112 billion a year, goes to workers, while the unemployment tax cut goes to employers.
Employers pay federal unemployment taxes on top of state jobless taxes, which are generally much higher and have been increasing as states cope with high unemployment. State jobless taxes are based in part on rating systems for employers that take into account their recent history of laying off workers. More layoffs mean higher taxes.
In general, state taxes cover unemployment benefits and federal taxes pay to administer the program and provide loans to states when they run out of unemployment funds. Federal taxes also help pay for the federal extension of benefits when unemployment is high.
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