Businesses could face changes in unemployment assistance tax

The sun sets behind the South Dakota Capitol in Pierre on Dec. 5, 2023. (Makenzie Huber/South Dakota Searchlight)

Legislators could soon be asked to impose a higher tax on employers to cover the administrative expenses of the state’s unemployment assistance program, but a lower tax to fund the program’s payouts to unemployed people, sparking concerns of an unequal impact on businesses.

The state’s Reemployment Assistance Advisory Council approved a plan this month to ask legislators for the changes in January.

South Dakota’s Reemployment Assistance program offers a safety net for laid-off workers. Payroll taxes from employers help support the trust fund to cover unemployment claims. Payroll taxes also go toward the administration of the program and toward the Future Fund, which is used by the governor for economic development grants.

The increase in the administrative portion of the taxes is needed, according to state Department of Labor and Regulation Secretary Marcia Hultman, because the administration fund is projected to fall into the red in coming years due to state employee salary increases passed by the Legislature, inflation and other expenses.

The proposal would triple the portion of taxes known as the “administrative fee.” Most businesses pay a 0.02% administrative fee on the first $15,000 of an employee’s wages annually, or $3 per employee. The fee increase would raise that by $9 per employee to raise a collective $3 million.

Hultman hopes to simultaneously reduce taxes paid to the unemployment trust fund by $3 million to be “revenue neutral.” Even with that reduction in funds, Hultman told board members in November that her department projects a “healthy balance” to meet the demand of the program and potential claims. The trust fund balance for 2023 was $217 million.

Hultman’s idea is “not the worst proposal,” board member and president of the South Dakota Chamber of Commerce & Industry David Owen said in November, when Hultman first proposed the bill.

But the proposal doesn’t affect all employers fairly, said South Dakota Retailers Association Executive Director Nathan Sanderson, who is also a board member.

“Some businesses who pay nothing now will pay a higher administrative fee,” Sanderson said after a recent meeting. “Some businesses who pay more now will pay less under this.”

Some employers currently pay nothing into the trust fund because they’ve previously contributed enough to cover potential unemployment claims. But they still pay an administrative and Future Fund fee, and their administrative fee would increase under the proposed legislation.

Other businesses that do pay into the trust fund could see a reduction in their overall burden because of the proposed reduction in that tax, while 2,906 employers that don’t currently pay an administrative fee because they’re “new employers” would lose that exemption under the new proposal.

Owen said small retailers would be disproportionately affected. The wage base — the first $15,000 on an employee’s salary — is a more significant share of a small business payroll than a larger business.

Owen also said the administrative funding ought to come from the state’s general fund, since it would be a more stable source and the program serves the state’s working population.

Sanderson plans to explore other options during the legislative session that may or may not be “complementary” to Hultman’s proposal.

“There are a lot of conversations that need to be had before we say this proposal is the right fit,” Sanderson added.

The Future Fund, controlled by the governor, has come under fire from some legislators in recent years due to the Legislature’s lack of oversight or approval of fund expenditures.

Julie Johnson, legislative director for the South Dakota Society for Human Resource Management State Council, said during public comment she doesn’t want the needed increase to get “tangled with Future Fund issues lingering out there.”

If nothing changes, the program’s administration fund would go into the red and put the state out of compliance with federal standards. That would be a bigger cost to South Dakota businesses in the long run than the proposed $3 million administrative fee hike, Hultman said in November.

Being in compliance gives South Dakota employers a break on their federal unemployment tax. Employers pay a flat $42 per employee in federal unemployment tax annually. That would increase to $420 per employee if the reemployment program isn’t in compliance — moving total payments from $18.3 million to $183 million.

“There is a real hazard and danger to not maintaining operations as they currently are,” Hultman said in November. “It would be a very heavy burden — obviously much more extreme than the $3 million we’re trying to generate to continue operations in an efficient manner.”

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