Dramatically higher unemployment insurance taxes set to go into effect in April could mean employers will have less money to hire new workers or give out raises, according to several business leaders.

The state said this week it will raise the tax employers pay from an average of $90 per employee per year to $1,040. The increase was triggered by a severe decline in the state's unemployment insurance trust fund, which pays out benefits to workers who have lost their jobs.

With Hawai'i's unemployment rate at 7.2 percent and lower unemployment insurance tax payments in 2008 and 2009, the Department of Labor and Industrial Relations projects the trust fund will be depleted by the end of 2010 from an all-time high balance of $552 million in 2007.

"It certainly couldn't come at a worse time," said Tim Lyons, president of the nonprofit Hawaii Business League, whose membership includes 1,100 small businesses.

"Unemployment benefits are mandated benefits, and those mandated benefits are a cost of doing business. If it comes at a time when you're able to increase your prices, those costs are manageable. The problem in this type of economy is that small businesses are stretched to their limits and are not able to transition a price increase without some loss of business."

With employers also struggling with rising health insurance costs, the tax increase could end up "eating up, if not entirely stealing, some of what's available for pay raises," he said.

Business owners were stunned to learn of the tax increase when the labor department issued a "reminder" Thursday urging employers to prepare for higher unemployment insurance payments next year. A law passed in 2007 lowered unemployment taxes for 2008 and 2009 from an average of $280 per employee to an average of $90 per employee, but many employers were unaware of a provision to automatically increase taxes if the trust fund dipped below adequate levels.

'IT'S DEVASTATING'

"It floored us," said Tommy Silva, president and chief executive officer of family-owned T&T Tinting of Honolulu. "We're doing everything we can now to cut expenses just to survive. We don't even know how that's going to affect us. It's devastating."

His 27-year-old business employs 25 and although Silva hasn't had to resort to layoffs, he hasn't been filling vacant positions.

"We're not making big profit dollars but we're surviving and we're not laying people off. It's frustrating; there's nothing we can do," Silva said. "We would like to expand and hire but it's too expensive."

Silva said T&T Tinting has had no turnover in recent years, and he feels he shouldn't have to pay higher rates because his company hasn't forced any workers onto the unemployment line.

"We're not the reason for this. We're one of the good examples. Tax the people causing the problem. The industries that have high unemployment should be the ones paying, not the rest of us."

Abbey Carpet of Maui in Kahului has only four employees, but the boost in unemployment insurance costs is still going to sting, said president Warren Orikasa.

"Whether you have two or 2,000 employees, I don't know where you find that extra money to give to the state," he said.

Orikasa is hopeful the economy will revive before the higher taxes take effect.

"We're just going to see what happens in April," he said.

Barron Guss, chief executive officer of the Altres Staffing employment agency and simplicityHR, which provides human resources administration services to other companies, said the seemingly drastic increase in unemployment insurance taxes should be put in perspective, as it comes at the end of the two-year "tax holiday" when payments were uncommonly low.

"There's a little bit of normalizing effect going on," Guss said. "Although employers will be paying much more than they are paying this year, it's not that disparate from what they were paying a couple years back, in the pre-glory years before the tax holiday and when unemployment was at an all-time low."

He predicted the cost of the tax increases will be reflected in stagnant wages.

"It's not necessarily going to keep employers from hiring to increase production. What it will do is keep employers from offering increases in compensation," he said.

PUSHED TOO FAR

Lyons of the Hawaii Business League said one positive note is that businesses have advance notice of the increase and "a little bit of time to transition." And those who managed to save money during the two-year tax break will fare better, but for some struggling companies it may not matter.

"If somebody's on the edge it could do it or contribute (to going out of business). If they're already sinking, it's a question of sinking that much faster," he said.

Economist Paul Brewbaker, speaking for himself and not as chairman of the state Council on Revenues, blamed lawmakers for the "ill-timed rate reduction" of 2007 that has left the state scrambling to replenish the unemployment insurance trust fund. At the time, the economy was on a roll and unemployment rates ranged from 2.2 percent to 3.2 percent during the period of 2004 to 2007.

"Reducing a tax rate during economic good times, forcing a tax increase in economic bad times, only makes sense if the policy is intended to destabilize the economy," he said. "I have just argued economic stabilization, not destabilization, should be part of the objective of tax-rate setting in this instance. It doesn't make that much sense to reduce rainy-day funding the day before a downpour. Of course, we don't know when the rain will come, that's why we have a rainy-day fund."

Noting that unemployment in Hawai'i isn't as bad as in some parts of the country or even as bad as in the state's recent past, Brewbaker said it's just "dog luck" that an even greater tax hike isn't being implemented.

"The lesson here is not to reduce a tax rate so that you won't have to raise it later, when it just makes things worse than they already are," he said. "In the balance between rules and discretion, a steady commitment to one tax regime can sometimes be better, over the cycle, than fulfilling populist pressures to 'give the money back.'

"Businesses — and society — don't think enough about the long term. It wouldn't hurt for public policymakers to do so on our behalf."