The state is looking for ways to dull a staggering jump in unemployment insurance taxes that is forecast to occur as the jobless benefit fund runs out of money.

The state Department of Labor and Industrial Relations is reviewing a variety of options and seeking input from businesses on various scenarios. If nothing is done, the average taxes employers pay will soar almost 12-fold, from $90 annually this year to $1,070 in 2010.

As it stands, the state forecasts the fund will run out of cash by the end of next year. forcing it to borrow at least $55 million from the federal government.

The state wants to blunt the increase, fearing the jump in employer costs may lead some to cut worker hours, lay off employees or close their doors altogether. There's also a concern that chopping unemployment payments could lead to worse economic problems.

Alternatives range from tinkering with the technical aspects of the tax to more federal borrowing and limiting benefits.

"The question is what would be reasonable in moderating that increase," said Darwin Ching, the Lingle administration's point man on the issue.

"We don't want to drive businesses into insolvency."

The situation has been brewing since last year when the state's unemployment rate began to ramp. Hawai'i, which three years ago was dealing with a labor shortage and a statewide unemployment rate of 2.2 percent, now is at three-decade highs in its joblessness because of an economic downturn.

The unemployment rate ballooned to 7.2 percent in October, with more than 46,000 people out of work. Unemployment payments have jumped along with the increase in joblessness. The amount of time people go without work has also lengthened, and people are collecting higher average weekly benefit amounts.

The unemployment fund stood at $552 million at the end of 2007. But by the end of December the state projects the fund will have dwindled to $125 million. At that level, the year-end fund balance will be below the $257 million adequate reserve amount that it should have.

"There's no way around that fact," said Rep. Karl Rhoads, D-28th (Pälama, Downtown, Lower Makiki), who serves as chairman of the House Committee on Labor and Public Employment.

"We need to rebuild the Unemployment Insurance Trust Fund."

The reserve is calculated using a formula in Hawai'i's unemployment laws. It's that same statute that's triggering the huge rise in employer taxes, and the one that the state and others hope to modify when the Legislature convenes in January.

The question is how to change the law and replenish the fund while walking a fine line. The state must figure out how to do so without bankrupting employers, borrowing excessive amounts from the federal government or slicing unemployment payments for the recipients already trying to figure out how to stretch their finances.

In recent weeks, Ching said he's been talking to anyone who wants to listen about various options. He's been asking businesses and anyone else to provide feedback by Dec. 10 so he can formulate recommendations for Gov. Linda Lingle.

The ideas will be put into legislation that the administration hopes to fast-track at the Legislature so the big unemployment tax increases are muted.

IT'S THE LAW

Under current law, the state is required to start charging employers more when the fund falls below the adequate reserve amount. It can do this by raising the tax rate and the amount taxed.

This year, employers paid $42 million to the unemployment fund, having enjoyed low rates the past two years because of a break passed by legislators when the fund grew to more than a half-billion dollars.

But if the law is left unchanged, the increase would be triggered and employers would end up paying $276 million in 2010. There would be other increases in 2011 and 2012.

Ching's department has come up with eight scenarios. These include cutting the amount needed for adequate reserves and lowering the amount of employees' wages that are taxed.

There's also scenarios dealing with reducing the maximum number of weeks where state benefits are paid to 20 from 26, and lowering the maximum weekly benefit payment amounts.

The various proposals can be seen at the Labor Department's Web site at http://hawaii.gov/labor/ and look under the heading about higher unemployment insurance taxes. Ching said people can provide feedback by e-mailing him at DLIR.Director@Hawaii.Gov.

OPTIONS STUDIED

Opinions vary about what should be done, with most people agreeing the tax increase must be moderated. Some people think the state needs to use a strategy of delaying major fund rebuilding for several years to when the economy is better.

"What we're trying to do right now is figure out the fairest way to do this," Rhoads said.

Lowell Kalapa, head of the Tax Foundation of Hawai'i, said he thinks it may take a combination of options, along with increasing borrowing from the federal government and possibly reducing benefits.

"Maybe in three years time if the economy comes back we'll have the ability to pay the feds back, and in the meantime we'll have had the ability to keep the taxes low," Kalapa said.

At least 24 states' funds have been depleted by high unemployment and forced to borrow $21 billion from the Federal Unemployment Account. California alone has taken out $4.86 billion of loans with its record double-digit unemployment.

Hawai'i has yet to seek federal help — it can't request a loan until its fund is insolvent. But state officials say the fund will run out of money a year from now when it will be about $5 million in the hole.

At some point in the future, however, Hawai'i taxpayers or its businesses would be forced to repay the loan at a 4.67 percent interest rate.

If repayment doesn't occur within a certain period, they also could face increases in federal unemployment tax rates, Ching said.

But Kalapa said there may be good reason for choosing a bigger loan than higher tax rates. He said the legislature could come up with other tax increases in the coming year as it grapples with a budget deficit.

"I'm damned sure the legislature is looking at raising (other) taxes to balance the budget," Kalapa said, explaining he believes lawmakers will increase the state's general excise tax.

He said such an increase, along with big jump in unemployment taxes, will likely drive some companies out of business.

NO EASY ANSWER

The Hawaii Employers Council also is worried that the unemployment tax increase could be combined with other cost escalations. It sees the unemployment tax jump coming as medical insurance costs rise for employers.

"It's (the tax increase) going to be a hardship on small companies and companies that are operating just on the edge of profitability," said Clayton Kamida, general counsel for the employers group.

He said if the economy is seen as turning around in a couple of years it may make sense to drop the reserve amount. Another option would be to borrow more.

Kamida said there may be too much of a danger in cutting unemployment benefits, which would be detrimental to the economy.

"The problem with that is people who receive unemployment benefits use them to pay rent, buy groceries," he said.

"There's just no easy solution to the problem."

BENEFITS ESSENTIAL

The state's various scenarios for cutting benefits don't show tax relief kicking in for several years.

Moreover, the Hawai'i unemployment program goals note the payments help stabilize the economy with each $1 spent on benefits generating $2.15 in gross domestic product.

Rhoads said he is reluctant to cut benefits. It might result in less money pumping through the economy and hurt the companies the tax break is intended to help.

"When you're receiving unemployment benefits, you're spending every penny of that money."

Ching said there doesn't appear to be any silver bullet for solving the unemployment fund problem. But he said the Lingle administration wants to try to reach a consensus on what should be done so it can go into the legislative session with a good plan.

"It's a real tough situation, it's a difficult situation," he said.