TRENTON - A tax increase that could cost employers $1 billion is needed to replenish New Jersey's depleted unemployment-insurance fund, according to Gov. Corzine's labor commissioner.

With large shortfalls in the fund expected for several years, David Socolow said, the state needs to let an automatic tax increase take effect July 1 to rebuild reserves. Once the fund recovers, a process likely to take several years, taxes would begin to fall to previous levels.

"The time has come to let the trust fund replenish automatically and get that over with, so that it can be restored to full solvency and employers can then return to lower tax rates," Socolow said this week.

He has publicly warned of a tax increase since at least April, but some Republicans say the state cannot afford another.

Aides for Gov.-elect Christopher J. Christie are examining options, but it's unclear whether they will be able to ease the tax hike. That could require federal aid or a huge infusion of state cash - $1.5 billion or more - and the budget has little to spare.

The tax rate for the fund, set by law, shifts according to the level of the reserves.

The fund, which temporarily aids workers who lose their jobs, is expected to have a $1.2 billion deficit on March 31. That would move the tax rate on employers, beginning in July, to the highest level allowed.

The increase would add about $1 billion to the current $1.7 billion levy on businesses, according to the Department of Labor and Workforce Development.

The tug-of-war between holding down taxes and replenishing unemployment funds hit hard by the recession has some states considering benefit cuts and others trying to change tax rules to sidestep increases.

A top New Jersey Republican said tax hikes should be avoided.

"It's unfortunate that more than a decade of mismanagement has created the situation in which we find ourselves," said Senate Minority Leader Thomas H. Kean Jr. of Union County. "We should work to avoid any tax increase."

The business community is also hoping for help.

"We strongly encourage the new administration to minimize these increases," said Mary Ellen Peppard, a lobbyist for the New Jersey Chamber of Commerce.

Christie campaigned on a platform of lowering taxes and attracting businesses, but the cost of avoiding this tax hike could be prohibitive.

A $1.5 billion deposit into the unemployment-insurance fund would be needed to reduce the tax increase to $550 million. Nearly $2 billion would have to be deposited to avoid any tax hike.

The prospects for such an infusion seem unlikely given the dire budget, which has a shortfall of $8 billion or more. The money would have to be committed by the end of March, a month when Christie aides are worried the state might run out of cash.

Federal loan forgiveness - an idea hoped for by some but not assured - could cover much of the shortfall, though. As of Monday, New Jersey had borrowed $873 million from Washington to keep its unemployment fund afloat. Twenty-four other states plus the U.S. Virgin Islands also owe money for benefits. Pennsylvania has borrowed nearly $1.8 billion.

Another option would be changing the automatic tax thresholds, as some states are considering, but that could create a persistent deficit. Cutting benefits would save money, but could create a fierce backlash.

New Jersey's fund was depleted by a history of budget raids, leaving it weak as the recession brought soaring job losses. Corzine, facing automatic tax hikes in 2008 and 2009, used cash infusions each year to ease the deficit and avoid or soften the increase. He added a total of $380 million in state money, plus $207 million in federal stimulus aid.

Socolow supported those steps, citing the pressure of the recession at the time. But he said another move to "artificially" keep the tax rate down would prevent the reserves from building back up and lead to even greater deficits in 2011 and beyond.

"It would delay by so many years getting the fund back to full solvency . . . that it doesn't seem like a prudent policy to look at," he said.

By the time of the July increase, Socolow argued, economic recovery should be under way. With the new rate, the unemployment fund, he said, should rebound with the economy.

With the impact of the recession still being felt in the labor market, the projected March 31 shortfall is so large that the tax rate is set to slide from its second-lowest level - Column B of the tax chart - to the highest, Column E plus 10 percent.

For the hardest-hit employers, that could mean a tax increase of nearly $700 per employee. At the lowest end of the scale, the increase would be closer to $270 per worker. A business' rate varies according to its history of firing or laying off workers. Workers also pay into the program, but their rates are not set to change.

Without a rate increase in 2010, an even larger infusion of cash - $4 billion or more - would be needed to keep the tax from rising in 2011, Socolow said.

For years the fund was sound, and taxes remained stable. But from 1991 through 2005, New Jersey governors and lawmakers took out $4.7 billion to use for other purposes. Then the recession hit, and claims climbed.

Kean and Senate Majority Leader Stephen Sweeney (D., Gloucester) have proposed a constitutional amendment to ban such raids. It will be on the ballot in November.

Contact staff writer Jonathan Tamari at 609-989-9016 or jtamari@phillynews.com.