Top 10 State Tax Trends #7: Collapsing Unemployment Insurance Systems

June 07, 2012

We've identified the top ten key tax trends among the states in recent years. We're sharing them with a short report each weekday with data and analysis on each trend. We hope this information will help you learn how states responded to the recession, how they're faring now, and how prepared they are for the future. The series kicked off last week with an overview of state budgets and state tax changes during 2011

Our #7 trend, released in today's report (PDF), is collapsing state unemployment insurance systems. Some highlights from the report:

  • Over the past three years, 34 states have exhausted their unemployment insurance trust funds and have had to borrow from the federal government to pay unemployment benefits. 

  • While some states have repaid their loans and others are no longer borrowing additional sums, 22 states have outstanding loan balances totaling over $30 billion.

  • As a result of outstanding federal loan balances, businesses and employees in many of these states now face increases in federal unemployment insurance tax rates. Normally, employers in a state program that meets federal guidelines pay a federal tax of just 0.6 percent. When a state  is insolvent for an extended period of time, however, the rate increases 0.3 percentage points per year. Arizona’s program, for example, has been insolvent for one year, so employers will pay a federal unemployment tax of 0.9 percent.

  • Higher unemployment insurance taxes, at both the federal and state level, 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 exacerbating negative job growth and tax trends, instead of operating as a counter weight to bad economic times as the program was intended. 

  • States generally reduced unemployment insurance taxes and expanded benefits during good economic times, and are hiking taxes and reducing benefits now. In the first quarter of 2008, just before the recession began, only 17 states had sufficient reserves to pay one year of high-cost benefits. Twenty states did not have sufficient reserves to even pay a half-year of benefits.

  • Now may be the right time for the federal and state governments to make significant changes to the unemployment insurance system. These options include reducing cross-subsidies through greater use of experience ratings, relying more on face-to-face training and advising, adopting elements of state workers' compensation programs, and experimenting with individual accounts to encourage saving.

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