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Posted by Admin Posted on Feb 08 2011

Unemployment insurance is, for the most part, a program run by each state.  The federal government helps the states programs by subsidizing administrative costs, job search programs, extended unemployment benefits, and a fund from which states can borrow if their own funds run low.

Under the Federal Unemployment Tax Act (FUTA), employers are charged 6.2% of employee wages up to $7,000 to fund the federal programs.  Employers qualify for a credit of up to 5.4% for state unemployment taxes paid, which reduces the effective FUTA rate to .8% - or a maximum of $56 per employee.

If a state borrows funds from the federal program and doesn't repay them, employers in that state lose some or all of the credit, paying a higher FUTA tax until the loan is repaid.  In 2010, this happened to employers in Michigan, Indiana and South Carolina.  With state unemployment borrowing up to $42.4 billion, employers in up to 23 states may face the same repayment terms.

The Wall Street Journal is reporting that the White House may propose replenishing unemployment funds by increasing the FUTA wage base from the current $7,000 to $15,000. The 6.2% rate would be reduced, so the federal take from FUTA would not change.

So why do this?  Expanding the wage base is seen as a way for states to replenish badly depleted unemployment funds without increasing their own unemployment taxes.

Any change in FUTA will require Congressional approval, and Republicans are reacting very cautiously to the Administration's proposal.