The Tax Foundation, a non-partisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937, recently released a report, Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds, in which it noted 34 states have taken federal loans amounting to $34 billion to help pay unemployment benefits due to unemployment insurance trust funds running out. Idaho is one of the states that took federal loan money, but also one of seven that has paid it back.
Well, that sounds pretty good, but the Tax Foundation report says it is not quite that simple.
Unemployment insurance taxes for employers in each state are calculated using their “experience rating,” which is a risk-based continuum that varies rates “according to how much or how little workers received unemployment benefits.”
Employers with a history of laying off workers get a higher rate, versus those employers who lay off fewer workers who receive a lower rate.
In Idaho, the minimum tax rate of 1 percent is reflective of most states. However, the maximum tax rate jumps to 6.8 percent. These tax rates are applied to the taxable wage base, or the ceiling set by each state. The taxable wage base in Idaho currently sits at $33,300, which makes it one of only five states where the taxable wage is higher than $30,000.
According to Bob Uhlenkott from the Idaho Department of Labor, there is a reason why the taxable wage is so high. “You will notice that states that have small wage bases such as California’s $7,000 have significantly higher average UI (unemployment insurance) tax rates to compensate for the low base. And also since the base is static and not indexed, wage growth and inflation slowly eat at the solvency of the fund since the liability is going up but the taxes aren’t. Therefore, these states with static tax bases have to aggressively legislate tax increases as wages rise over time.”
The Tax Foundation found that when the economic downturn started during the first quarter of 2008, two-thirds of the states had enough money in the reserve fund to pay unemployment benefits for a year or less, Idaho being one of the states in the “less” category. Idaho had enough money only to pay benefits for six months.
The problem, according to Uhlenkott, was the state’s .8 multiplier. The .8 multiplier involves the state’s unemployment reserve fund. He explained that “an indexed taxable wage basis is considered the most important property toward preserving fund solvency. So it is a good question why that property in Idaho only led to six months of reserves? That has to do with a .8 multiplier that was legislated into law back in 2005. The multiplier essentially builds a fund that will only handle 80 percent (.8) of the typical recession we have experienced in the last 20 years. Obviously, the recent recession well exceeded the recession of the 1980s so that broke the fund in a hurry.”
Is there something in place to head off another reserve fund problem? Unhlenkott believes there is. “Last year’s bonding legislation included allowing the .8 multiplier to float up one-tenth each year ultimately capping out at 1.5 in 2018. Ultimately, this will ensure the fund will be solvent for up to 18 months (1.5 multiplier roughly equals 18 months) in future recessions as measured against the typical recession of the past 20 years. Since the UI rates are already at their maximum level it did not result in a tax increase for employers but it is estimated to keep the state at the maximum level for an additional year as the multiplier floats up.”
While there seems to be a plan in place to prevent future reserve fund issues, Idaho remains one of 17 states that pays benefits for 99 weeks. The Tax Foundation noted, “With record-high unemployment and benefits lasting up to 99 weeks, unemployment programs are under enormous pressure.”
Idaho provides 26 weeks of unemployment benefits. Once that runs out, a person can apply for up to 53 weeks from a federal program, which is funded by federal unemployment insurance taxes. Thirteen of those 53 weeks can only be approved if a state has an unemployment rate of over 6 percent, which Idaho does. Idaho’s rate for September was 9 percent and it has averaged that number for the past several months.
Following those 79 total weeks, there is an option for Extended Benefits, which is a program in which funding is shared by the state and the federal government from unemployment insurance taxes. The first 13 weeks are applicable if the state has an unemployment rate of 6.5 percent, and the remaining seven weeks applicable if the state has an unemployment rate of at least 8 percent, which Idaho does due to an unemployment rate averaging around 9 percent.
“Unemployment insurance was meant to be a program that built up surpluses in prosperous times, with the expectation that they would be spent down during economic downturns,” says Joseph Henchman, Tax Foundation vice president of legal and state projects. “The problem with most state funds is that they stopped building up reserves during the good times. Before the beginning of the recession in 2008, less than half the states were in a position to disburse more than a year’s worth of the kind of high benefit payouts that would be expected in a major economic downturn.”
But the problems with unemployment insurance also create an opportunity for reform, according to Henchman. “Given the array of serious problems facing government unemployment programs today, it could be an opportune time for reform,” said Henchman. “Lawmakers have an opportunity to take a new look at benefit levels, program requirements, and whether such programs should be expected to accomplish additional fiscal and social policy goals.”
One thing the Tax Foundation warns lawmakers is to be cautious of turning to increased taxes as a way to solve the problem, explaining, “Increased tax levels to cover emerging deficits would hit existing employers especially hard at a time when private sector hiring is already at low levels.”