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

April 26, 2022

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 tax 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.

Ranking Unemployment Insurance Taxes on Our 2022 State Business Tax Climate Index How Does Your State Rank on Unemployment Insurance Taxes?

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 Indexclick 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.


Related Articles

A surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services.

A property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.