On the Bright Side
Why a higher taxable wage base for SUTA might not be as bad as it seems
As high unemployment lingers, states are burdened with corresponding high unemployment benefits payments and are looking for ways to offset those increased expenditures. As such, they are looking for ways to increase taxes on unemployment insurance as part of SUTA (State Unemployment Tax Authority).
Such tax increases can be applied either by increasing the average rate on taxable wages or by increasing the taxable wage base, which varies substantially among states. For example, California’s SUTA applies to the first $7,000 of wages. Up the coast in Washington, the taxable wage base is more than $35,000.
The Rate Burden
Generally, a state’s taxable wage base applies to all employers, but rates for employers can vary substantially. When states raise the wage base, and many have done so recently, that information is made publicly available for all to see. However, rate increases are more complicated because they often vary by company, which means we hear about them less. Because wage caps are easier to track, there is more attention — and political pressure — when they increase, but rate increases have been just as common recently, and are much more burdensome to staffing firms.
In Arkansas, the taxable wage base increased to $12,000 in 2010 from $10,000 in 2009. Because the annual wages for many temporary staffing assignments, particularly short, low-wage assignments, are less than $10,000, any increase in the cap does not increase the SUTA burden for those assignments.
In California, meanwhile, the cap remained at $7,000. More revenue had to come from somewhere, though, so rates were increased — the average rate increased to 4.96 percent from 4.29 percent, by our estimates. For assignments that pay less than $7,000, the rate increase applies to total wages.
Some of you may be thinking that the answer is for states to cut benefits to the unemployed rather than raise taxes at all. You are certainly welcome to lobby on behalf of cutting benefits, but in all likelihood states will need to raise more revenue to pay unemployment benefits for several years, and we make the case that it is better for the staffing industry when states raise funds through increases in the wage cap as opposed to the rate.
Moreover, if states don’t collect enough revenue to pay back debts to the federal government, then those states risk seeing higher FUTA (Federal Unemployment Tax Act) taxes. Increases to FUTA are applied to the rate, not the wage base.
We propose that the best course of action is for you and industry associations to encourage your state political representatives to raise the wage base rather than rates when an increase is unavoidable.
Some states, like California, have a low wage base but a high average tax rate. Other states, such as Utah, have a high wage base ($28,300), but a low average rate (0.71 percent). Perhaps recent increases in SUTA will create a push for more states to adopt the high-base, low-rate model, lowering rates while compensating by cap increases. Not only would the high-base, low-rate model lower SUTA expense for most staffing firms, it would lower SUTA expense relative to what buyers would pay for non-contingents.
By our estimates, seven states have average SUTA tax rates above 4.0 percent, which disproportionately burdens many staffing firms. These states are Pennsylvania (5.78 percent), Michigan (5.30 percent), California (4.96 percent), Massachusetts (4.89), Maryland (4.79 percent), New York (4.58 percent) and Kansas (4.02 percent).
There are other benefits to the high-base, low-rate model beyond advantages for staffing firms, argues The West Virginia Center on Budget & Policy in its report, “Raising Taxable Wage Base is Best Way to Keep State Unemployment Fund Solvent.” Increases in the wage base would reduce the regressive nature of the tax, the report states.
The next time a state announces an increase in the taxable wage base, keep in mind that a rate increase would have been worse.
Tony Gregoire is senior research analyst at Staffing Industry Analysts. He can be reached at firstname.lastname@example.org.