Local business owners are among about 40,000 employers in the state who learned last week that they must pay a solvency tax, triggered this year because the state had to borrow federal funds to make its payments to a rising tide of unemployed workers.

Every employer who must pay the tax - a maximum amount of $67.50 per year per employee - was sent a notification letter by the Michigan Department of Labor November 7. Those who must pay into the fund are "negative balance employers," businesses whose laidoff workers drew more out of the unemployment insurance program than the business owner put in.

Michigan has borrowed $1 billion from the U.S. Department of Labor in the last two years, and still has to pay back $472.8 million, and employers who received the notification letter are on the hook to collectively pay the interest charges on the federal loan, said Norm Isotalo of the state labor department.

In addition, starting in January 2010, most employers in the state will have to pay an annual $21 more per employee to pay off the principal of the state's debt to the federal government. That money goes to the unemployment trust fund and will be paid directly to the Internal Revenue Service.

Construction, manufacturing, and landscaping top a list of business categories named by the department as likely to be the hardest hit by this year's solvency tax, Mr. Isotalo said. Seasonal restaurant and hotel businesses such as those at the Straits of Mackinac are also on the department's list of business categories expected to be highly impacted.

No figures are available from the department regarding how many area employers are affected.

Jay Caldwell at Michigan Works! in St. Ignace said his office had received several calls about the tax by late last week, mostly from business owners who were upset by the notification. This was the first they had heard of the tax, he said, and most were worried that they had to come up with a large payment immediately.

"Some of the employers, it's scaring them," Mr. Caldwell said. "For one local company I talked to, it's almost $8,000, at a time when things are already rough. A couple of employers are looking at it like they have to pay this" immediately.

Employers Can Settle Negative Balance With State

Immediately,

or Start Paying Tax in 2009

Employers actually have two options. They can get out of paying the solvency tax by instead paying off the negative balance assigned to them by November 30. Or they can carry their negative balance foward, and begin paying the solvency tax in their next quarterly business tax payment, due in April 2009.

Those who settle up their accounts by the end of this month will not be responsible for the tax in 2009, Mr. Isotalo said.

Each negative balance employer has already been informed in the November 7 letter of exactly how much is owed to pay off the balance with the state, Mr. Isotalo said. For some, the amount may be in the thousands or even hundreds of thousands of dollars, because it's a cumulative total that could be added up over years.

"That cumulative amount continues

to add up until the employer pays it off," Mr. Isotalo said. How many years will the state reach back to calculate the employer's negative balance? "It could be many, many years," Mr. Isotalo said - in effect, indefinitely.

Although several local business owners have told the newspaper they were never notified that they owed a negative balance to the state's unemployment system, Mr. Isotalo said the number is printed as a negative number each year in the tax rate determination letter that each employer receives. This letter explains how the business' unemployment tax is calculated.

"Ordinarily it will show up as a negative number under the heading 'Account Building Component' on this form," Mr. Isotalo said. Employers who see a negative number there will know they have a negative balance. No separate notification or bill is sent.

For those who choose to begin paying the tax next year, rather than settling up with the department now, they will be notified in January of exactly how much they will owe under the upcoming solvency tax, Mr. Isotalo said.

But paying the solvency tax and paying off a negative balance with the state are, in effect, two different things, he said. The amount the employer pays for the tax will not be applied to their negative balance. The employer will continue to carry that negative balance forward.

Local Businesses Say They

Would Have Liked More Notice

Joe Plaza of Arrowhead Carriages on Mackinac Island said he was among those taken by surprise by the notification, and he believes the state should have given employers a better advance warning about the situation.

"I don't think there's been any communication by the state on this over a number of years, and there was never any mention that I know about advising business people to pay any negative balance," Mr. Plaza said. "I don't see how any small businessman with six or eight or nine employees can come up with this money. This came out of a clear blue sky, and there should have been some warning."

The move will hurt employers at a time when business has already been "relatively dismal," Mr. Plaza said.

"I think it's going to have a tremendous impact on all seasonal businesses in the state. I mean, they're seriously talking about shutting down tourism in Michigan," Mr. Plaza said. "Think of Mackinac Island, Mackinaw City, and all of those ski resorts" that lay off employees seasonally.

Mr. Plaza employs seven people, all of whom are laid off in winter.

At Mackinac Island's Grand Hotel, which employs about 600 people, manager John Hulett said his staff was working last week to figure out the tax's impact on the business.

"At this point, we've got nine days to decide whether to pay up front or pay it in next year's taxes," Mr. Hulett said Friday. "We're trying to determine what its impact will be for us. It would be difficult now for us to pay up front. Many, many that are affected by this are seasonal employers, and they will probably have to deal with it after the first of the year."

The tax is calculated for each business based on its total workforce during the year, including foreign nationals here on work visas, not the number of its workers who draw unemployment, Mr. Isotalo said. The amount of the tax will be divided into quarterly payments. The maximum amount an employer could be taxed is $67.50 per worker per year.

Payroll accountant Ryan Willobee of Willobee and Willobee at St. Ignace said roughly 75% of his customers have learned they are negative balance employers, and he's gotten "quite a few calls" about the issue, and expects even more to come.

"At this point, there's a lot of confusion," Mr. Willobee told The St. Ignace News. "The letter outlines what may happen, but doesn't give a definitive answer."

Most of his customers, he said, will choose to start paying the tax in the coming year. He's seen negative balances ranging from $700 to tens of thousands of dollars for local businesses, he said. The bulk of his clients are in St. Ignace and on Mackinac Island.

"A lot of them have been paying unemployment for many years and have some rather high negative balances," Mr. Willobee said.

Many Local Businesses Already Paying Maximum

Unemployment Tax Rate

Businesses in Michigan pay into the state unemployment fund anywhere from 0.6% to 10.3%. The tax rate is paid by the employer for the first $9,000 of each worker's wages. The more layoffs a business has, the higher its unemployment tax rate. At Michigan Works!, Mr. Caldwell estimates that most local hospitality businesses like motels and restaurants already pay at or close to the maximum of 10.3%.

The solvency tax is a surcharge on top of this rate.

The tax is hitting employers who can least afford it, Mr. Caldwell said. For those who wait until April to pay, that's going to be an added expense at a time when their season is just getting started.

The solvency tax is being applied to about 20% of all businesses in the state that pay into the unemployment insurance program. It applies only to those that have been in business and paying unemployment taxes for at least five years, and who have the negative balance.

The tax was created in 1982 when the state was in recession, Mr. Isotalo said, and the last time employers paid it was in 1985.

The Department of Labor makes no projection about how many years the solvency tax will have to remain in effect, according to Mr. Isotalo.

"The simple answer is the tax will remain in effect as long as there are interest charges to be paid on the federal loan," he said.

Paying that off is unlikely in the short term, accountant Mr. Willobee believes.

"Based on the economy now, I don't think this will be a short term thing, but will probably be in effect for several years," he said of the tax.

The swelling number of unemployed workers in the state has overwhelmed the unemployment insurance fund. In October, Michigan's jobless rate increased to 9.6%, the most recent statistic available in a year in which total employment has steadily declined each month since January. The hardest hit categories for job loss over the last year in Michigan have been manufacturing (-30,000 jobs), construction (-16,000 jobs), transportation and utilities (- 14,000 jobs), and government (- 10,000 jobs), according to the Department of Labor and Economic Growth.