Warning: SUTA geniuses at work in state labor departments

We are doing some research right now on expected 2010 increases in state unemployment taxes, and it's looking pretty scary. In Florida, for instance, the minimum annual rate for unemployment taxes rises to $100.30 per full-time employee in 2010 from the current rate of $8.40. The maximum annual rate will go to $459 from $378. 

Needless to say, staffing firms are very concerned how higher SUTA rates will play out for the temp industry.

Of course, there's a reason for the SUTA increases. The funds for unemployment benefits are fast running out and continued benefits depend on additional funding. It's customary in these times that SUTA rates go up to replenish the supply of dollars.

There's only one problem. SUTA is a tax on labor, and one of the more settled questions in economics is the general effect of taxation on economic activity: people buy less when taxes raise the price. You tax steel, manufacturers buy less steel. You tax TVs, consumers buy fewer TVs.  Econ 101. Also in the Book of Duh.

The dampening effect of taxation is indeed so well understood that taxes are consciously used to discourage unwanted behavior. Cigarettes and alcohol are very heavily taxed--"sin taxes" as they say--to discourage people from smoking and drinking.

So higher SUTA taxes on labor mean that the "consumers" of labor, i.e. business, will buy less of it.

And what does that mean? Well, in a case where you have a lot of unemployed people, it means that they will be unemployed longer than they otherwise would, and so collecting unemployment benefits longer. 

And that in turn means that the effect of the rise in SUTA, intended to increase funding for unemployment benefits, will at least in some degree be offset by a need for more unemployment benefits.

Yes, life is indeed a circle, a vicious circle sometimes.  So, to get to my point, it would be far better to shore up unemployment funds in some other way than through a higher tax on labor. Word on the street is that most of the trillion in stimulus is yet to be spent. Given that it was supposed to be about moderating unemployment in the first place, one could hardly think of a better way to redeem its original intent. Eh?

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