Higher business taxes kick in after unemployment talks collapse

Minnesota businesses have begun paying quarterly taxes that are much higher than before because the Legislature failed to plug a deep hole in the unemployment insurance trust fund.

The latest round of negotiations at the Capitol ended 15 minutes after it began, with House and Senate leaders accusing each other of being intractable. Gov. Tim Walz urged all sides to keep talking about ways to quickly reverse the unemployment tax increase. 

“We believe that this was a very real deadline for businesses,” Walz said of a March 15 date for action that his Department of Employment and Economic Development communicated to lawmakers. “We started talking about this in December, and here we are."

Employers first learned in December they would be charged an average of 30 percent more in payroll taxes tied to unemployment. But that financial hit wouldn’t be a reality until first quarter payments came due.

DEED officials say the tax payments are now coming in and will arrive through the end of April. And they’re at the higher tax rate because lawmakers have yet to provide a $2.7 billion patch for a jobless fund tapped out during COVID-19. 

“A lot of small business owners are going to be shocked that we got to this point,” said John Reynolds, state director for the National Federation of Independent Businesses that represents more than 10,000 business owners, mostly small operations. 

Reynolds said his group had been optimistic that a deal would come together after Walz got behind a fix and the GOP-controlled Senate passed a bill by a wide margin. 

The House, led by DFLers, took no action as it tried to pressure Republican senators to make good on a pledge to pandemic front-line workers, too.

Now, Reynolds said, it’s critical for lawmakers and the state agency to limit the impact and offer clear direction of what’s next, including possible refunds.

“We hope that DEED and the Legislature, if they do come to an agreement down the line, will provide certainty about when these retroactive credits would come to small businesses,” he said. “But they really do need the relief now – for all the reasons we hear about every day at the Capitol like record inflation, chronic worker shortages, supply chain disruptions, skyrocketing energy costs.”

DEED Commissioner Steve Grove said the situation is complex because each business assessment is unique, depending on their size, staff churn and layoff history.

“We will have to figure out a way to repay them what they overpaid and that could take months, several months,” he said in an interview Tuesday.

Grove said it’s not a matter of pushing a button to wipe away the tax increases because agency staff will have to put eyes on all 130,000 business accounts. While businesses have several more weeks to make payments and some might wait until it’s all worked out, Grove said they don’t deserve the turbulence.

“In times of uncertainty in the economy, you want to provide as much certainty as you can to employers,” Grove said. “And I think just the stability of having this great system in our state – again this system that put out $15 billion to help keep our economy and our workers afloat through the darkest days of the pandemic – is so important.”

Walz, key aides and top legislators met in private Tuesday for the third time in the past week to search for a compromise. The conversation adjourned quickly.

Meanwhile, there’s political jousting in public.

Rep. Kristin Robbins, R-Maple Grove, said she doesn’t understand why a state with a massive surplus is accruing substantial interest on more than $1.3 billion debt to the federal government. Another $1.3 billion is needed to rebuild the account to a level where jobless claims can be paid without additional borrowing. Robbins said it’s not a sweetheart deal.

“This is not an incredible gift to businesses,” she said. “They’re going to continue to pay unemployment taxes all the time. It’s just that we’re repaying this debt so they don’t face an even bigger increase.”

House Speaker Melissa Hortman, DFL-Brooklyn Park, said Republicans in the Senate must stand by their pledge last year to provide extra pay to those who were on the front lines during the pandemic. After meeting with the governor and Senate Majority Leader Jeremy Miller, she said Democrats will not back down from their promise.

"This caucus will be with the workers until the last dog dies,” she said. “And if the Senate Republicans aren't willing to live up to the agreement that we made in June to Minnesota's workers who were on the front lines during COVID-19, it's going to be a long, tiring session."

The House has passed a bill to spend $1 billion on what's called hero pay, but the GOP-led Senate hasn’t held a vote on any plan. Miller, R-Winona, didn’t rule out a vote but said it shouldn’t be linked to the unemployment issue.

“House Democrats want front-line worker pay. Senate Republicans want permanent, ongoing tax relief. The governor has proposed one-time checks,” Miller said. “Let's put all the proposals on the table to put more money back in the pockets of Minnesotans, but that's a separate discussion than UI."

It’s clear the stalemate on both issues will continue for the foreseeable future. Walz, who supports both the unemployment fix and the pandemic bonuses, said something will have to give.

"The only bad outcome in this deal is not doing a deal. That really seems to me to be the only bad outcome you can get in this case,” Walz said. “We're not talking about cutting millions from education. We're not talking about raising massive taxes. We can avoid all of those things by coming to a compromise."

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