Article by Erik Smith. Published on Friday, December 01, 2011 EST.

But Just Wait for That Sales-Tax Hike!

Gov. Christine Gregoire is flanked by Judy Schurke, director of the Department of Labor and Industries, and Paul Trause, commissioner of the Department of Employment Security.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Dec. 2.—Protests from hundreds of business owners across Washington state appear to have accomplished the astounding, convincing state officials to forego a proposed worker’s-comp tax hike for 2012. At the same time Thursday, the state Department of Employment Security announced that unemployment insurance rates will drop next year for the vast majority of employers.

            But before business owners across the state begin popping open the champagne, it should be noted that there is another big tax hike on the horizon. Gov. Christine Gregoire is proposing a half-cent increase in the state sales tax, a tax hike with an effect that will be felt by retail businesses statewide.

            Gregoire made the announcement at a Thursday news conference, flanked by the directors of the two departments that oversee the state’s primary business taxes. The announcement “brings absolutely good news to employers across the state of Washington at a time when they are desperate for good news,” she said. “We are by no means out of the recession, as you well know. We are struggling mightily, and any additional burden on these employers will adversely affect their employees and could result in layoffs or not hiring people.

“So now is the time for good news for employers. This is that good news. I hope that will mean that they could put more people back to work.”

            Other Shoe Soon to Drop

The announcements were an unexpected bit of good news, all right, said Kris Tefft of the Association of Washington Business. “Today’s announcement reflects the value of the reform measures passed in 2011, without which employers would surely have seen rate increases next year,” Tefft said. “We’ve appreciated the opportunity to make our case that this is not the time for any sort of rate increase on business. We are grateful that L&I took to heart both our concerns and the thoughtful input of our member companies.

             “Private employers need every possible tool to help better position themselves for success in this challenging economy. Today’s announcement takes away some of the uncertainty for employers who are perhaps on the verge of adding jobs but reluctant to do so because of continued tax increases. And while some industries may still see a slight bump in their taxes for 2012, while others a slight decrease, on the whole, this is great news for employers.”

All well and good, said state Sen. Janea Holmquist, R-Moses Lake, the Senate Republican lead on business and labor issues, but just wait for the sales tax. Democrats are expected to send their proposal to increase the sales tax to the ballot early next year. For retail businesses it will cancel out the gains made in unemployment insurance and workers’ comp, she said.

“The sales tax increase is going to go right after that savings, go after our pocketbooks and take a step backward when we need to continue to make steps forward,” she said.

            And from the National Federation of Independent Business, the state’s leading small-business association, came what director Patrick Connor is calling “half a clap.” Basically, what the announcements mean is that business won’t have give as much of their money to the state, he said.

“Small businesses will be relieved by the governor’s and department’s change of heart about a proposed workers’ comp. tax hike,” he said. “But I feel a bit like Cindy Lou Hoo when the Grinch returns Whoville’s Christmas gifts—glad to see the present, but disappointed the Grinch is just giving us our own stuff back.”

            L&I Decision Most Striking

The decision by the Department of Labor and Industries to forego a rate increase next year is the most striking of the announcements, because each year’s rate-setting decision is up to the discretion of the department. The unemployment-insurance rate, meanwhile, is more a matter of simple math.

Though this year’s big reforms had reduced the actuarial need for a worker’s comp increase to zero, the department had proposed a 2.5 percent rate increase in order to rebuild its reserves. They had been depleted over the last two years. Big increases in the cost of the mandatory state-run insurance program, coupled with big losses on the stock market, indicated big increases in tax rates, but the agency adopted somewhat lower rates and drew down reserves instead. Businesses nevertheless were hit with a 7.6 percent rate increase in 2010 and 12 percent in 2011.

L&I director Judy Schurke said a concerted protest from business owners convinced the department that now isn’t the time to begin rebuilding the bank account. During a hearing Thursday afternoon before the Senate Labor and Commerce committee, she said this year’s effort was considerably different in nature than last year’s business protest. Last time out, business owners were focused on Initiative 1082, the unsuccessful measure that would have allowed private insurance companies to compete with L&I. Business frustration with the program was one of the big factors behind this year’s reforms, which among other things will allow structured lump-sum settlements for injured workers who are at least 55 years old. Because of those changes, the state program will save $1.1 billion over the first four years.

            Tired of Form Letters

“I must say that had I not received over 300 letters and e-mails from businesses primarily about the impact of any increase on their businesses, I might not have done that,” Schurke said. “But really the tipping point for me was the kind of input that I got from the public about this rate increase. It was very different from last year, when I got reams of form letters about the initiative. This year they were very pointed about the impact of any increase and the struggles of their own businesses and their workers.

“And because of that, we took a really hard look at what we had to do and we decided that we were not in a worse position this year than we were in last year. We are actually in a much better position because of the reforms, and we could afford to help the Washington economy.”

She noted that the business community has agreed to assist in efforts to rebuild the reserve in future years. Right now it stands at about 5 percent of liabilities, a low figure by industry standards. And she said the department expects another critical report from the state auditor’s office as a result.

Some employers will still see increases, however, because of claims experience in their particular industries.

UI Savings Bigger Than Expected

Last session’s unemployment insurance changes included a “smoothing” formula that makes adjustments based on claims over a longer period of time. The bottom line is that the reforms produced greater savings than anticipated — $500 million, rather than the expected $300 million. Some 88 percent of employers will pay lower unemployment taxes than they do today. The overall average unemployment tax rate will drop by 13 percent next year, and for the 77,338 employers who have had no layoffs in the last four years, the tax rate will plummet by 71 percent.

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