Do Unemployment Insurance Taxes Really Affect a State’s Business Climate?

We all rely on shortcuts when making decisions in order to avoid getting overwhelmed. State legislators, in my more than three decades of experience, only rarely have the time and staff to really understand many policy issues before they vote. With respect to unemployment insurance (UI) issues, rather than debate the merit of a particular proposal, most legislators give great weight to conventional viewpoints that they share with other legislators. More often than we might wish, these viewpoints control the outcome of legislative debates while keeping discussion of underlying facts to a minimum.

UI benefits are financed by state payroll taxes on wages. The checks for these taxes are written by employers. UI programs are then widely perceived as being “paid for” by employers. For this reason, employers have great influence on UI policy in most states.

Too many employer organizations focus solely on the costs of UI payroll taxes and for this reason take the perspective that virtually any increase in UI benefits or expansion of UI eligibility rules is bad. This cramped perspective ignores the fact that UI benefits are quickly spent by recipients and then immediately go into the bank accounts of employers. In other words, while employer UI taxes go into a state’s UI trust fund and are then paid out in UI benefit checks, those checks are quickly spent on utilities, gas, groceries, and housing. In plain language, UI benefits end up in the pockets of employers—not in the pockets of jobless workers. To conceive of UI checks solely as a benefit for unemployed recipients and a cost for employers is a simplistic and flawed viewpoint.

Some critics of UI go so far as to claim that UI taxes are an important factor in a state’s so-called “business climate.” This viewpoint is commonly employed by taking regressive legislation adopted in some states as a signpost of UI “cost containment” and creating the sense that other states must follow suit if they want to remain “competitive” in attracting new businesses. Since the Great Recession and subsequent recovery, state after state has followed this lowest-common-denominator approach to UI legislation.

The business climate argument ignores the fact that employers and their allies have already played a significant role in reducing UI to a shadow of itself. As detailed in a recent NELP report, only 27 of every 100 unemployed workers in the United States received UI benefits in 2016. In many states, fewer than one in five jobless workers gets UI benefits. All others out of work are forced to rely upon families, community resources, and charities to survive until they find work.

Claims that UI costs are a significant element in any state’s business climate should not be taken seriously by legislators considering restrictive UI proposals in their states.

Ironically, the factual case for UI payroll tax costs playing any tangible role in business climate has been swamped by the program’s decline over the past two decades. In September 2017, the U.S. Department of Labor reported that employers’ average costs for compensation (including wages, fringe benefits, healthcare, and legally mandated benefits) were $35.64 an hour. Of this amount, state UI taxes were only 15 cents an hour, or 0.4 percent of overall employer labor costs. (A small federal UI tax adds three cents to this hourly amount.) What does this mean in terms of yearly costs? Nationally, the Labor Department reports that state UI payroll taxes constitute 60 cents of every $100 of wages at an average annual employer cost of $313 per employee in 2017.

Certainly, there are employers who have lots of layoffs and whose UI costs rise well above these average levels as a result. The answer to this problem is to adjust how state taxes are applied across the ranks of employers, rather than continue to adopt wholesale benefit cuts that will leave UI programs unable to protect jobless workers in future recessions. Meanwhile, claims that UI costs are a significant element in any state’s business climate should not be taken seriously by legislators considering restrictive UI proposals in their states.

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Rick McHugh

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