South Dakota Employers Brace for Higher Administrative Costs Amid Uncertainty
South Dakota employers could soon be facing an unexpected shift in the state’s unemployment assistance tax. The Reemployment Assistance Advisory Council has approved a proposal to adjust the state’s unemployment tax system, potentially raising administrative costs while lowering funds directed toward unemployment payouts. While the plan aims to balance the books, concerns have already surfaced about its fairness to businesses.
The state’s unemployment system, which provides a financial safety net for laid-off workers, is funded primarily through payroll taxes from employers. These taxes go into several areas: the trust fund that pays unemployment benefits, the administrative costs of running the program, and the Future Fund, which is used for economic development grants. However, with rising expenses—such as state employee salary increases and inflation—the state’s administrative fund is in danger of running out of money. As a result, the proposal seeks to address the shortfall by increasing the administrative fee employers pay, while reducing the tax going toward the unemployment trust fund.
Proposed Changes: A Mixed Bag for Employers
The new proposal, which will be presented to state legislators in January, seeks to triple the administrative fee on businesses. Currently, employers pay a 0.02% administrative fee on the first $15,000 of an employee’s wages, which translates to a $3 fee per employee annually. Under the new plan, that fee would increase to $9 per employee in order to raise an additional $3 million for the state’s unemployment administration costs.
While this adjustment is intended to be “revenue neutral,” meaning that it won’t raise the overall burden on employers, the impact of the proposal will not be felt equally across the board. Some businesses, particularly those that are already paying into the unemployment trust fund, could see a reduction in their overall tax burden. This is due to a planned $3 million reduction in the amount employers contribute to the unemployment trust fund.
However, the proposed changes will affect businesses differently depending on their size and contributions. Some businesses that currently don’t pay into the trust fund—because they’ve already contributed enough to cover potential claims—would face the brunt of the new higher administrative fees. These companies would see their administrative fee increase from $3 to $9 per employee, which could be a significant financial burden, especially for smaller businesses.
Concerns Over Fairness and Impact on Small Businesses
One of the most vocal critics of the proposal is Nathan Sanderson, executive director of the South Dakota Retailers Association. Sanderson, who also serves on the Reemployment Assistance Advisory Council, has expressed concerns that the proposal would disproportionately impact smaller businesses.
“Some businesses who pay nothing now will pay a higher administrative fee,” Sanderson noted after a meeting on December 21. “Some businesses who pay more now will pay less under this.”
Currently, about 80% of South Dakota employers do not pay into the unemployment trust fund because their past contributions have already covered the necessary claims. However, all businesses—regardless of their trust fund contributions—still pay the administrative and Future Fund fees. Under the new plan, the businesses that pay nothing into the trust fund could be hit with the full $9 administrative fee, even though they are not directly benefiting from the trust fund payouts.
Small businesses, in particular, could feel the effects of these changes more acutely. Since smaller companies typically have a lower payroll, the first $15,000 of an employee’s wages represents a larger portion of their total expenses. For these businesses, the increase in administrative fees could add up quickly, further tightening their financial situation.
David Owen, president of the South Dakota Chamber of Commerce & Industry, acknowledged the potential drawbacks of the proposal. “It’s not the worst proposal,” Owen said in November when the bill was first introduced. However, he also noted that it could place a heavy burden on smaller retailers, who might struggle to absorb the higher costs without any reduction in other taxes.
Alternative Solutions and Legislative Debate
While some stakeholders support the changes as necessary to keep the unemployment system functioning, others believe there are better alternatives. Owen, for instance, has suggested that the administrative costs should be covered by the state’s general fund, which would provide a more stable funding source for the unemployment program. He argues that the program serves the broader working population and should not solely rely on employer payroll taxes, which fluctuate depending on the state’s employment rates.
Sanderson, on the other hand, is exploring other options to address the unemployment assistance system’s funding issues during the legislative session. He has emphasized that the upcoming debates will likely lead to a variety of solutions, which could be complementary—or even in opposition—to the current proposal.
The Future Fund and Legislative Oversight
In addition to the changes to the unemployment assistance tax, the proposal also brings renewed attention to South Dakota’s Future Fund, which is controlled by the governor. This fund has faced scrutiny in recent years, particularly due to a perceived lack of oversight from the Legislature regarding how the fund’s expenditures are managed. The Future Fund’s funding comes from employer taxes, and some legislators have voiced concerns that it is not being used transparently or equitably.
As the legislative session approaches, both the proposed changes to unemployment taxes and the Future Fund’s role in state economic development will likely become key issues of discussion. Business groups and lawmakers will have to balance the needs of the state’s growing economy with the financial burdens placed on employers.
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