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Friday, February 3, 2012

Employers in Many States Face Tax Hike To Help Repay Federal UI Loans

Jasmine Tucker, National Academy of Social Insurance

Employers in 28 states owing $38.2 billion to the federal government for unemployment insurance benefits incurred an increase in their Federal Unemployment Tax Act (FUTA) tax this week.  Revenues from the tax increase will go directly toward repaying the balance of the loans.  A total of 35 states opted to borrow federal dollars because their unemployment insurance trust fund reserves were insufficient to weather the recent economic downturn.  The deep and prolonged Great Recession, current sluggish recovery, and continued high rate of long-term unemployment have further reduced revenues and increased outgoing unemployment insurance payments.

While it is common for states to borrow from the federal trust fund during recessions, states have never had to rely on federal funds quite so heavily as in the recent economic downturn.  States are able to make voluntary repayments on their federal loans whenever they receive greater unemployment insurance contributions than outgoing benefit payments. In fact, a large portion of the federal loans will be repaid through this process rather than through tax increases.  However, in order to bring down the balance of these loans more quickly, employers in some borrowing states will face an increase of 0.3% on the first $7,000 of a worker’s earnings, or $21 per worker, in 2012. The tax rate will continue to increase by at least an additional $21 per worker each year until the balance of the loan is paid in full.

One of the primary obstacles to adequate state financing has been the maintenance of very low taxable wage bases (the amount of an employees’ wages upon which employers pay taxes). Federal statutes require only that states have a taxable wage base that is at least the value of the federal taxable wage base, which has remained at $7,000 since 1983. At that time, it represented 40% of the average annual wage; today $7,000 represents less than 20% of the average wage and is less than one tenth of the Social Security tax base of $110,100 (which represents roughly 2.5 times the average annual wage). While 18 states do index their wage bases, currently a majority (33) of state programs have a tax base between $7,000 and $15,000 – which, again, represents less than 20-40% of the 2010 average annual wage.

To ease the burden on employers, seven states have chosen to help repay federal loans by reducing benefits paid to unemployed workers. Others may follow suit or choose to cover part of the loan repayment from their general revenues, although these are difficult choices at a time when two out of five unemployed workers (41.3%) have been looking for work for six months or more and while states face growing deficits.

In addition to reducing benefits or increasing taxes, some states have restricted regular unemployment insurance benefit eligibility. Yet, at the same time, some have done nothing to respond to their increasing debt to the federal government and may be waiting for new federal policy actions. Three bills that would affect unemployment insurance financing were introduced in Congress last year, including one entitled “The Unemployment Insurance Solvency Act of 2011,” which would require acceptable state plans for improved long-run solvency, and in return would waive federal loan interest payments, postpone federal tax rate increases for two years, and forgive up to 60% of federal borrowing. No new proposals have been introduced thus far in 2012.

Looking ahead, what does all this mean for employed workers? The only certainty is that they will be working in a climate of continuing uncertainty about how much protection they will receive, and for how long, if they are unfortunate enough to join the ranks of the unemployed.  To learn more about state unemployment insurance program solvency and prospects for improving financing, check out our recent brief, “Unemployment Insurance: Problems and Prospects.”

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