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InsiderOnline Blog: June 2012

Collapsing Unemployment Insurance System Imposes Higher Taxes at Exactly the Wrong Time

“Over the past three years, 34 states and the U.S. Virgin Islands exhausted their unemployment insurance trust funds and have borrowed from the federal government to pay unemployment benefits. […]

“As a result of these outstanding federal loan balances, businesses and employees in many of these states now face increases in federal unemployment insurance tax rates. This tax is ostensibly levied at a 6.0 percent rate on the first $7,000 of each worker’s earnings, but if a state’s program meets federal guidelines, state UI taxes are credited against up to 90 percent of the federal tax. […] When a state UI program is insolvent for an extended period of time, this 90 percent credit is reduced by 0.3 percentage points per year. […] Of the states that exhausted their trust funds, 26 states and the U.S. Virgin Islands will see federal UI credit reductions in 2012 due to insolvency.

“These higher federal UI taxes, and higher state UI taxes enacted in many states, come at a time when private sector hiring is already at a low level and states are under significant fiscal pressure. The present method of financing the unemployment insurance system is thus exacerbating negative job growth and tax trends, instead of operating counter-cyclically as the program was intended. Indeed, states generally reduced UI taxes and expanded benefits during good economic times, and are hiking UI taxes and reducing benefits now.” [Internal citations omitted.] [Joseph Henchman, Tax Foundation, June 6]

Posted on 06/07/12 01:41 PM by Alex Adrianson

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