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High Unemployment Means More Job-Killing Taxes

Economics / Unemployment Oct 05, 2011 - 01:56 PM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleKerri Shannon writes: The unemployment problem in this country has gotten so bad it's starting to sustain itself.

Essentially, high rates of unemployment have led to tax increases that are further suppressing hiring - thus making an already-ugly unemployment problem even worse.

That's bad news for thousands of prospective employers and millions of Americans.

Paying for the Unemployed
Sept. 30 was the deadline for states to pay more than $1 billion in interest payments for loans used to cover unemployment benefits. It was the first time since the start of the economic downturn that states had to pay interest on federal borrowing.

And many states were forced to raise unemployment taxes to cope with the extra burden.

Employers in 2010 paid 27.8% more in state jobless taxes than they did in 2009. Employers in 24 states will have to pay between $21 and $63 more per employee following another tax hike in January 2012.

"Unemployment taxes, which were a relatively low bottom-line cost in 2008, are now becoming a significant cost," Doug Holmes, president of UWC - Strategic Services on Unemployment & Workers' Compensation, told CNNMoney. "It discourages companies from electing to hire new employees."

The extra expenses hit small businesses especially hard.

"We try not to hire because we will be socked by a bigger tax bill for unemployment insurance," Margery Keskin, an executive at four small construction-related companies in New York, told CNNMoney. Keskin said she's had to take money from bonuses and profit-sharing plans to pay higher unemployment taxes.

Job Cuts Ahead
These additional costs are just the latest obstacles hitting the dismal U.S. jobs environment. While businesses are already uninterested in hiring new workers, the added expenses paired with the weak economic outlook will lead some companies to trim their workforce.

A quarterly survey released last week by the Business Roundtable found 24% of chief executive officers (CEOs) expect to cut U.S. jobs over the next six months, up from 11% in the second quarter.

The executives cited weaker growth and revenue projections as reasons to pull back on hiring. Just 65% of executives expected sales to rise over the next six months, down from 87% in the second quarter, and only 32% planned to boost capital spending this year down to from 61% in the prior quarter.

Executives also lowered their U.S. growth forecast to 1.8% this year, down from their earlier estimate of 2.8%.

A number of companies and industries have already announced layoffs this year.

Deutsche Bank AG (NYSE: DB) just this week announced it was cutting 500 jobs over the next six months, reducing its headcount by 11% through 2012. Bank of America Corp. (NYSE: BAC) already announced plans to cut 6,000 jobs this year, and will eliminate a total of 30,000 positions through 2014. And the American Hospital Association said last week that a 2% cut in Medicare could lead to 195,000 job cuts by 2021.

U.S. Federal Reserve Chairman Ben Bernanke, who last week called unemployment a "national crisis," said yesterday (Tuesday) in testimony to Congress that economic data shows no hint of employment improvement. He urged Congress and the White House to take more action to create job growth, but so far Washington has failed to deliver any promising proposals.

Waiting on Washington
Meanwhile, Republicans and Democrats are still battling over the best ways to create jobs, but have done nothing more than stall progress.

Under pressure to act, U.S. President Barack Obama last month proposed a $447 billion jobs plan, but Republicans will likely shoot down many provisions in the proposal. Even if passed intact, the plan would only reduce the unemployment rate by one percentage point over the next year.

Republicans blame overregulation for killing employment. House majority leader Eric Cantor, R-VA, on Aug. 29 sent a memo to other Congress members asking them to favor the repeal of regulations that inhibit job growth.

"By pursuing a steady repeal of job-destroying regulations, we can help lift the cloud of uncertainty hanging over small and large employers alike, empowering them to hire more workers," the memo said.

But there's little evidence showing that eliminating these regulations would significantly dent unemployment as long as the economic growth outlook remains weak. A July survey of business economists by The Wall Street Journal found that "the main reason U.S. companies are reluctant to step up hiring is scant demand, rather than uncertainty over government policies."

The unemployment rate has remained near 9% since April 2009. It's expected to remain at 9.1% for September when the U.S. Labor Department releases the nonfarm payroll report Friday.

Source :

Money Morning/The Money Map Report

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