Falling into the Same Trap Twice:
Understanding Unemployment Insurance Financing
and Trust Fund Solvency in Massachusetts
(November 2003)
By Rick McHugh and Andrew Stettner, National Employment Law Project

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Massachusetts once again faces a crisis in financing its unemployment insurance program. Current proposals offer combinations of higher payroll taxes and sacrifices by jobless workers as solutions for this financing crisis. For the most part, these “solutions” ignore the underlying reasons why Massachusetts is facing another unemployment insurance financing crisis only ten years after its trust fund last borrowed hundreds of millions of dollars from the federal government. Understanding the history and policies that have led Massachusetts to again have insufficient trust fund reserves to ride out a fairly mild recession is essential, in our view, to developing real solutions to unemployment insurance trust fund financing in Massachusetts. The findings of our examination are as follows: 

• Legislation has put lower tax rate schedules into effect for nine of the ten years between 1994 through 2003, reducing unemployment insurance (UI) taxes by about $1.69 billion dollars over these ten years.
  
• As a result of the artificially low rate schedules in effect between 1994 and 2003, and higher benefit claims due to the economic slowdown since 2001, Massachusetts now faces a dwindling trust fund, higher UI payroll taxes and potential federal borrowing.
  
• The result of interference with the rate schedules has been falling UI payroll tax rates over the last ten years, with average UI taxes falling by more than half between 1994 and 2002. The average tax rate on total wages in calendar year 2002 reached 0.67 percent in Massachusetts. In other words, of total wages and salaries paid in the state, UI payroll taxes amounted to two-thirds of a penny for every dollar paid in wages.
  
• While employers in Massachusetts enjoyed $1.69 billion in tax reductions and falling tax rates as a result of legislation blocking higher rate schedules from taking effect, the state’s trust fund lost from between $300 million and $970 million in federal interest earnings between 1994 and 2003.
  
• In order to keep lower tax schedules in effect, Massachusetts did not build trust fund solvency levels after 1994. At its peak level at the end of 2000, the Massachusetts