Proposed Tax Adjustments Spark Concerns Over Business Impact
South Dakota businesses could soon see significant changes to how they fund the state’s unemployment assistance program. While the state’s unemployment trust fund remains healthy, legislators may approve tax hikes to cover administrative expenses, triggering a wave of mixed reactions from business leaders.
South Dakota’s Reemployment Assistance program, which helps laid-off workers stay afloat, is largely funded by payroll taxes from employers. These taxes go toward the unemployment trust fund, the program’s administration, and the Future Fund, which is used for economic development grants. However, a recent proposal by the Department of Labor and Regulation could change the way businesses contribute to the system.
The proposal, set to be presented to legislators in January, would increase the administrative fee businesses pay into the program while reducing the taxes earmarked for unemployment payouts. While the intention is to keep the changes “revenue neutral,” the plan has raised concerns about its fairness, particularly for small businesses.
Why the Increase in Administrative Fees?
The South Dakota Department of Labor and Regulation has cited several reasons for the proposed changes. Marcia Hultman, the department’s secretary, explained that the administrative fund is projected to run into a deficit in the coming years. The deficit is largely attributed to state employee salary increases, inflation, and other growing costs tied to managing the program.
Currently, businesses contribute a minimal 0.02% of the first $15,000 in wages per employee annually to cover administrative expenses. This results in about $3 per employee each year. The proposal would increase this fee by $9 per employee, generating an additional $3 million in revenue for the administrative fund.
Interestingly, the increase in administrative fees would be offset by a $3 million reduction in taxes to the unemployment trust fund. Hultman has assured business owners that this change would keep the program financially stable and able to handle potential future claims, noting the trust fund’s balance was $217 million in 2023.
Despite these reassurances, the proposal has triggered alarm bells in certain quarters. David Owen, president of the South Dakota Chamber of Commerce & Industry, called the proposal “not the worst” but expressed concerns over the potential impact on small businesses.
Who Gets Hit the Hardest?
One of the key points of contention is that the proposed changes may not impact all businesses equally. Some businesses that currently pay little or nothing into the unemployment system could end up paying significantly more. These are businesses that have already met their unemployment contribution requirements, but still pay administrative and Future Fund fees. Under the proposed plan, the administrative fee for these businesses would increase, even though they are not contributing to the trust fund itself.
For other businesses, particularly those that currently pay into the unemployment trust fund, the proposed tax reduction could lead to a decrease in their overall tax burden. However, there’s a significant group of employers who will see no benefits from the plan. Specifically, 2,906 businesses that don’t currently pay an administrative fee due to their “new employer” status will lose that exemption.
The proposal, therefore, seems to disproportionately affect smaller businesses, according to Nathan Sanderson, executive director of the South Dakota Retailers Association. Small businesses, he pointed out, have smaller payrolls where the first $15,000 of wages represent a much higher percentage of their total expenses compared to larger employers.
“Some businesses that pay nothing now will pay a higher administrative fee,” Sanderson said. “Some businesses that pay more now will pay less under this.” The shift could lead to uneven impacts, with small retailers being hit harder than their larger counterparts.
A Call for Alternative Solutions
While some business leaders have acknowledged the need to ensure the stability of the unemployment program, they argue that the administrative fees should be covered by the state’s general fund rather than by employers. Owen, for instance, suggested that general state revenues would provide a more stable and equitable source of funding for the program’s administrative costs. After all, the unemployment system serves the state’s entire working population, not just employers.
With the proposal set to be introduced in January’s legislative session, Sanderson and others plan to explore alternative solutions that could balance the needs of the program with the realities of small business owners. “There are a lot of conversations that need to be had before we say this proposal is the right fit,” he added.
As lawmakers consider the proposal, business owners and associations will likely continue pushing for changes or alternative solutions that ensure the stability of the unemployment system without disproportionately burdening smaller employers.
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