Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds
- Unemployment insurance (UI) is a social insurance program jointly operated by the federal and state government. Employers pay federal and state UI taxes that fund benefits, with employers paying different tax rates based on their layoff history ("experience rating").
- High rates of unemployment and benefits lasting up to 99 weeks have led 34 states to borrow over $37 billion from the federal government to pay benefits. States are not expected to repay these amounts for some time and must begin paying interest on their balances in 2011.
- Businesses are in danger of facing higher UI taxes at a time when private sector hiring is already at a low level. Some states are already reducing UI benefits or raising taxes.
- States routinely cut UI taxes in good economic times and raise them in bad economic times, undermining the argument that the program is countercyclical.
- Modest UI reforms should be considered, including eliminating the "firewall" between administrative costs and benefits, reducing cross-subsidies to high-layoff employers, and relying more on face-to-face training and advising. More significant reforms that could be considered include adopting elements of state workers' compensation programs and experimenting with individual accounts.
- Economic evidence suggests that extending unemployment benefits increases unemployment by encouraging "excessive search."
- States should be sure that their UI tax systems are not overly complex and burdensome, particularly to new employers. States should also balance the goal of spreading the costs of unemployment to all employers with the danger of overly subsidizing high-turnover employers. Finally, states should resist efforts to introduce need-based features into UI.
Record high levels of unemployment and record low reserve funds have placed great pressure on the federal-state unemployment insurance (UI) tax and benefit system. Between 2008 and 2011, $174 billion was paid in unemployment taxes while $450 billion was paid out in benefits, a gap of $276 billion. In 2011 alone, employers and employees are projected to pay $51.8 billion in taxes, while $131.4 billion is projected to be paid out in benefits for workers recently unemployed. Benefits are drawn for an average of 18 weeks, with many claimants receiving the maximum 99 weeks of benefits.
Over the past two years, 34 states and the U.S. Virgin Islands exhausted their unemployment insurance trust funds and have had to borrow from the federal government to pay unemployment benefits; 27 states have outstanding balances. While 4 million new hires are made each month, the unemployment rate has stood above 9 percent and the number of unemployed per job opening remains high (see Figures 2 and 3). While some states have repaid their balances and others are no longer borrowing additional amounts, the current outstanding balance of loans is $37.3 billion. States are not expected to repay their loans fully for several years.
Beginning on September 30, 2011, states must pay approximately $1.3 billion in interest on those outstanding balances; in many cases, businesses and employees in those states will also face increases in federal unemployment insurance tax rates as a result of those federal loan balances. These new interest obligations and tax increases, if they ultimately occur, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure. These unemployment insurance fiscal policies may exacerbate negative job growth and tax trends, instead of operating countercyclically as the program was intended.
Filed Under : Unemployment Insurance