Unemployment Insurance System Broken

May 10, 2013

Unemployment Insurance System Broken, Employer Federal UI Tax Increasing
California Debt to Federal Unemployment Fund
Exceeds $10 Billion

The California Chamber of Commerce and a number of employer groups are working to raise awareness of the plight of the state?s unemployment insurance (UI) system, as evidenced by the outstanding debt to the federal government.

California continues to have one of the highest unemployment rates in the country, and economists predict a slow recovery. The state needs a sustainable UI system that protects both workers who are temporarily unemployed through no fault of their own, and employers trying to put people back to work.

Federal Tax Increasing

Cumulative Impact: State UI Taxes will Escalate
as Long as California Owes Federal Unemployment Debt
Tax increases continue until debt is paid or tax rate reaches 6%.

California employers? federal UI tax is increasing dramatically. In accordance with federal law, all the increase goes toward paying down California?s $10.9 billion debt.

California?s UI Trust Fund has been insolvent since 2009, and the state has been borrowing from the federal unemployment account to continue paying benefits to unemployed Californians.

The increasing tax is the same for all employers, regardless of experience, size or industry.

Both federal and state UI taxes are paid entirely by employers on the first $7,000 in wages paid to each employee annually.

Generally, employers receive a credit against the Federal Unemployment Tax Act (FUTA) tax rate.

Due to California?s outstanding debt, however, California employers are now subject to a credit reduction, which results in a federal tax increase on employers.

For each year the state?s loan remains unpaid, an employer?s FUTA credit is reduced by 0.3%, resulting in a tax increase.

Cumulative Impact

The table below illustrates the cumulative impact on California employers. Each 0.3% of credit reduction is equal to a federal tax increase of approximately $21 per employee per year.

Taking Control

California needs to take control, and the business community is taking an active role in approaching the UI problem in a way that is equitable, preserves the integrity of the system and protects the safety net.

The business community is committed to working with the administration in developing a comprehensive, realistic, workable solution that won?t hinder job creation and economic recovery for the state, is equitably applied, and includes needed reforms.

The solution must be consistent with other states.

System reform must address fraud, overpayments and benefit eligibility, and is necessary to ensure future solvency.