Hawai'i's employers will face a stunning jump in unemployment taxes next year, with the average amount paid per employee increasing to at least $1,040 annually from the $90 paid now.

The state said the dramatic rise in rates will take effect in April and comes as Hawai'i's unemployment trust fund plunges toward insolvency. The state has been paying out more in jobless benefits than it collects in unemployment taxes because of the slumping economy and jump in unemployment.

"We'll be insolvent, but we won't be bankrupt," said Darwin Ching, director of the state Department of Labor and Industrial Relations, explaining that the state has a plan to nurse the fund back to solvency in 2011.

He said benefits paid to the unemployed will be unaffected by the situation.

Employers yesterday said the enormous jump in unemployment taxes could damp an economic recovery and result in companies laying off workers to meet the increased costs or holding off on new hiring.

"It's going to increase unemployment," said Richard Botti, who represents more than 1,100 businesses as head of the Hawaii Food Industry Association and Legislative Information Services of Hawaii.

"The only way we can address it is either raise prices or terminate somebody so that person's salary will cover the unemployment increase. It's a slippery road we take."

FUND SHRIVELING

The state isn't alone in unemployment fund woes. Its research found that funds in 14 other states are out of money and another four are likely to become insolvent before the end of the year.

Ching said Hawai'i projects it will go into the negative in December 2011, in part because Gov. Linda Lingle had not spent $18 million of discretionary labor funding, choosing instead to keep it in the fund.

That decision was made as the state's unemployment rate surged. The rate has been in the 7 percent range, the highest in more than 30 years, and is projected to go higher before the economy recovers. There are some 45,000 people jobless in the state, about half of them collecting unemployment benefits.

Ching said the state paid out roughly $255 million in unemployment benefits this year through August, while collecting only $44 million in taxes and interest.

The unemployment fund has fallen from $430.7 million at the end of 2008 to $243.8 million at the end of August.

What's more, the fund balance is projected to shrink to $118.5 million by the end of the year, triggering a provision in state law requiring employers to up their unemployment tax ante.

"Our hands are tied by statute," Ching said.

Under this formula, the employee wage base subject to taxation will rise along with the tax rate. The state doesn't know how much the rate will increase yet — that depends on fund balances later this year — but says the maximum wages taxed will rise from the current $13,000 to $37,800.

TAX MAY RISE MORE

State projections show the average tax rising from $90 annually per employee to either $1,040 or $1,250 depending on the tax rate. What individual businesses pay will vary because of their salaries, unemployment benefit use and other factors, with the maximum paid being $2,040.

The state said it will send out bills in March for the first quarter, with employers starting to pay the higher rate in April.

Even with this boost, the fund is forecast to continue dropping through 2010 and hit a $14.9 million deficit in the fourth quarter. That will trigger another increase in employer-paid unemployment taxes in 2011 (to an average of $1,480 annually), along with the state seeking a federal loan to cover the insolvency.

The state projects borrowing $61.4 million from the federal government at a 4.5 percent interest rate for several quarters until higher taxes put the fund back into the black.

State officials acknowledged businesses face an almost 12-fold increase in average unemployment taxes but noted that the increase is mandated by law.They said they would work with the Legislature to provide some relief if lawmakers want that.

Part of the reason for the big jump in rates is a cut that was passed into law in 2007 when state unemployment rates were under 3 percent and the trust fund had more than $500 million in it.

Employers had paid an annual average per employee of $440 in 2006 and $280 in 2007. That went down to $90 for both 2008 and 2009. The state estimates the cut saved employers $151 million during the two-year period.

Botti acknowledged that employers had relief from high unemployment taxes at a time when the economy went into a tailspin.

"We were fortunate we had the reserve we had," Botti said.

Linda Smith, Lingle's senior policy adviser, lamented the timing of the tax increase, acknowledging it could inhibit a recovery and that employers will have less money to pay wages or create new jobs.

"It certainly comes at a time when we were hoping there were signs of an economic recovery," Smith said.