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   Little Businesses Subsidize Big Ones

Little Businesses Subsidize Big Ones:

"Constant" Problems with Employment-Related Taxes and Insurance Curb Job Creation in Maryland

by Alice Cherbonnier
Who's going to pressure the Maryland Legislature to change its regressive employment insurance laws? The union-busting, layoff-prone big media?

Anyone interested in adding jobs to the Maryland economy—and we all should be—needs to know what financial underpinnings have to be in place before a business hires someone. It's not enough that a business needs an extra pair of hands and can afford that person's salary. That's just the beginning.

A business has to match an employee's contributions to Social Security and Medicare, which means a job carrying a $20,000 salary (and let's not kid ourselves--this is the category where the job creation action is) actually costs the employer $1,590 on top of that.

Furthermore, the employer has to pay into the Maryland Unemployment Insurance Fund (MUIF) in behalf of the employee, at a rate determined by the employer's previous experience; this rate (multiplied by the first $8,500 of an employee's annual salary) can vary from minimal to substantial—from maybe $80 a year up to perhaps $640 or so per employee.

Maryland's unemployment insurance rates are determined by such factors as whether a business is new or not, or what percentage of its workforce has previously been laid off. This means a small business with two employees can get slammed with the highest rate if it lays off just one person, because that's 50% of its workforce. A company with 100 employees can lay off one person (1% of its workforce) and have no increase in rates. This regressive methodology favoring big businesses at the expense of the small ones has been set by the lobbyist-ridden Maryland Legislature.

Imagine what a risk a small business takes in hiring a new person. If, after six months or more, the employee proves unsatisfactory, or the business experiences an economic downturn and has to lay that person off, the business will incur a disproportionate unemployment insurance rate penalty following the layoff. If, during the subsequent three years, the employer adds new employees, the same high rate will apply to each of them as well as to the employees remaining with the business following the single layoff. Small wonder a small business shies away from hiring anyone who might be a marginal choice.

And never mind if that layoff is for "cause"—public policy dictates that any laid-off person will ultimately get unemployment insurance, and the employer will have that dreaded rate increase. (Of course, the employer can wage a protest, but this takes time and involves a lawyer and in the end may not be successful anyway.)

On top of Maryland unemployment insurance, there's the federal unemployment tax (FUTA), which can cost another $40 to $120 per person per year.

Add to this the workers compensation insurance employers are required to carry to assure that employees receive compensation for on-the-job injuries. Rates for this vary depending on the risk of the job. Even if a job is low-risk, like a clerical position, a Maryland employer must pay about $74 a year. On top of the cost of "workers comp" insurance for employees, the Maryland employer is assessed an additional $200 "expense constant." This amount, the same for the behometh Black and Decker as it is for the one-employee doctor's office, follows the Maryland Legislature's theme of making the state's smallest businesses subsidize the big ones. The $200-per-business "constant" is remitted by the workers compensation insurance companies to the State of Maryland's Injured Workers Fund. This fund provides job injury insurance to workers whose duties are deemed so dangerous that insurance companies won't insure them—such as roofers and dynamite manufacturers, according to one state functionary. Approximately one in five Maryland jobs is covered by IWF ("Eye-Wef"), some higher risk than others. (For those who have read this far, the phone number for the Injured Workers Fund is 410-494-2000. You don't have to be high-risk to enroll, and can save some bucks because even though insurance may cost more, no "constant" is applied.)

For illustrative purposes, let's say this new employee is hired by a company founded last year that already has two other employees. That new person now will cost the company $20,000+$1,590+$640+$120+$274=$22,624.

And we haven't even gotten into costs for health insurance, disability insurance, dental insurance, and overhead costs such as supervision, training, bookkeeping and additional liability insurance—not to mention retirement plans or costs to upgrade facilities for worker safety.

Retirement? There's another rub for the small business. Unlike big businesses that can set up 401(k) programs, a small business can't cost-effectively do this. The dreaded "expense constant" required to set up an approved program costs more than the amount that could be set aside for an employee.

While local, state and federal programs often provide significant tax breaks and incentives to large businesses to create or retain jobs, did you ever hear about any such stimulus programs for businesses with ten or fewer employees? There used to be some during the Carter years, with supplemental income payments and food stamps for the "working poor" and subsidized salaries to entice employers to "try 'em before you buy 'em," but that all stopped with Reagan.

Small wonder that a small business—the best hope for entry-level jobs or for marginal applicants—thinks twice before hiring anyone new. There are plenty of temp agencies for every kind of job, from day laborer to attorney, and although the hourly cost is higher, you can hire them only when you really need them and thereby avoid long-term employee-related expenses. (Another alternative, frequently resorted to by small businesses even though it could land them in a lot of hot water if found out, is to hire people off the books and pay them in cash. The "invisible" employees make a living, but have no protections.)

THE BOTTOM LINE:
The state's smallest businesses, though they offer the best prospect for job creation, especially among those most needing employment, lack the political clout to influence legislators to change regressive unemployment and workers compensation insurance legislation that adds disproportionately to employment costs. One simple solution: If expense "constants" were recast to be proportionate to the number of employees in a company, small businesses would be on a more equal footing with the bigger businesses they are now subsidizing.

Since the smallest businesses lack influence, the situation will not change unless legislators are pressured from the public. And the public has no idea what's going on, because who's going to explain all this to them and get them lathered up enough to act? The union-busting, layoff-prone big media?


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This story was published on February 6, 2002.
  
MARCH 2002
LOCAL NEWS
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SPEAKING OUT
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NEWS MEDIA CRITIQUE
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CITIZENS REFERENCE: BLUE CROSS PRIVATIZATION ISSUES
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