February 11, 2011
To replenish state unemployment funds, the Obama Administration said on Feb.
8, 2011, that it would propose increasing the Federal Unemployment Tax Act (FUTA)
tax paid by employers by increasing from $7,000 to $15,000 the wage base to
which the FUTA tax applies. The proposal – immediately criticized by several
prominent Republican members of Congress – preceded an alternate proposal by two
policy think tanks on Feb. 9, as it has become clear that the recent economic
recession has depleted state unemployment funds.
Under current law, employers pay 6.2% in taxes on the first $7,000 of
earnings paid to each worker. Employers get a credit against FUTA tax for
contributions paid into state unemployment funds, provided certain federal
requirements are met. The credit can not exceed 5.4% of the first $7,000 of
wages, thereby potentially reducing the FUTA tax rate to 0.8%. This tax
assessment is not deducted from employees’ wages, but is paid directly by
employers. The Obama Administration’s proposal would increase the $7,000 wage
base (in effect since 1983) to $15,000 – more than doubling it. Thus, an
employer’s maximum FUTA contribution per employee when combined with
contributions paid into state unemployment funds would increase from a potential
maximum of $434 to a potential maximum of $930. (If an employer receives the
maximum credit for contributions paid into state unemployment funds, the FUTA
tax would increase from $56 to $120.) This increase would not go into effect
until 2014 to permit further economic recovery and allow employers to plan for
the tax increase.
As evidenced by the alternate proposal from the Center on Budget and Policy
Priorities and the National Employment Law Project for increasing state
unemployment insurance fund accounts, many state unemployment insurance trust
funds have been fully depleted due to the recent economic crisis. This has
resulted in states taking out $38.9 billion in loans from the federal government
to allow them to continue paying unemployment insurance benefits. Thus, some
form of action must be taken to address this problem.
As noted above, several congressional Republicans reacted negatively to the
Administration’s recent proposal. They are concerned that increasing taxes on
employers so shortly after the end of the most recent economic recession will
hurt job growth and the economy in general. Given the fact that the Obama
Administration has yet to submit its upcoming budget, as well as the negative
reception the proposal received from congressional Republicans, it is possible
that this proposal may change in the coming days and weeks.