Minnesota businesses face tax hike to plug $1 billion unemployment insurance gap

Minnesota's $1.1 billion deficit in its unemployment benefit trust fund is about to trigger a tax increase on businesses.

If state lawmakers don't act, companies will face an unemployment insurance tax hike of roughly 15 percent in April. Business groups and Republicans are calling for the state to use its $7.7 billion budget surplus to provide a tax break, while Democrats appear open to targeted relief.

"We shouldn’t have to have these discussions," said David Henrich, president of Bergerson Caswell, a well drilling company in Maple Plain. "It is a death by a thousand cuts situation. It’s not going to break a company, but it’s not a small amount of money."

Henrich questioned why employers like him -- he laid off one of his 19 workers, his mother, during the pandemic -- would be penalized.

Minnesota paid billions of dollars in benefits to laid-off workers as government forced businesses to close in 2020 during the COVID-19 pandemic. Like many states, Minnesota needed loans from the federal government to keep its unemployment insurance trust fund from running dry. Now the money is coming due.

The state needs to replenish $2.4 billion to both cover its deficit and reach a required rainy day fund balance. To achieve that, the state will use three pieces of its unemployment insurance tax -- increasing the base rate companies pay, levying an additional 14 percent assessment, and adding a 1.8 percent special federal repayment rate.

Minnesota is one of several states with insolvent unemployment insurance trust funds. Many states have used federal COVID relief money to repay their federal debts.

The debate reached a new level in early December when state budget officials projected a $7.7 billion surplus over the next two years, half of which is already money in the bank. It sparked numerous ideas from both sides of the political aisle on how to spend it.

Gov. Tim Walz said decisions on how to provide relief to businesses would be subject to negotiations when lawmakers return for the 2022 session on Jan. 31.

"We'll fix it," Walz said when asked of the looming tax increase. He did not say which approach he favored.

Democrats who control the Minnesota House said they would be open to targeted relief for struggling businesses, but not others.

"We are not interested in a big tax benefit to large corporations that don't need it," said House Majority Leader Ryan Winkler, DFL-Golden Valley.

Republicans said covering the deficit and preventing a business tax increase should be a top priority.

"I think (a tax increase) is unconscionable at a time when we have a $7 billion surplus," said House GOP Leader Kurt Daudt of Crown.