Corporation Lobbies to Close Corporate Loophole

Kelly Services Inc. is credited with helping end a tax dodge that cost states more than $1 billion over the last decade.

The loophole allowed companies to greatly reduce the money they paid to state unemployment trust funds. The federal State Unemployment Tax Act, or SUTA, directs states to set aside unemployment funds with taxes collected from employers. Companies with high layoff rates pay more than companies with little turnover.

Through a scheme known as SUTA dumping, companies can move employees from one unit that has experienced sizable layoffs to a new unit with none, reducing the unemployment-tax bill. Over time, the first unit would be eliminated, along with the high turnover rate that boosted unemployment taxes, the Wall Street Journal reported.

Kelly Services, a Troy, Mich., staffing-services agency, got involved in the issues during the 2001 recession. Kelly’s president Carl Camden worried that competitors were underbidding Kelly for contracts by using the advantage they enjoyed because of SUTA dumping. If the practice were outlawed, Camden thought, all companies would pay their fair share, replenishing state unemployment trust funds.

Camden said his company was advised to use SUTA dumping to cut its unemployment taxes by $30 million. The plan was rejected as unethical. The company was particularly offended by a 2001 letter from accounting firm Arthur Andersen LLP, which chastised a Kelly vice president for violating the staffing company's "fiduciary responsibility to your shareholders" by refusing to engage in SUTA dumping, Camden told the Journal.

Kelly started educating lawmakers on SUTA dumping and lobbied for the practice to be outlawed. The company worked with states to learn how to detect SUTA dumping. Lawmakers were overwhelmingly receptive, as they were looking for ways to get tough with tax dodgers.

"It was so outrageously wrong, that it became overwhelmingly apparent that something had to be done," says Rep. Wally Herger, a California Republican.

Peter Moffitt, vice president of Barnett Associates Inc., a Garden City, N.Y., unemployment-tax planning firm, has argued that barring SUTA dumping could stifle legitimate company reorganizations and mergers, while burdening states with expensive paperwork requirements.

Nevertheless, opposition to the proposal was minimal, and the House and Senate passed the bill unanimously last month. President Bush is expected to sign the bill into law within two weeks.

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