Higher unemployment taxes will hurt workers and job seekers

Starting today, businesses in Minnesota will start paying higher Unemployment Insurance taxes after lawmakers failed to reach an agreement on replenishing the Unemployment Insurance (UI) Trust Fund. As the Minnesota Public Radio News reports,

The latest round of negotiations at the Capitol ended 15 minutes after it began, with House and Senate leaders accusing each other of being intractable. Gov. Tim Walz urged all sides to keep talking about ways to quickly reverse the unemployment tax increase. 

“We believe that this was a very real deadline for businesses,” Walz said of a March 15 date for action that his Department of Employment and Economic Development communicated to lawmakers. “We started talking about this in December, and here we are.”

Employers first learned in December they would be charged an average of 30 percent more in payroll taxes tied to unemployment. But that financial hit wouldn’t be a reality until first quarter payments came due.

DEED officials say the tax payments are now coming in and will arrive through the end of April. And they’re at the higher tax rate because lawmakers have yet to provide a $2.7 billion patch for a jobless fund tapped out during COVID-19. 

There is a huge consensus among lawmakers that raising taxes on businesses would not be ideal, which is why it is very surprising that an agreement was not reached. But what’s even more concerning (and less talked about) is how higher taxes will affect workers and the job market.

It’s bad for workers and job seekers

Economics generally tells us that taxes are not always paid by the individuals on whom the tax is levied. Corporate taxes, for example, while they are levied on businesses, are ultimately paid by workers, consumers, and sometimes shareholders. How the tax is shared between these three groups is what is referred to as tax incidence, or tax burden.

Payroll taxes like unemployment insurance taxes are also ultimately paid by workers mostly through lower wages, according to research. So, while Democrats argue that replenishing the UI Trust fund would be a giveaway to big corporations, the fact of the matter is that it is the workers who will be hurt by these high taxes.

Evidence also indicates that higher unemployment taxes reduce the demand for workers, meaning businesses hire fewer workers.

Generally, when businesses want to hire individuals they take into account all the costs associated with that individual, including unemployment insurance taxes. Higher unemployment taxes in this case mean that it will be more expensive for businesses to hire workers, which could hurt Minnesota job seekers. This will likely be truer in industries that have high usage rates for unemployment benefits — due to high turnover — like the hospitality industry.

All in all, higher unemployment taxes are not only bad for Minnesota businesses, they are also bad for workers and job seekers. And they are very likely to hinder employment at a time when our labor market has started getting workers back into the workforce.