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FEDERAL GOVERNMENT TO PROPOSE INCREASE IN STATE UNEMPLOYMENT TAXES? CON'T.

Posted by Admin Posted on Feb 10 2011

We have more details on the White House plan to deal with unemployment tax problems, and with more details we have more reactions.

The proposal will let states that borrowed money from the federal government to fund unemployment benefits skip principal and interest payments for two years.

In 2014, the federal wage base for unemployment tax would roughly double, and the rate would decrease enough to keep the total federal tax stable. So if the base is increased to $15,000, the rate would decrease from 6.2% to roughly 2.9%.  But under current law, states are required to use the federal wage base as the wage base for their own unemployment taxes.  (They can use a higher wage base, as does New Jersey.)

So, if the states that borrowed from the federal government leave their own unemployment tax rates the same as they are now, the amount of the tax per employee will increase.  This increase will provide the funds to repay the loans.

Republican reaction was cautious on Monday, but on Thursday opposition began to build.  Rep. Dave Camp (R-MI), Chairman of the House Ways and Means Committee, warned that "any plan that relies on more than doubling the wage base and then raising payroll taxes in perpetuity isn't going anywhere in the house."

Sen. Orrin Hatch (R-Utah), ranking Republican on the Senate Finance Commitee and facing a possible primary challenge from the Tea Party wing of his party, "strongly urge[d] the White to reconsider this job killing proposal."

But the reality is that if the states do not pay back the loans timely, current law will collect the debt directly from employers.  Employers do not actually pay a 6.2% rate, because they get a 5.4% credit for paying state unemployment taxes.  If a state borrows from the federal unemployment fund and cannot or does not repay the loan, the credit is reduced.  The increased Federal Unemployment Tax is used to repay the loan;when the loan is repaid, the credit is restored.

So in states that haven't repaid loans (including Rep. Camp's own state of Michigan), employers are already scheduled to face increases in their Federal Unemployment Taxes.  Indiana employers are also facing an increase in FUTA, and the Indiana Manufacturers Association thinks the idea is worth discussing (which may explain why Rep. Mike Pence (R-IN), known for vocally conservative views, hasn't commented yet.  The National Federation of Independent Business is against the propsal, callling it "a tax on labor".

States that have kept their unemployment funds solvent, by raising taxes or cutting benefits, are also miffed by the proposal. But there are estimates that more than 23 states will be borrowing from the federal unemployment fund by the end of 2011 and unable to repay those loans. 

It isn't clear if Rep. Camp has heard from the new Republican governor of Michigan about his opposition to the proposal.

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