Will COVID-19 aid forestall tax increase?

Businesses told to pay more into New Jersey’s unemployment fund. Lawmakers want federal money to be used instead
Credit: (AP Photo/David Duprey)
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A big share of New Jersey’s federal pandemic aid is still unallocated, and both Democratic and Republican lawmakers want to use those dollars to avert a tax hike businesses now face amid the ongoing health crisis.

Whether those lawmakers — and the businesses they’re advocating for — get their wish remains to be seen.

Late last week, Gov. Phil Murphy’s administration began notifying employers that a payroll tax increase would be required under state law to replenish the balance of New Jersey’s unemployment fund.

The unemployment fund was swamped last year when the state’s jobless rate surged during the worst months of the pandemic following shutdown orders from Murphy to slow the spread of COVID-19.

Employers must cover October payroll tax hike

Whenever the fund’s balance gets too low, state law requires employers to cover the payroll tax increases used to replenish the account to prepare the state for the next economic downturn.

In response to hardships businesses have faced during the pandemic, Murphy and lawmakers took action earlier this year to spread that required payroll tax over three years. The overall cost could be as much as $1 billion.

The first payroll tax increase, based on an assessment of the unemployment fund in March, comes due in October. It is expected to raise an estimated $252 million over the next year, according to figures the Department of Labor and Workforce Development shared with lawmakers earlier this year.

Notices detailing the payroll tax rates for unemployment insurance typically go out to employers in August, as they did this year, according to Angela Delli-Santi, a spokeswoman for the Department of Labor and Workforce Development.

“While the new payroll tax amount is applicable for the July-Sept quarter, employers will first experience it when they file their third quarter taxes by Oct. 30,” Delli-Santi said.

$75.2 million in federal aid

Meanwhile, in addition to the drawdown of jobless benefits, New Jersey also borrowed from the federal government to ensure unemployment checks kept flowing throughout the health crisis.

The current balance of that loan is $75.2 million, and it is expected to be paid back with interest in roughly a year, Delli-Santi said.

Several months ago, when a new state budget came together in Trenton, Republicans who are in the minority in both houses urged their Democratic counterparts in a formal budget resolution to put some of the more than $6 billion New Jersey received earlier this year from the federal American Rescue Plan Act toward restoring the unemployment fund’s balance.

Rental assistance, trauma centers were priorities

Those efforts proved unsuccessful. Of the roughly $2 billion in federal dollars earmarked in the budget for the 2022 fiscal year, none were directly allocated to the unemployment fund as priorities like rental assistance and funding for trauma centers took precedence.

And while many businesses could see the writing on the wall after the new budget was enacted without giving them any immediate tax relief, the pending payroll tax increase is still likely to be a tough pill to swallow, especially as the delta variant of the coronavirus creates a surge in new COVID-19 cases.

Christopher Emigholz, vice president of government affairs for the New Jersey Business & Industry Association, called the increase a “tax on jobs” since companies that have kept workers on the job during the health crisis will be hit hardest.

He also emphasized there will still be a need for tax relief even though the three-year phase-in has at least spread out the blow for businesses.

Tax relief for businesses?

“Next year, and the following year, businesses are still going to be recovering — especially small businesses,” Emigholz said.

The state budget enacted in late June did add millions of dollars to the state and federal funds previously allocated to pandemic assistance programs for businesses. Under a deal reached around the same time as the new state budget, lawmakers and the governor also agreed to work together to fund any new appropriation of the federal aid dollars that totals more than $10 million.

With the first payroll tax hike for the unemployment fund now looming, Sen. Troy Singleton (D-Burlington) on Monday sent a letter to Murphy and legislative leaders calling on them to prioritize tax relief for businesses.

“This increase comes at a particularly difficult time for many of our state’s businesses who are just beginning to re-establish their economic footing,” Singleton wrote in the letter.

Sen. Dawn Marie Addiego (D-Burlington) also issued a statement throwing her support behind using the unallocated federal dollars to prevent the payroll tax hike.

“We have plenty of federal dollars to go around, and there is no reason businesses should be burdened with an unemployment tax hike when laying off employees was the only way they could stay afloat through last year’s shutdown,” she said.

Republicans criticize Murphy

But Republicans have been much more critical of Murphy, a Democrat who is up for reelection in the fall. All 120 legislative seats will also be on the November ballot this year.

The agreement to phase in over three years the statutorily required payroll tax hike needed to replenish the unemployment fund received bipartisan support in both houses of the Legislature, but more recently, GOP lawmakers have attempted to place the blame for the upcoming increase squarely at Murphy’s feet.

“After fighting so hard to weather the virus and lockdowns that kept customers and workers quarantined at home, companies are in no position to handle a major tax increase,” said Sen. Steve Oroho (R-Sussex), who was one of the lawmakers pitching for tax relief for businesses months ago.

‘The business community needs help’

“Unfortunately, this is only the latest example of the Murphy administration turning its back on the state’s employers,” added Sen. Anthony M. Bucco (R-Morris). “The business community needs help.”

The Murphy administration recently began discussions on where the state could use its still-unallocated portion of federal COVID-19 aid, and the need to replenish the unemployment fund was among dozens of concerns raised by those the administration invited to provide input last month.

But because of how the three-year phase-in was structured, a new law may be needed to override the first pending payroll tax increase, and lawmakers typically go into virtual hibernation in the months leading up to a full legislative election.

Murphy press secretary Alyana Alfaro Post referred to the language related to the federal pandemic aid inserted into the fiscal year 2022 budget when asked about the calls to head off the looming payroll tax increase.

“Decisions on federal spending over $10 (million) must be made with the Legislature,” she said.

She did not respond when asked by NJ Spotlight News if the governor agrees with lawmakers who are now calling for the state to use some of its federal pandemic funding to head off the payroll tax hike before it comes due in October.

Darryl Isherwood, another Murphy spokesperson, pointed back to the law that established the three-year phase-in and said since the state did not receive funding from the American Rescue Plan Act until May “any contribution (from those funds) would have missed the deadline of March 31 for impacting FY22 rates anyway.”

NJ employers received millions in aid

Cecilia Williams, a spokeswoman for Assembly Speaker Craig Coughlin (D-Middlesex), pointed to the millions in aid already sent to New Jersey businesses during the pandemic in response to questions about the pending payroll tax increase.

“To determine the most fiscally responsible uses of American Rescue Plan funds, and whether that includes further UI rate mitigation beyond the three-year easement, the Speaker remains engaged in ongoing discussions with the Governor and Senate President,” Williams said.

The office of Senate President Steve Sweeney (D-Gloucester) also highlighted the assistance for New Jersey businesses while making no promises about blocking the pending payroll tax hike.

“We have provided substantial amounts of financial aid to help businesses make it through the pandemic crisis and to expand operations in an economic recovery, and we acted to ensure the financial health of the unemployment fund by extending replenishment costs over three years,” said Richard McGrath, a spokesman for the Senate Democrats.

“We will review the request to use federal ARP funds with the understanding that these decisions are made in consultation with the Assembly and the Administration,” he said.

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