Article by Erik Smith. Published on Tuesday, November 01, 2011 EST.

Businesses Will Die! – Department of Labor & Industries Plans Average 2.5 Percent Rate Hike to Rebuild Reserve, and Highest Tax Will be $19.10 an Hour

Assistant L&I director Beth DuPre listens with a poker face as employers explain that if the planned tax increase goes through, businesses will die.

By Erik Smith

Staff Writer/ Washington State Wire

OLYMPIA, Nov. 1.—Around the statehouse, there’s a hearing that comes at least once a session that everyone calls the “trail of tears.”

            It comes right after someone proposes a budget. Someone always gets cut, and so for five or six or seven hours, there’s a parade that includes every social service advocate, every program head, every K-12 and higher education lobbyist and every union rep. It is one of those special burdens of those lawmakers who sit on the budget committees, who must sit there stony-faced as one speaker after another explains that people will die.

            But for the last five years or so, business has had a trail of tears of its own, and it’s not so well known because it doesn’t take place at the Capitol. You’ll find it at the Department of Labor & Industries headquarters in Tumwater, and at select locations around the state. This is the fifth year in a row that L&I has proposed a tax increase on business for the state workers’ compensation program, and for business owners the annual public hearings have become an exercise in screaming pain.

            They rail and wail. They talk about the sweat and blood they have poured into their family enterprises. They say they can’t afford to give another dime to the state. They say businesses will die. Department officials sit there and watch with about as much emotion as your typical Vulcan. And then, at the end of November, the rate increase goes through, pretty much as the department planned.

            Next year the department proposes to raise rates an average 2.5 percent.

            As Much as $19.10 an Hour

            At the Tumwater hearing Friday, one of six held around the state last week, assistant director Beth DuPre listened to testimony with a poker face, as business owners charged the state-run insurance program with every form of mismanagement and anti-employer bias imaginable. Washington is one of only four states in the union that maintains a state monopoly over industrial insurance benefits, requiring all but the very largest employers to participate. For years business owners have complained that the state program has kowtowed toward labor interests at their expense. Next year’s proposed rate increase is particularly galling, they say, because unlike previous increases it is not motivated by immediate financial problems. Nor is there any relationship to the deep financial troubles that are forcing the Legislature to consider massive cuts to programs and tax increases on business and the general public. Instead, the department hopes to rebuild a financial reserve that has been depleted in previous years by enormous and fast-rising claims costs within the insurance program.

            “It is so frustrating,” said Patrick Connor, director of the Washington state chapter of the National Federation of Independent Business. In 2010, while business pushed an unsuccessful ballot measure that would have allowed private competition, the department maintained that it was in sound financial shape. “Here, at the first opportunity, they are going to push a rate increase again, despite their own actuaries’ guidance that it is not called for, because they want to cover up for their past monkeying around in the rates.”

            In 2010, rates went up an average 7.6 percent and another 12 percent this year. The 2.5 percent comes on top of that. But it is important to note that those increases are merely averages – some industries with high injury rates have had much greater increases. At the top of the scale, the logging industry, which pays the highest rates, will have seen its rates more than double since 2007. Its worker-comp taxes go from $16.66 an hour this year to $19.10 next year. In other words, in that line of work, the worker-comp taxes alone are roughly equal to wages.

            Universal Opposition

            At Friday’s Tumwater hearing, not a single person testified in favor of the increase. No one from the department made the case for it, either, though it should be noted that L&I director Judy Schurke has publicly called it a matter of financial prudence. The department drew down reserves by $332 million over the last three years to avoid even larger rate increases. The argument from business is that the draw-down merely deferred the impact of problems from previous years, and that a better-run program wouldn’t have needed whopping increases in the first place.

            “L&I actually issued a press release talking about the necessity for this, and to quote the press release, it said ‘help save jobs in the state’s struggling economy,'” said Tom Kwieciak of the Building Industry Association of Washington. “L&I is proposing a 2 ½ percent average increase. I would just say that if that saves jobs, maybe a 10 percent increase would save four times as many jobs.”

            Business owners said the big tax increase will make it harder for them to rehire workers once the economy pulls out of recession. Every dollar they pay the state is a dollar they can’t pay to a worker, they said.

            In the battered construction industry, one of those hardest hit by the recession, the rate increase could squeeze out operators who are on the margins, said Anna Choate of Rainier Valley Construction. “We have cut every corner we could think of. We have cut our hours, employees’ retirement accounts, decreased holiday pay, decreased our medical benefits, and our employees have not received cost-of-living increases for some time now. We have also poured our own retirement savings into our company that used to thrive; now we just try to survive. We do not understand the necessity of an increase for your reserve fund at a time when small businesses are trying just to survive. We also don’t understand how this will help when it will force more small companies to fold.” 

            A Crummy Time to Raise Taxes

            The Tumwater hearing, because of its proximity to the timber country of Lewis County, drew a high percentage of logging operators – no doubt the angriest group of business owners in the state. The Oregon workers’ comp program charges about $269 a day for industrial insurance for the typical cable-logging operation; in Washington, said logging operator Jerry Bonagofsky. The same operation in Washington state would pay $571 a day. And because of reciprocal agreements between states, Oregon timber operators can chop wood in Washington without having to participate in the Washington system. “It’s a crummy time to raise taxes when there’s no need to,” he said.

The taxes are going to bankrupt Washington small businesses, said Beryl Berger of C&C Logging. “Currently L & I is engaged in incredibly poor claims management practices. The result is out-of-control claims costs. L & I’s solution to the problem that they’ve created is to increase taxes on the people and business of the state of Washington.

“I suggest L & I take a look at itself. What can you do internally to improve efficiency? I recommend a change of direction, one of accountability and consequence for the entire claims management division to bring claim costs into control. How about holding claims managers, claims supervisors, operations managers and program managers accountable for poor decision-making, unprofessional conduct and questionable ethical practices in the course of managing claims? I have learned the motto of claims management personnel in this building is when in doubt, pay it out.”

           Lobbyists a Bit More Restrained

Small-business owners fumed and sputtered and barely contained their anger. “I keep on wondering how we can do things differently,” said logger Jim Bower. “I know I can’t get rid of you. I tried.”

And former Olympia cab-company operator Cindy Martin said L&I forced her company out of business by auditing her firm and demanding additional payments for previous years, after she had tried to work with L&I in good faith. She couldn’t raise rates on customers because cab rates are regulated. “It’s real hard to do business with a business that doesn’t run like a business,” she said. “We don’t know what to charge for our services because we don’t know what you’re going to do to us. And it’s not just you personally, it’s every other tax entity. It’s scary. And it’s a scary way to do business, and it just shuts industry down.”

The lobbyists who have to deal with L&I every day were a bit more restrained. Carolyn Logue of the Washington Food Industry Association, which represents smaller grocery stores, said, “If you give us just a little more time to get through this economic crisis and not have these increasing pressures with these worker compensation costs just to build the reserves, I think what you will find is that this industry will begin to bounce back.”

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