Obama Administration to Propose Increase in Federal Unemployment Tax Act Wage Base for Employers

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.