If you were a policymaker who had the task of increasing unemployment tax revenue, you might ask yourself this question: How can I increase unemployment taxes in the most palatable way possible, so that the tax increase has a chance of acceptance? One proven strategy is to leave tax rates alone or even reduce them, and to increase the wages on which such taxes are levied. The administration’s budget proposal for Fiscal Year 2012 (October 1, 2011 through September 30, 2012) takes this approach, and also delays the increase for a couple of years.
Beginning in 2014, the proposal would reduce the net federal unemployment (FUTA) tax rate from 0.80% to 0.38%, but increase the FUTA taxable wage base from $7,000 to $15,000, and index the FUTA wage base to growth in wages for subsequent years. At first glance this looks benign. The current FUTA tax collected on a full-time worker is $56 per year (0.80% times $7,000) and the proposed tax for 2014 is $57 per year (0.38% times $15,000).
The kicker is the fact that every state unemployment wage base would have to match or exceed the FUTA wage base. Right now thirty-two states, the District of Columbia, and Puerto Rico would have to increase their unemployment taxable wage bases. Twenty states currently have taxable wage bases of $10,000 or less, and employers in these states can expect to pay at least fifty percent more state UI tax beginning in 2014 if the proposal is enacted. Failure by a state to match or exceed the FUTA taxable wage base results in substantially higher FUTA tax rates for employers in that state and is not a viable option.
The Administration states that this proposal would restore the UI wage base to near the same real level as set under President Reagan. The last time that the UI wage base increased was in 1983, when it was set at the current $7,000. Further, the Administration projects that the economy will be stronger by 2014, and employers will be better able to absorb the tax increase.
As an incentive, the proposal would provide short term relief from interest on loans to states whose UI trust funds are depleted, and delay for two years the increased FUTA tax rates for employers in states with long-term loans. There would be no interest charges and no FUTA tax increases for 2011 and 2012. Currently, employers in over twenty states are facing FUTA tax increases for 2011, and thirty states are facing interest payments, which are usually passed through to employers by means of a surtax. The combination of short term relief and increasing the wage bases is expected to cost employers $58.5 billion in state and federal UI taxes over ten years.
Click here for a list of the current state unemployment taxable wage bases, so you can see where the greatest potential tax increases would occur. Clearly the potential exists for an uneven impact. Just as clearly, something has to be done to increase UI tax revenues or decrease UI benefits, or a combination of both if the UI system is going to return to fiscal balance. Outlays from state trust funds for UI benefits are projected to exceed revenues (UI tax payments) and interest income by $16 billion for the current fiscal year and $15.1 billion for the next fiscal year. State trust fund balances will continue to fall to a projected negative $62.7 billion at the end of fiscal year 2013.
The gorilla in the room is California, which currently has a state UI taxable wage base of $7,000. It is one of only four remaining jurisdictions (the others are Arizona, Florida, and Puerto Rico) with the lowest allowable wage base. The forced increase of the California wage base would certainly have a significant impact on UI revenue, shouldered disproportionately by California employers. On the other hand, twenty-three percent of the current outstanding UI loans stem from California. Without the higher wage base, California employers will eventually repay the loan via higher and more prolonged FUTA tax increases. Such FUTA taxes are not credited to an employer’s state UI reserve account (the basis of state tax rate calculations); whereas state UI tax payments are credited to the employer’s UI tax account.
We have not seen any mention of the disparate impact that forced higher wage bases would have on subsequent state UI tax rate calculations. State UI tax rates are recalculated annually, based on experience. Some states with low current taxable wage bases are “benefit ratio” states, and higher taxable wages would actually tend to lower future UI tax rates in these states, which include AL, FL, MD, TX, and VA. Other states with low current taxable wage bases are “reserve ratio” states where the opposite effect would occur and future UI tax rates would trend higher for awhile. These states include AZ, CA, GA, KS, NY, OH, and others.
It seems to us that it may be difficult for the Administration to build a consensus for this proposal. Some states, such as California, would be greatly impacted. Other states have no outstanding loans and already have wage bases that exceed $15,000, so they would neither benefit from the short-term relief nor incur future tax increases. These states include IA, NM, OK, UT, WA, and WY. Still other states would actually benefit from the short-term relief but would not be forced to increase their wage bases. These states include CT, ID, MN, NV, NJ, NC, and RI.
As a final thought, it would be possible for a state legislature to lower tax rates by statute, thereby subverting the intention of the federal administration to increase revenue via the higher taxable wage base. If this were to occur with any frequency, the estimated revenue projection could be significantly overstated.
As always, if there are any questions please feel free to contact us at (615) 242-8246.