Ranking Unemployment Insurance Taxes on Our 2022 State Business Tax Climate Index

Today’s map examines another major component of our 2022 State Business Tax Climate Index: unemployment insurance (UI) taxes. Compared to individual, corporate, sales, and property taxes, UI taxes are less widely understood, but they have important implications for a state’s business climate. A state’s performance on the UI taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. component accounts for 9.8 percent of that state’s overall Index score.

Unemployment insurance is a joint federal-state social insurance program that finances benefits for recently unemployed workers through taxes on employers. State unemployment insurance tax systems are often quite complex, using variable-rate structures that impose different rates depending on the age of a business, its layoff history, and the health of the state’s UI trust fund, among other factors. All 50 states and the District of Columbia levy UI taxes, but some states structure their systems better than others.

The least-damaging unemployment insurance tax systems are those that adhere closely to the federal taxable wage base, have low minimum and maximum tax rates on each rate schedule, avoid levying surtaxes or creating benefit add-ons, and have straightforward experience formulas and charging methods. More harmful UI tax systems are those that have high minimum and maximum rates, wage bases that far exceed the federal level, complicated experience formulas and charging methods, and surtaxes or benefit add-ons that go beyond the core functions of the UI program.

On this year’s Index, the states with the best-scoring unemployment insurance tax systems are Oklahoma, Florida, Delaware, Missouri, Louisiana, and Mississippi. The worst-structured UI tax systems are found in Massachusetts, Rhode Island, Kentucky, Idaho, Maryland, and Nevada.

The climates created by UI policies can differ greatly. Some states have high statutory minimum and maximum tax rates that apply to large taxable wage bases, while others have low minimum and maximum rates and low taxable wage bases. For example, Arizona, California, Florida, and Tennessee align their taxable wage base with the federal base of $7,000 per employee, while other states extend the taxable wage base far beyond the federal minimum, so that the tax is applied on tens of thousands of dollars of each employee’s wages. (Currently, Washington is the state with the highest taxable wage base, at $56,500.) Rates can only be understood in tandem with wage bases. A 10 percent tax on a $7,000 wage base raises $700, while the same rate on a $49,800 wage base generates $4,980.

Another important consideration is a state’s experience rating formula, which varies from state to state. The concept behind experience ratings is that each employer’s UI tax liability should be adjusted by their own past experience with layoffs. Companies with frequent layoffs face greater liability than companies with steadier track records. But there are different ways that these ratings can be calculated, and different approaches for handling new businesses which have yet to develop a meaningful track record. Some states lean more heavily on aggregate state “experience,” while others focus more specifically on individual businesses. Some use what is called a benefit ratio formula, based on the ratio of unemployment benefits to payroll. Others use a benefit wage ratio formula, or a reserve ratio formula, defined as the balance in the employer’s state unemployment insurance account divided by payroll.

One of the most harmful aspects of UI taxes is that financially troubled businesses, for which layoffs may be a matter of survival, are shifted into higher tax rate schedules when they can least afford to pay a higher tax bill. Failing businesses face ever-higher UI taxes, sending them into further decline. Similarly, surtaxes imposed when UI fund reserves are low mean higher tax liability right when businesses are struggling most. Well-designed UI tax systems emphasize greater stability and predictability, especially in times of economic downturn.

To read more about how UI tax systems are evaluated in the Index, click here.

To determine whether your state’s unemployment insurance tax has risen or fallen in the ranks in recent years, see the following table.

Unemployment Insurance Tax Component of the State Business Tax Climate Index (2019–2022)

State	2019 Rank	2020 Rank	2021 Rank	2022 Rank	Change from 2021 to 2022
Alaska	35	46	44	43	1
Arizona	13	6	8	11	-3
Arkansas	34	23	23	33	-10
California	17	22	21	23	-2
Colorado	40	43	40	41	-1
Connecticut	23	21	22	22	0
Delaware	3	3	3	3	0
Florida	2	2	2	2	0
Georgia	38	39	38	37	1
Hawaii	26	28	25	29	-4
Idaho	48	48	47	47	0
Illinois	42	40	42	40	2
Indiana	11	25	27	25	2
Iowa	33	35	36	34	2
Kansas	15	14	14	16	-2
Kentucky	47	49	48	48	0
Louisiana	4	4	4	5	-1
Maine	24	32	32	35	-3
Maryland	28	33	33	46	-13
Massachusetts	50	50	50	50	0
Michigan	49	17	18	7	11
Minnesota	25	34	31	30	1
Mississippi	5	5	5	6	-1
Missouri	8	9	7	4	3
Montana	21	20	20	19	1
Nebraska	9	11	11	13	-2
Nevada	45	47	46	45	1
New Hampshire	44	45	43	44	-1
New Jersey	32	30	30	32	-2
New Mexico	10	8	9	8	1
New York	31	38	37	36	1
North Carolina	7	10	10	12	-2
North Dakota	14	13	13	9	4
Ohio	6	7	6	10	-4
Oklahoma	1	1	1	1	0
Oregon	37	36	35	39	-4
Pennsylvania	46	42	39	21	18
Rhode Island	29	31	49	49	0
South Carolina	27	26	24	27	-3
South Dakota	39	44	41	38	3
Tennessee	22	24	26	20	6
Texas	18	12	12	14	-2
Utah	16	15	17	17	0
Vermont	20	16	16	15	1
Virginia	43	41	45	42	3
Washington	19	19	19	24	-5
West Virginia	30	29	28	26	2
Wisconsin	41	37	34	28	6
Wyoming	36	27	29	31	-2
District of Columbia	33	35	36	39	-3
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states. Source: Tax Foundation.

To learn more about how we determined these rankings, read our full methodology here.

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