Act Now To Lift Hawaii’s Unemployment Tax Burden

by Keli‘i Akina

Many Hawaii employers are being hit with large increases in their unemployment taxes, thanks in part to a lack of foresight by the 2021 state Legislature.

Because of its inaction, Hawaii employers are projected to pay an additional $113 million into the state’s unemployment insurance fund this year, or 46% more than they paid last year.

The genesis of this problem is that after the COVID-19 lockdowns began in early 2020, unemployment in Hawaii spiked to historic levels. At one point during the crisis, more than 22% of Hawaii workers were unemployed. This, in turn, tanked the state’s unemployment fund, which had to pay out billions of dollars in benefits.

The result was that Hawaii employers, through no fault of their own, suddenly were looking at catastrophic increases in their unemployment insurance taxes. That’s because the unemployment tax rates are automatically adjusted depending on the balance of the state Unemployment Compensation Trust Fund.

If unemployment goes down, the tax rates go down as well. If unemployment goes up and the insurance fund starts to run low, as it did during the coronavirus crisis, the tax rates automatically increase to replenish it.

The amount that individual employers pay into the fund each year depends on the salaries of their employees and how often those companies experience layoffs. But in general, all employers pay more if the fund runs low. In fairness to the 2021 state Legislature, it did mitigate unemployment tax increases that would have applied to 2021 and 2022 by lowering the rates and drawing on federal funds to improve the fund balance. But it did not lower rates for 2023 or beyond, so now Hawaii businesses are facing the tax hammer again.

But there might be some ways to counteract or soften the blow.

In the short term, the governor could call a special session of the Legislature with the goal of passing a bill to lower the unemployment insurance fund tax rate. This would ease the burden on Hawaii employers for the time being. The governor could also apply all or some of his $200 million discretionary fund to the unemployment fund, which could also help mitigate the need to collect higher taxes.

In the long run, the Legislature could take a hard look at how the state’s unemployment insurance system is structured, since Hawaii’s current model hardly seems to be the best way to help people who have fallen on hard times. Chile and Austria both use a private account system, in which each employee has an individual unemployment account that they and their employer pay into. This model gives individuals more freedom to draw on their accounts and incentivizes them to find new jobs as quickly as possible when they become unemployed.

Researchers have also suggested front-loading unemployment benefits so that job seekers receive a larger benefit in the first week and successively smaller payouts in subsequent weeks. This would encourage job seekers to find high-quality jobs, and perhaps more quickly than the current system. One way or another, we have to figure out how to avoid falling into this funding trap for unemployment benefits again — and sooner rather than later.

KELI‘I AKINA is president and CEO of the Grassroot Institute of Hawaii.