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October 2011, Number 61
Unemployment Insurance Taxes:
Options for Program Design and
Insolvent Trust Funds
Businesses Face Higher Taxes as States Exhaust Trust Funds and
Incur Interest Payments
Joseph D. Henchman
Joseph Henchman is the Vice President of Legal & State Projects at the Tax Foundation. He would like to thank Dr.
William Conerly for his prior work on the subject and his advice, as well as Elsie Watters, the author of our 1981 study
on unemployment insurance. He would also like to acknowledge the valuable research assistance of Sarah Hyon and
•	 Unemployment	insurance	(UI)	is	a	social	insurance	program	jointly	operated	by
the	federal	and	state	government.	Employers	pay	federal	and	state	UI	taxes	that
fund	benefits,	with	employers	paying	different	tax	rates	based	on	their	layoff	history
•	 High	rates	of	unemployment	and	benefits	lasting	up	to	99	weeks	have	led	34	states	to
borrow	over	$37	billion	from	the	federal	government	to	pay	benefits.	States	are	not
expected	to	repay	these	amounts	for	some	time	and	must	begin	paying	interest	on	their
balances	in	2011.
•	 Businesses	are	in	danger	of	facing	higher	UI	taxes	at	a	time	when	private	sector	hiring
is	already	at	a	low	level.	Some	states	are	already	reducing	UI	benefits	or	raising	taxes.
•	 States	routinely	cut	UI	taxes	in	good	economic	times	and	raise	them	in	bad	economic
times,	undermining	the	argument	that	the	program	is	countercyclical.
•	 Modest	UI	reforms	should	be	considered,	including	eliminating	the	“firewall”	between
administrative	costs	and	benefits,	reducing	cross-subsidies	to	high-layoff	employers,	and
relying	more	on	face-to-face	training	and	advising.	More	significant	reforms	that	could
be	considered	include	adopting	elements	of	state	workers’	compensation	programs	and
experimenting	with	individual	accounts.
•	 Economic	evidence	suggests	that	extending	unemployment	benefits	increases
unemployment	by	encouraging	“excessive	search.”
•	 States	sh