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Unemployment Tax Levels Up Through 2020

June 13 2011

U.S. unemployment taxes are heading up and will remain at elevated through 2020, according to TALX, a provider of unemployment tax data and human resources services. In addition, some proposed tax legislation is making life more difficult for staffing firms.

“Unemployment taxes will be considerably higher for the next eight or nine years,” Steve Carter, TALX’s assistant director of government relations – tax, said in an interview with Staffing Industry Analysts.

The level of unemployment is expected to remain relatively high, and federal and state unemployment tax systems will be financially stressed. Payments for unemployment benefits in 2009 were more than double the 2008 level, according to TALX.

As a result, the unemployment tax burden in the U.S. is estimated to increase to $75 billion by 2013 from $38 billion in fiscal year 2009, according to the non-partisan Congressional Budget Office as reported in its federal budget outlook last year. And it’s expected to remain in the $78 billion to $84 billion range through 2020.

Carter said the forecast could change if the U.S. is hit by another recession and unemployment trust funds are drawn further down. Things could also change if employment growth does not start to gain traction.

Unemployment taxes also include federal unemployment taxes. And they could rise for states with insolvent unemployment trust funds that borrow money from the federal government.

The federal unemployment tax rate is 6.2 percent on the first $7,000 in wages per employee. Employers usually receive a 5.4 percentage-point credit that reduces their federal unemployment tax rate to 0.8 percent from 6.2 percent. However, that credit falls by 0.3 percentage point each year a state has a balance on its federal unemployment insurance loan after two years.

So far, three states have had their federal credits reduced – Michigan, Indiana and South Carolina. However, trust funds in 28 states and the U.S. Virgin Islands are insolvent and have been forced to borrow money from the federal government. If they don’t repay on time, employers in those states could also face a loss of federal credit. Talx reports the jurisdictions have borrowed approximately $40 billion as of May 26.

Carter said proposals by the Obama Administration and the Republicans could change how federal unemployment taxes are calculated.

The Obama Administration proposal would waive interest on unemployment loans to states for 2011 and 2012 as well as suspend credit reductions for 2011 and 2012. In addition, it would raise the federal unemployment tax wage base to $15,000 in 2014 from $7,000 today while reducing the rate to 0.38 percent from the 6.2 percent today. The federal wage base would also be indexed on a yearly basis. It would also extend a 0.2 percent federal unemployment surtax for 2011, 2012 and 2013.

A number of states would also have to raise their wage bases if the federal government raises its wage base.

Meanwhile, a proposal by the Republicans — the Jobs Act of 2011, H.R. 1745 — would let states decide whether to continue paying extended unemployment benefits and emergency benefits or to spend that money on repaying unemployment loans from the federal government or jobs training programs. It would also allow the temporary 0.2 percent to expire.

“From a staffing industry perspective, both of those proposals are driving staffing companies nuts right now,” Carter said. “[It's] not just difficult in terms of the pricing, but also just conveying the message to the customers.”

Staffing firms have to convey to customers the cost of taxes, he said. In addition, staffing buyers may hear that a tax rate is not rising and push back.

It’s unlikely the federal government will provide wholesale relief for the $40 billion in outstanding loans because of the federal deficit, Carter said.

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