Why Are New York’s Employers Facing an Unexpected $150
Million Dollar Federal UI Tax Bill?
(November 2004)
National Employment Law Project

Questions and Answers

What’s happening: On Tuesday, November 9th, New York State missed the deadline to pay back their $587 million outstanding federal unemployment insurance loan, triggering an automatic increase in the federal unemployment tax (FUTA) for all of the state’s employers. 

• The state had to borrow money from the federal government twice in 2002 to pay regular state jobless benefits because our unemployment insurance trust fund ran out of money.
• Federal law gives states two years to repay their debt, after which they recoup the loan directly from employers through an additional federal tax. In the first year (the fourth quarter of 2004) this will amount to a $21 per employee tax (0.3% on each employee’s first $7,000 in wages).
• This federal tax increase is estimated to cost over $150 million, with the entire extra tax due on January 31, 2005.  The tax is assessed equally on all employers in the state regardless of whether they had to lay off any of their employees.  Most employers had not included this tax in their financial planning.
• New York will have a UI deficit even after this January’s tax increase and will continue to pay interest on its balance.  If still unpaid by next November, employers will face a $42 per employee federal tax surcharge that would be due on January 31, 2006).

Did bad policy cause New York to face this large federal debt? New York’s UI debt is largely a result of bad policy and planning, not the impact of the 9/11 disaster. 

• Unemployment insurance is a self-financing system, with benefits paid for by a dedicated state tax.  The most prudent financing strategy is to build trust fund reserves during good economic times in order to save for a rainy day, providing a net boost to the economy during a recession.  In 1999, the state enacted several UI tax cuts including the elimination of a $400 million tax meant to build the trust fund.  This tax cut followed earlier large UI tax reductions in 1997 and 1998.
• As a result of these tax cuts, in December 2000—at the end of a record economic recovery—New York’s UI trust fund had just 4 months of recessionary-level benefits saved as reserves. Only Texas and North Dakota entered the recession with less savings than New York.
• The state was force to borrow even though they paid out less in unemployment benefits during the post 9/11 jobs slump than during the 1990s recession. In 1991 and 1992, UI benefits cost were equivalent to more than 1.3% of total wages in the state. In 2002, the comparable figure was 1.08% and in 2003, just 0.84%.  With fewer tax cuts in the late 1990s, New York’s UI  program would  handle these increased benefit costs without borrowing, as it did in the early 1990s.

Is New York meeting its debt obligations in the most fair and efficient manner?
Like New York, California, Illinois, Massachusetts, Minnesota, Missouri, North Carolina, Pennsylvania and Texas have borrowed from the federal government in the past three years. 

• New York is the only borrowing state to face an automatic increase in the FUTA tax credit.  FUTA tax credits are charged equally to all employers. In contrast, state UI taxes are experience rated, meaning they vary depending on each firms experience with UI taxes. New York’s UI taxes currently range from 0.9% to 8.9% on the first $8,500 of each worker’s salary. 
• Six of these other eight states passed legislation to address their trust fund situation, and spread the obligation more rationally among employers.  Three of these states (Illinois, Massachusetts and Missouri) strengthened the long-term solvency of their program by increasing the proportion of each employee’s wages subject to UI taxation (the taxable wage base).
• Four of these states (North Carolina, Illinois, Missouri and Texas) borrowed from the private debt market to pay off their UI debt with lower interest rates (the current rate charged by the Treasury to the state is around 6%) and with no changes in federal UI tax rates.  Federal rules give states up to nine months of interest free borrowing each year—and, while it is not a panacea, private borrowing can be part of prudent approach towards long-term solvency.

What should New York State do to fix its UI system?

• State UI taxes are only assessed on the first $8,500 of each workers’ salary, despite the fact that the state’s average annual wage is more than $45,000.  31 states (including New Jersey, Connecticut and Massachusetts) assess taxes on a greater “taxable wage base.” Increasing the base would make it easier to charge benefits to those employers with higher benefit costs and would the state trust fund could recover quickly after an upsurge in costs.
• Currently, state UI taxes amount to just 0.8% of employers’ total payrolls, which is less than or equal to assessments in New Jersey, Pennsylvania, Connecticut and Massachusetts. (This figure is lower than the rates quoted above because most employees make more than $8,500 per year). There is room to recoup the debt through state tax changes without damaging New York’s competitive position.
• The legislature should actively research different ways of paying off the UI debt that would spread the costs out over time and reduce interest charges.
• New York’s UI system is flawed in several fundamental ways.  Fewer than half of jobless workers receive UI. The maximum weekly benefit amount is just $405 per week, and UI benefits only replace 30% on an average worker’s paycheck—the 6th worst rate in the nation.   New York needs to make fiscal UI reforms if the system is to help state residents deal with unexpected periods of unemployment which are part of our changing economy.