Iowa Senate Republicans advance Reynolds’ $1 billion unemployment tax cut proposal

DES MOINES — Iowa businesses would pay nearly $1 billion less to fund benefits for unemployed workers under a proposal by Gov. Kim Reynolds advanced by Senate Republican lawmakers.

The Senate Workforce Committee on Monday voted largely along party lines to advance the governor’s bill, with Sen. Charlie McClintock, a Republican from Alburnett, joining Democrats in opposition.

Reynolds’ office estimates the cut would save Iowa employers nearly $1 billion over five years.

“We are over collecting on Iowa businesses, and if we lower unemployment taxes, businesses will be able to hire more employees, increase wages and it decreases usage of the unemployment system,” Molly Severn, legislative liaison for the governor’s office, said during a legislative hearing last week on Reynolds’ proposal.

This is the second year that Reynolds has proposed the unemployment tax cuts. Lawmakers last year pumped the brakes on Reynolds’ proposal over concerns about the long-term solvency and stability of the unemployment trust fund.

Since then, Republican lawmakers and business groups said they’ve been reassured based on modeling and projections provided by Iowa Workforce Development of maintaining the fiscal integrity of the trust fund.

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Joe Murphy, president of the Iowa Business Council, a nonprofit that advocates for 22 of Iowa’s largest businesses, said Reynolds’ proposal “preserves benefits” while ensuring a competitive tax climate for businesses and individuals.

“And so this bill is helpful for employers. It's helpful to the labor force. It doesn't cut benefits, it doesn't reduce time that individuals could go on those benefits. And so this is really about rightsizing the program,” Murphy said.

Democrats and representatives from Iowa labor unions and the construction industry, however, worry Iowa’s unemployment trust fund will face challenges in the long term if the economy takes a downturn, and stress the need for a strong safety net.

“I'm just very concerned that eventually this fund is going to go down to the point where we have to do something, and that's either going to be an increase in the insurance premium to the employers, or it's going to be another type of benefits (cut) to the workers,” said Sen. Tom Townsend, D-Dubuque.

Governor: Trust fund balance exceeds what’s needed

The governor is again proposing cutting the taxable wage base in half and lowering unemployment taxes to a maximum rate of 5.4 percent on wages up to about $19,000 per employee, as opposed to the current 7 percent on wages up to about $38,000 per employee.

Senate Study Bill 1173 and House Study Bill 114 also would reduce the number of tax tables, effectively cutting overall tax categories, and encourage business to reinvest savings into their employees.

The governor’s office said Iowa’s Unemployment Trust Fund Balance stands at an all-time high of $1.8 billion and far exceeds what is needed to support Iowans. Iowa ranks ninth in the country for unemployment trust fund balance, ahead of more populous states.

“Our nearly $2 billion fund balance is the ninth highest in the country even though we’re 32nd for population,” Reynolds said during her Condition of the State Address in January. “Clearly, we’re over collecting.”

More than $700 million of that, though, comes from one-time federal pandemic relief funds tapped by Reynolds to shore up the state's unemployment insurance trust fund and avert an increase in tax rates as pandemic-related layoffs provided a major hit to state unemployment funds.

Reynolds’ office, though, notes the average duration of unemployment claims in the state is at a record low, averaging about nine weeks.

Legislation in 2022 shortened number of weeks paid to workers

Lawmakers passed and Reynolds signed into law a cut to unemployment benefits in 2022. Iowa shortened the number of weeks that Iowans can receive unemployment benefits from 26 weeks to 16.

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Iowa Workforce Development Executive Director Beth Townsend said Iowa has shifted its approach to handling unemployment claims by having IWD perform one-on-one case management with unemployed Iowans, seeking to pair them with a job. Prior to implementation of the reemployment case management system, where IWD begins helping people find jobs the first week that they file for unemployment benefits, the average duration of unemployment benefits in Iowa was 13 weeks.

“And we paid out roughly between $350 million and $400 million a year,” Beth Townsend said, compared to about $250 million to $275 million a year currently. “So it would have to be a really bad turn even to get to a billion dollars currently.”

Reynolds said Iowa also taxes a larger amount of wages than surrounding states. Currently, Iowa ranks 12th in the country for its taxable wage base for unemployment insurance and is the second-highest among its surrounding states, second to Minnesota ($42,000). Illinois taxes up to $13,000 in wages; South Dakota is at $15,000 and Wisconsin is at $14,000.

“We need to stop punishing our employers by requiring them to pay more tax than necessary,” Reynolds said. “Instead, employers should keep and reinvest this money into their business, their workers, and their communities.”

Under current state law, the trigger for deciding which unemployment insurance rate table to implement is derived from a formula based primarily on the balance in Iowa’s unemployment insurance trust fund, unemployment benefit history and covered wage growth.

“Our balance remains so high, but under our current structure there's a danger that we might actually fall to a higher tax rate, regardless of the fact that we have a higher balance because of the way the current system is currently structured,” Beth Townsend said. “So this overhaul of the bill will change that so that we make sure we're only raising taxes when we get essentially to below a billion dollars. Most states don't even have a billion dollars (in their unemployment trust fund).”

Sen. Zach Wahls, D-Coralville, said he worried the bill puts the state on a trajectory of depleting the trust fund and having to raise taxes on employers “potentially during times when things are in an deteriorating economic position.”

Peter Hird with the Iowa Federation of Labor, AFL-CIO, called the legislation a continuation of the 2022 cuts.

“When you cut benefits for workers who lost their job but through no fault of their own, this turns those potential benefit weeks into a giant tax break for Iowa businesses and corporations that's worth nearly a billion dollars,” Hird told lawmakers during a legislative hearing last week on the bill.

Hird said Iowa’s unemployment system is broken, with seasonal construction workers running out of unemployment benefits while laid off during winter months and forced to take lower-paying work due to the changes.

“Workers on temporary layoffs are having to do work searches and interview … when they literally have a return to work date a few weeks away, or even worse, running out of unemployment while their employer is asking them to hang around for a little bit longer so they go back to work,” Hird said.

He and Townsend said they’ve also heard from numerous workers of difficulties applying for unemployment benefits.

“I've heard from people saying they visited unemployment offices and it's understaffed,” Hird said. “… People do want to work. They want to work hard. Let's fix this broken system before we start taking all the funding that we could use for it.”

Amendment adds surcharge for the fund’s highest users

The Senate committee amended the bill by adding a 10 percent surcharge for employers whose workers withdraw more than 25 percent from the unemployment trust fund than they contribute over a three-year period.

Sen. Adrian Dickey, R-Packwood, offered the amendment after pulling a competing bill he introduced that would have created a higher rate and higher wage base for employers that rely on seasonal workers who collect unemployment benefits. He argued the current unemployment system rewards such businesses that heavily use the unemployment system.

“They take out more than they pay into the plan each every year,” Dickey said during a Monday subcommittee hearing on his bill. “So the question being asked and presented with this bill is, should 92 percent of businesses that have paid into the system and are the majority reason why there’s nearly a $2 billion balance, should they receive the bulk of the $1 billion in tax reduction, or should the 7 percent of the Iowa businesses that have not paid into that level receive the bulk of the $1 billion?”

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