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Bill That Increases Unemployment Taxes Moves Ahead

Legislation pushed by a politically connected company would increase unemployment taxes for Texas employers. Proponents say it would help outsourcing companies avoid "double taxation." Critics say it's a special interest perk.

State Sen. Brandon Creighton, R-Conroe, at a Texas Tribune event in 2014.

*Correction appended. 

Republican leaders are touting billions of dollars in proposed tax cuts and vow to oppose anything with even the slightest whiff of a tax increase.

But the Texas House and a Senate committee have passed a bill that would trigger an increase in unemployment taxes to cover an $84 million hit to the unemployment insurance trust fund, according to calculations from the Texas Workforce Commission.

The legislation, pushed by a politically connected company in Kingwood known as Insperity, would give a tax break to about 150 Texas businesses that are licensed and specialize in human resources outsourcing services. Insperity (previously known as Administaff), whose founder sits on Lt. Gov. Dan Patrick’s citizen advisory council, declined comment late Thursday.

Proponents of the measure, including two legislators who represent Kingwood, say the bill is necessary to eliminate what they describe as “double taxation” of the outsourcing companies, known as professional employer organizations, or PEOs. Critics dispute that characterization and say it’s not fair for other employers to be forced to make up the lost revenue by paying more into the state’s Unemployment Compensation Trust Fund. 

It’s a very small increase — amounting to what the Workforce Commission says is roughly a dollar per Texas employee — but critics say there’s no reason to be raising costs on employers at a time when the state is enjoying a big government surplus. They call it a special interest bill that would only help a tiny, albeit influential, piece of the business sector.

“No other state in the entire country does this, and they don’t do it for good reason — because they recognize that there is a significant impact to their own UI trust fund, and if they did this they’d be passing on those costs,” said Todd Cohn, vice president of regulatory affairs for TriNet, a California-based outsourcing firm that figures among the top three PEOs doing business in Texas. 

Though Cohn’s own company would benefit financially from the bill, he said the small business clients TriNet serves would not, and he doesn’t want to get blamed for passing on higher unemployment taxes to them. 

“We look at this as a negative because it harms every employer in the state by allowing PEOs to do this. PEOs become then the poster child for depleting the trust fund and passing on an additional tax that has to be absorbed by all the employers in the state to pay for it,” Cohn said. 

The sponsor of the bill, Sen. Brandon Creighton, R-Conroe, said that was a “clever way” to describe the effect of the bill. He said it’s needed because PEOs face a type of double taxation under current law.

When a company hires a PEO, it generally enters into a co-employment agreement and transfers its employees over to the firm, which then processes payroll and handles health benefits, retirement plans and the like.

As part of that arrangement, the PEO also becomes responsible for the client’s unemployment taxes, which go into a trust fund that pays out unemployment compensation to employees who lose their jobs. The change Creighton wants would allow the PEO to get credit for any taxes already paid on behalf of the employee by the old employer.

Critics say that would bestow a benefit onto PEOs that no other business in Texas, or the nation, enjoys. But backers of the idea say it recognizes the unique relationship between a company and its outsourcing partner.

“This bill changes the law to ensure that these small employers in a PEO relationship are not faced with paying double tax if they make a change after Jan. 1,” Creighton said. “This bill is good for small employers in Texas, it’s good for all PEOs in Texas and it avoids double taxation.” 

Creighton said the bill was “brought” to him by the House sponsor and Insperity, which he described as “one of the largest employers in Senate District 4.” 

According to the Texas Workforce Commission, the bill would force unemployment tax rates up by just 0.01 percent, working out to 90 cents assessed for every employee in Texas. The rates have to go up to make up for the negative impact to the fund, calculated at $84.2 million over five years.

“This is the result of a decrease in taxable wages reported by PEOs, and impacting (the) replenishment rate component of each employer’s effective tax rate,” Workforce Commission spokeswoman Lisa Givens said in an email.  

The unusual procedure used to get the bill moving in the Legislature demonstrates the power the company and the industry have among lawmakers. On May 11, Patrick, the lieutenant governor, referred the bill to the Senate Committee on Natural Resources and Economic Development, chaired by Sen. Troy Fraser, R-Horseshoe Bay.

After Fraser objected to the bill, Patrick “re-referred” it Monday to the Senate Committee on Business and Commerce, chaired by Sen. Kevin Eltife, R-Tyler. On Thursday, that committee voted 6-1 to send it to the Senate floor.

The legislation “was referred to Sen. Fraser’s committee, and after analyzing the bill he found that it benefited one company, and he felt it would increase unemployment costs to the rest of the state,” said Fraser spokesman Will McAdams. “Sen Fraser adamantly disagrees with the content of the bill and had no intention of passing it, and he did not ask for a re-referral.”

Patrick spokesman Keith Elkins said the fact that Insperity founder and CEO Paul Sarvadi sits on his 55-member commission — known as the Lieutenant Governor’s Board of Private Citizens — played no role in the re-referral. 

Elkins also said that nearly all of the 143 PEOs operating in Texas support the bill.

“This bill was passed out of the Texas House 143-0. However, when it came over to the Senate and was referred to committee, it was not being scheduled for a hearing,” Elkins said. “When that was brought to the lieutenant governor's attention and he read the bill, he felt it deserved a public hearing and he had the bill re-referred. Texas businesses should not be double taxed.”

Correction: A previous version of this story misidentified the spokeswoman for the Texas Workforce Commission. She is Lisa Givens, not Linda Givens. 

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State government Brandon Creighton Dan Patrick Texas Legislature