Our nation's unemployment insurance system, which provides a safety net for jobless Americans while also benefiting employers and the economy as a whole, is under silent siege.
Many companies are engaging in questionable and unethical efforts to avoid unemployment compensation insurance taxes. This corporate tax scheme forces society to pay the tab in the form of depleted state coffers, government borrowing and increased taxes.
The urgency of this problem was highlighted in a recent U.S. House subcommittee meeting and with last week's introduction of bill HR 3463 -- the SUTA Dumping Prevention Act of 2003 -- which was referred to the House Ways and Means Committee for review. Federal legislation would help end this practice in a uniform fashion, thus sustaining a nationwide level playing field.
The unemployment insurance system was created under the Social Security Act of 1935. States were then required to enact and administer unemployment compensation programs commonly known as State Unemployment Tax Acts (SUTA). Within guidelines established by federal law, these state programs provide temporary financial assistance to eligible workers who are unemployed through no fault of their own.
In most states, benefit funding is based solely on a tax imposed on employers. By law, employers bear a responsibility to pay unemployment taxes at rates determined by the number of claims made by their former employees. Employers with high unemployment activity -- and thus a higher "experience rating" -- are assigned higher unemployment tax rates. Employers with lower activity and a lower experience rating pay less.
A growing number of companies -- encouraged by their accounting, law or consulting firms, according to Congressional testimony -- are engaged in tax avoidance schemes designed to disguise their true claims experience. This practice, known as SUTA dumping, involves companies creating related shell organizations populated with few employees at first to make it "legitimate." Via the new entity, the company is able to manipulate its unemployment claims experience to obtain very low or even zero SUTA rates. The company later transfers a large population of workers into the shell firm to significantly reduce its tax obligations. This is the most common SUTA dumping scheme. Other tactics include the use of mergers, acquisitions and reorganizations as loopholes to dodge their fair share of unemployment taxes.
SUTA dumping schemes undermine the integrity of the state unemployment insurance system, harming both workers and employers who play by the rules.
Workers are harmed because this questionable practice depletes state trust funds and eliminates the incentive for companies to keep employees working -- the companies can escape the financial harm that otherwise comes with laying off workers. Employers are harmed because they must pay more to make up for the taxes that other companies avoid through SUTA dumping.
The Department of Labor suggests that SUTA dumping could be costing states billions of dollars in lost unemployment funds. While more study is needed, what is clear is that increased unemployment over the last two years has negatively impacted the solvency of unemployment trust funds in most states.
SUTA dumping schemes are most pervasive in businesses such as staffing, hospitality and construction, but they can be found wherever payroll taxes are a large portion of the company's total tax burden. And the period following an economic slowdown -- such as now -- is the time when the temptation and payoff of SUTA dumping is greatest, making this an opportune time for legislators to act.
The law should be revised to require the mandatory transfer of unemployment experience for mergers, acquisitions and transfers of trade or business, regardless of the reason for the transaction. The Department of Labor should be directed to develop tools and provide funding to train state agencies to detect the practice. In some states, laws already exist to prevent such practices; these laws should be enforced.
If state and federal governments fail to address this critical issue, they will be sending a tacit message to employers that SUTA dumping is acceptable, even expected. Doing nothing threatens the competitiveness of companies that refuse to engage in SUTA dumping schemes. In fact, inaction is a slap in the face of those companies who adhere to higher standards of ethics. The recent lessons of corporate misconduct must not be forgotten so soon.
CARL CAMDEN is president of Kelly Services Inc., headquartered in Troy. Write to him in care of the Free Press Editorial Page, 600 W. Fort St., Detroit, MI 48226.
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