The state of North Carolina owes the federal government $2.8 billion, and North Carolina employers are paying more taxes to fit the bill.
The state got money from the feds over the past two years to pay out initial unemployment benefits during the recession. It hasn’t paid back the money it borrowed in the two years it was required to, so now North Carolina is one of 20 states in a category called “credit reduction states.”
Normally, employers get a tax credit for paying unemployment taxes on the first $7,000 of federally taxable income earned by their employees. The credit already has been reduced by 0.3 percent, and it will continue to drop by 0.3 percent every year until the money is paid back.
That means employers pay more–about $7 per employee for North Carolina employers.
It makes sense from a banking perspective, but it’s causing problems for veterinarian John Canipe and his Asheboro Animal Hospital.
“It just makes me really aggravated that I have to pay more taxes because of the state. Like I don’t pay enough taxes already,” Canipe said.
In January, Dr. Canipe paid more than $2,000 in unemployment taxes for his 24 employees. He got a letter from the IRS last week informing him he owed another $428 because of the credit reduction.
“That’s what I don’t think is fair about it. They want to dock the state, that’s their problem, but making employers pay for it, I don’t think that’s very fair,” Canipe said.
According to the North Carolina Division of Employment Security, the state had no say in the federal government deciding to reduce the employer tax credit. The only way North Carolina can reverse it is by paying back that $2.8 billion. That would make the state unemployment trust fund solvent again, and that would bring payroll taxes back to normal.
“It was tough to be prepared for the number of claimants that this recession faced, and with that came more claims than the trust fund could handle,” Larry Parks, spokesman for the DES, said by phone.
“One of the ways to get back to trust fund solvency is to take in more taxes than you are paying out in unemployment benefits,” Parks said.
Parks said the state government is currently making interest payments but isn’t sure how it will pay back the principal.
The General Assembly has requested a study on how to do just that. If the study doesn’t come up with workable a plan, Canipe’s payroll taxes next year will be what he already owes, plus the $7 per employee he’s paying extra this year, plus another 0.3%, and so on for as many years as North Carolina is in debt.
Canipe says it’s only a little bit, but every little bit counts when he’s trying to keep his commitment not to lay anyone off despite the down economy.
“I’ve done the best I can not to lay anybody off. I haven’t laid anybody off through this whole recession to the point that my business is about to go under. I’m determined not to lay anybody off, and yet they still hit me with more unemployment taxes,” Canipe said.