Taxes on businesses will drop after Iowa spent millions in federal aid to bolster unemployment fund
The tax on businesses that Iowa uses to fund benefits for unemployed workers will drop to the lowest rate in more than two decades, Gov. Kim Reynolds said Wednesday.
The announcement comes as Iowa's unemployment rate has returned to pre-pandemic levels, and after Reynolds has spent more than $725 million from Iowa's allotment of federal pandemic aid to keep the tax on businesses from increasing as a result of the pandemic. It also follows the July enactment of a new Republican-backed law that made cuts to the number of weeks unemployed Iowans could receive benefits.
Iowa Workforce Development director Beth Townsend said employers will see an average 25% reduction in their unemployment taxes next year as a result of the rate decrease.
Reynolds, a Republican, touted Wednesday's announcement as a win for "employers who are already dealing with significantly increased costs due to historic inflation." And the Iowa Association of Business and Industry, a pro-business group that represents more than 1,500 employers, called the announcement "great news for employers across Iowa."
But Democrats and a nonprofit public policy group said the news shows that Reynolds has prioritized businesses while not supporting workers enough as the state rebounds from the pandemic. They specifically pointed to her decision last year to cut off federal pandemic unemployment benefits early and the legislation she signed in June cutting the program.
Deidre DeJear, the Democrat running against Reynolds in this fall's election, said Thursday morning that Reynolds should be investing more in workers.
"The policies that she passed in this past session have a detrimental impact on people who are transitioning in the workforce right now," she said.
More: Iowa governments are hiring! If they weren’t, state would fall further behind U.S. economy
What is Iowa's unemployment trust fund? How does it work?
Iowa workers who have lost their jobs can qualify for benefits the state pays from its unemployment trust fund. The trust fund draws its money from payroll taxes paid by businesses. Iowa Workforce Development sets the payroll tax rate each year using a formula that takes into account how much money is in the trust fund.
The new rate that takes effect in 2023 is currently the lowest possible rate on an eight-tier scale. For the last five years, Iowa businesses have been on the second-lowest tier.
Now, under the new rate, an Iowa business that sits at the median tax rate would pay $72.20 less in taxes per employee than it would have in 2022, according to Reynolds' news release.
Iowa hasn't raised its unemployment tax rate over the past two years despite the record year of unemployment compensation payments that occurred during the COVID-19 pandemic. And Reynolds has spent federal pandemic funding to bolster the fund and keep taxes on businesses low.
More: Iowa's unemployment rate returns to pre-pandemic level
How much is in the fund now?
At the end of February 2020, weeks before the pandemic began, the trust fund contained about $1.2 billion. The fund dropped to about $886 million by the beginning of June 2020.
In 2020, Reynolds used $490 million out of Iowa's allocation of federal Coronavirus Aid, Relief and Economic Security (CARES) Act relief money to support the fund. Then, in 2021, Reynolds directed another $237 million into the fund using Iowa's share of State and Local Fiscal Recovery funding through the federal American Rescue Plan Act.
By the beginning of August 2021, the state's unemployment trust fund sat at about $1.22 billion — above its pre-pandemic level. And, as of the start of August 2022, the trust fund balance had increased to $1.47 billion.
Reynolds' use of pandemic funds to reduce taxes on businesses is polarizing
The amount of federal money that Reynolds put into the fund during the pandemic was about one-quarter of the funding she has had available from those two federal aid programs.
The federal aid programs have a wide availability of uses, and Reynolds has been directing other portions of the funding toward initiatives such as broadband projects, affordable housing and school safety.
“Iowa faced the pandemic and its economic impacts head on, and due to our conservative fiscal practices and prudent investment in Iowa’s Unemployment Trust Fund, unemployment insurance taxes in our state will soon reach their lowest rates since 1999," Reynolds said in a statement.
Townsend said the savings "will provide more resources for Iowa employers to invest in growing their businesses.”
But state Sen. Nate Boulton, of Des Moines, the ranking Democrat on the Senate Labor and Business Relations Committee, said the tax decrease shows Reynolds likely made an "overinvestment" into the fund. Boulton also strongly opposed Republicans' legislation cutting unemployment benefits.
“I think this is evidence that she was probably too aggressive in doing what she did," he said. "That amount of resources could have been a lot better help for Iowans in a really trying time.”
Previously: Iowa unemployment benefits cut by 10 weeks after Kim Reynolds signs bill
Democrats have repeatedly accused Reynolds of taking credit for the success of programs she has funded using the American Rescue Plan Act, a bill she opposed prior to its passage in 2021 by congressional Democrats.
Sean Finn, a policy analyst at Common Good Iowa, said he isn't completely opposed to infusing federal money into the trust fund to help keep it afloat and keep taxes on businesses lower. But he said he doubts an increase in taxes would have been crippling to businesses, and that Reynolds appears to have placed more pandemic funding than needed into the fund.
"Clearly, it was completely overdone, and it wasn’t for the benefit of workers," Finn said.
But JD Davis, the Iowa Association of Business and Industry's vice president of public policy, said he credits the contributions bolstering the fund, as well as Republicans' unemployment legislation, as making an impact.
Reynolds has also made changes to the state agency that handles unemployment that she says are geared toward helping Iowans connect with jobs sooner.
"I think this is exactly how it ought to be working," Davis said. "When you have low unemployment, you should have low tax rates for unemployment."
The result of the tax decrease, he said, will likely free up more than $100 million for businesses that can go toward expenses.
Iowa isn't the only state that has infused pandemic aid money into its trust fund. An April analysis from the Center for Budget and Policy Priorities — a group that recommends against using COVID-19 funding for unemployment trust funds — found that 21 states had used American Rescue Plan dollars for their trust funds or to improve their unemployment insurance system.
Iowa recently reduced how long people can receive unemployment benefits
The news of the drop in taxes on businesses comes just over two months after Reynolds signed a new law that reduces the number of weeks Iowans can receive unemployment benefits.
Since the law went into effect in July, most Iowans have been able to receive only 16 weeks of benefits, down from 26 weeks. Republicans passed the law this session, saying in part that they hoped to lower the payroll taxes on Iowa businesses. Democrats opposed the legislation, saying it attacks workers who lost their jobs through no fault of their own.
An estimate from the nonpartisan Legislative Services Agency found the change would likely reduce payouts from Iowa's unemployment trust fund by approximately $70 million.
Reynolds had called for the change in her Condition of the State address, saying one of the reasons for the state's worker shortage is that the government was paying people too much in benefits, and that "the safety net has become a hammock." Democrats have leveled blame on Reynolds for the state's workforce issues.
The legislation was politically divisive. A March Des Moines Register/Mediacom Iowa Poll found 53% of Iowans opposed the cuts. However, support was at 60% among Republicans. Only 14% of Democrats supported the idea.
Unemployment rate returns to pre-pandemic levels, but job gains lag
Meanwhile, Iowa's unemployment rate has dropped to 2.5%, the lowest rate since May 2019. But the state has not bounced back as quickly as the United States as a whole. While the U.S. has recovered all of the jobs it lost during the first two months of the COVID-19 pandemic, Iowa has recovered about 91%.
Part of the reason is that Iowa relies more heavily on slow-growing jobs. And certain industries in Iowa — such as the trade, transportation and utilities sector, construction jobs and professional and business services jobs — have not grown as fast as their competitors in other states.
The Des Moines Register's Tyler Jett contributed to this report.
Ian Richardson covers the Iowa Statehouse for the Des Moines Register. Reach him at irichardson@registermedia.com, at 515-284-8254, or on Twitter at @DMRIanR.
This article originally appeared on Des Moines Register: Iowa's unemployment taxes on businesses to drop for 2023
