Businesses brace for tax hike as unemployment debate drags at Capitol

Business owners have been prodding state legislators for weeks, urging them to beat Tuesday's deadline to prevent tax hikes.

But lawmakers remain locked in a holding pattern, unable to reach a deal that would avert employer tax increases — or even agree on whether the Tuesday deadline is accurate.

The situation stems from Minnesota's need to replenish its unemployment insurance trust fund and repay the federal government for helping cover a dramatic jump in unemployment benefits during the pandemic. Department of Employment and Economic Development officials said if legislators do not act on those expenses by Tuesday, about 130,000 businesses will start paying higher tax rates on their unemployment insurance bills to rebuild the depleted fund.

For some, the change would be minimal. But others, like Marshall-area business owner Kris Gruhot, are bracing for an increase of tens of thousands of dollars over the next year.

"It's just going to be a tough year. A really, really, really tough year," said Gruhot, owner of D & G Excavating. Many other states are using federal pandemic relief funds to cover their unemployment insurance debt. "I wish Minnesota would be one of those 30 states," she said.

Legislators on both sides of the aisle have said they want to put some money toward addressing the federal debt and rebuilding the trust fund. But House Democrats argue the spending should be coupled with $1 billion for workers who were on the front lines of responding to the COVID-19 pandemic.

"The challenge with this bill is not that we don't want to help businesses. It's that you don't want to help anyone else," House Majority Leader Ryan Winkler, DFL-Golden Valley, told Republicans Thursday as GOP members pushed to pass a $2.7 billion plan to replenish the trust fund and repay the federal government.

The Senate approved that sum in February with bipartisan support, and Democratic Gov. Tim Walz has said he supports it. The House narrowly rejected the effort, 67-66.

The bill would direct the vast majority of tax relief to large businesses, such as Target, that generally fared well during the pandemic, Winkler said. He also dismissed the Tuesday deadline that Republicans and state officials have emphasized. Unemployment insurance bills aren't due until April 30, he said, and noted that if they change the law after some business owners have paid at a higher rate, the state can give them refunds.

However, Department of Employment and Economic Development Commissioner Steve Grove warns that employers start paying their taxes in earnest on Tuesday.

"Once those checks come in, we've officially taxed businesses at that level and unwinding it gets complicated. So March 15 is an important day," Grove said.

With the state projected to have a nearly $9.3 billion budget surplus, as well as more than $1 billion in federal relief dollars, Minnesota Chamber of Commerce President Doug Loon said missing the deadline is "unwise, and it's unnecessary."

If the state decides to undo a tax increase after businesses have paid, it could take six months or more to return their money, House Deputy Minority Leader Anne Neu Brindley, R-North Branch, said during a news conference. She said it won't just be business owners who feel the impact of a tax hike.

"If you don't think these taxes on employers are going to impact every Minnesotan then, I mean, we're not living in reality," she said.

The three key negotiators at the Capitol — Walz, GOP Senate Majority Leader Jeremy Miller and DFL House Speaker Melissa Hortman — held two private meetings over the past week to try to reach a deal, but emerged unsuccessful.

Hortman sent the other two leaders a letter after Thursday's meeting saying House Democrats' highest priority is a $1 billion proposal that would provide $1,500 bonuses to 667,000 front-line workers. They also have a nearly $1.2 billion plan to eliminate the unemployment insurance trust fund deficit and allow hourly school workers, such as bus drivers and cafeteria staff, to get unemployment compensation during the summer. She said they are willing to negotiate on the measures, but House Democrats have so far refused to act on unemployment insurance alone.

Senate Republicans proposed $250 million for a smaller group of essential pandemic employees last fall, but have since shifted their focus to broader tax cuts rather than the checks.

Walz said Tuesday that pairing unemployment insurance funding with front-line worker pay "seems like a natural fit." However, he said the upcoming deadline is important and said leaders talked about the House acting on an unemployment insurance package in the near future and then working through pandemic worker checks in a conference committee.

As political machinations play out behind closed doors at the Capitol, business owners are left worrying about what's next.

"Some people wonder why assistance like this might be necessary. Well, the truth is some businesses did well during the pandemic, but a lot of them have a lot of deep scar tissue," Brady Folkestad with Lakeview Bank said during a recent news conference. "Business owners and businesses spent their savings, tapped lines of credit, utilized everything that they could, including their retirement savings, to keep the business going and keep their employees paid."

Staff writers Briana Bierschbach and Stephen Montemayor contributed to this report.